AML checks on insolvency clients referred to your firm must be as thorough as on any other new instruction — a referral changes how a director reaches you, not what the Money Laundering Regulations require. Under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, every regulated firm must carry out its own customer due diligence before acting, regardless of who made the introduction.
That catches firms out more often than it should. A warm introduction from a trusted referrer can feel like a form of pre-vetting, but it isn't one in the eyes of the regulator. This guide sets out what full AML and KYC checks look like for a referred, financially distressed director, when you can genuinely rely on an introducer's own checks, and how to risk-rate the instruction from the outset.
Why referred insolvency clients still need full AML checks
A referral is a source of business, not a substitute for due diligence. Whether the client arrives through a solicitor, an accountant or a commission-based introducer such as Harbourfirst, your firm remains the obliged entity under the regulations and carries the regulatory risk.
The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 require every business in a regulated sector to apply customer due diligence at the start of a business relationship. There is no exemption for clients who arrive pre-introduced, and supervisors — the SRA for solicitors, or HMRC and the recognised professional bodies for insolvency practitioners — expect to see the same standard of file evidence for every client.
Treating a referred instruction as "lower friction" rather than lower risk is a common compliance gap. In practice, insolvent companies and distressed directors often sit at the higher end of your risk assessment, so the checks matter more here, not less.
Identity verification for distressed directors
Standard identity verification still applies: a government-issued photo document (passport or driving licence) and independent evidence of current address, checked against the individual and, where relevant, against Companies House records for the company itself.
A few points are specific to distressed-company work:
- Cross-check company details. Confirm the director's name and registered office match Companies House records, and note any recent changes of registered office or directors, which can be a red flag.
- Verify authority to instruct. Where a company is close to insolvency, confirm the individual instructing you is a current director or authorised officer, not someone who has recently resigned.
- Watch for urgency as a pressure point. Directors facing a winding-up petition or statutory demand are often under genuine time pressure. That is a reason to be methodical, not a reason to shortcut verification.
Where the referral came from a party you've assessed before, our guide to Onboarding a Referred Distressed Director sets out a practical sequence for the first meeting through to engagement.
Source of funds and fees on insolvent companies
Source-of-funds enquiries are often the most sensitive part of onboarding a referred client, because the company itself may have little or no free cash. Fees are frequently paid from a director's personal funds, a family member, or a new source of finance, and each of those routes needs its own evidence.
Points to establish and document:
- Who is actually paying the fee — the company, the director personally, or a third party — and why.
- Where third-party funds are involved, the third party's relationship to the director and their own identity evidence.
- Whether payments are consistent with the company's known trading history, or whether they suggest funds have moved from the company shortly before instruction.
- Any unusual payment patterns: cash, funds routed through unconnected accounts, or requests to invoice a different entity from the one instructing you.
None of this means treating every distressed director with suspicion. It means recording, plainly and contemporaneously, why you are satisfied — or not — with the explanation given.
Can you rely on an introducer's checks?
Regulation 39 of the 2017 Regulations allows a firm to rely on customer due diligence carried out by certain other regulated persons, but reliance has narrow conditions and does not remove your own responsibility. The party you rely on must be a regulated firm subject to the Money Laundering Regulations (or an equivalent overseas regime), you need their written consent to rely on their checks, and you must obtain the underlying due diligence information from them, not simply their assurance that checks were done.
Commission-based introducers who are not themselves subject to the Money Laundering Regulations — most lead-generation and referral businesses — cannot be relied on under Regulation 39 at all. Their introduction may be a useful source of instructions, but it carries no AML weight whatsoever. Your firm must complete its own full customer due diligence regardless of what checks, if any, the introducer says it performed.
Even where reliance is technically available, ultimate legal responsibility for the adequacy of the checks stays with your firm. Many practitioners treat reliance as a convenience only for low-risk, well-documented professional introducers, and still complete independent verification on higher-risk referred work such as insolvent company instructions. Our related article on Due Diligence on Insolvency Introducers covers what to check about the introducer relationship itself, separate from the client checks described here.
Risk-rating referred instructions
Every new client should be risk-rated under your firm's policies, and referred insolvency work often justifies a higher rating than an equivalent instruction that came in directly. Relevant factors include:
- How the referral arrived. A regulated professional introduction (solicitor, accountant) generally carries lower inherent risk than a commercial lead-generation channel, though neither removes the need for your own checks.
- The company's financial position. Recent HMRC arrears, a winding-up petition, or a pattern of late filings at Companies House can all raise the risk score.
- Complexity of ownership or funding. Multiple related entities, offshore connections, or unclear beneficial ownership all point toward enhanced due diligence.
- Any referral fee arrangement. Where your firm pays or receives a referral fee, that relationship should be assessed and documented separately from the client's own risk profile — see Are Referral Fees Legal in the UK? for the compliance position on fee-sharing.
A higher risk rating should trigger enhanced due diligence: more detailed source-of-funds evidence, senior sign-off before acceptance, and closer ongoing monitoring once the engagement begins. It is also worth running a conflict check alongside the AML assessment, particularly where the same introducer has referred connected parties before — our piece on Conflict Checks on Referred Insolvency Work sets out how the two checks fit together.
Frequently asked questions
Do I need to file a SAR if a referred client raises money laundering concerns?
Yes. If, during onboarding or afterwards, you know or suspect money laundering, you must consider a suspicious activity report to the National Crime Agency, regardless of who referred the client or how well-established the referral relationship is.
What ongoing monitoring is expected after onboarding a referred insolvency client?
The 2017 Regulations require ongoing monitoring throughout the business relationship, not just at onboarding. For insolvency work this typically means reviewing transactions against what you'd expect given the company's position, and re-checking source-of-funds evidence if the picture changes materially.
How long do I need to keep AML records for a referred client?
Firms are generally required to retain customer due diligence records and supporting evidence for five years from the end of the business relationship, in line with the record-keeping requirements in the Money Laundering Regulations. Check your firm's specific policy, as some supervisors set longer internal expectations.
Does the introducer need to be named on the AML file?
It's good practice to record how the instruction arrived, including the introducer's name and any referral fee arrangement, even though the introducer's own checks (if any) cannot substitute for your due diligence unless the narrow reliance conditions in Regulation 39 are met.
Can I decline a referred instruction on AML grounds?
Yes. If you cannot complete satisfactory customer due diligence, or the source-of-funds explanation doesn't stand up, you should not proceed with the engagement, whatever the referral relationship or commercial pressure to accept the work.
This article is general information for firms, not legal or compliance advice, and does not cover every scenario your AML policy may need to address.
If a referred director you're assessing would benefit from speaking to a regulated specialist directly, Harbourfirst can make that introduction — start an enquiry.