The sector in brief
Insolvency practitioners are appointed to restructure, wind up or take control of businesses in financial difficulty. They collect and sell assets, deal with creditors, review past transactions and make distributions. In the DIFC and ADGM, insolvency firms and practitioners are covered by the AML rules for designated professionals.
The work has two sides. On one side, practitioners are often the first to see what has happened inside a failed business, including signs of fraud and laundering. On the other, they handle assets and money, buy and sell property, and may be approached by people who want to buy at a discount or gain control of a business cheaply.
Supervisors expect practitioners to apply AML controls to the people they deal with and to use their position to report what they find.
Where the risk sits
Purchasers of distressed assets
Buyers who pay in cash or through third parties for assets sold in an insolvency can use the process to launder funds.
Records of past wrongdoing
The practitioner may find evidence of laundering or fraud by the former management, and must decide what to do with it.
Pre-insolvency transfers
Assets moved out of a company shortly before failure, perhaps to related parties, can be proceeds of crime or a way to hide them.
Creditor claims
False or inflated claims, particularly from connected parties, can draw funds out of the estate.
Handling of funds
Money held in the estate and later distributed needs to go to the right people for the right reasons.
Who supervises you
Insolvency firms in the DIFC are supervised by the DFSA, and insolvency practitioners in Abu Dhabi Global Market by the ADGM Registration Authority. Practitioners onshore should check with the authority that licensed or registered them, because the regime depends on the appointment and the jurisdiction.
The supervisor decides the detailed rules for your licence category, so always read its current guidance alongside this page.
What supervisors expect
- A named compliance officer with authority over appointments, and a proportionate programme.
- A risk assessment that covers the types of appointment, the sectors and countries involved.
- Due diligence on the parties the practitioner deals with, including purchasers of assets, significant creditors and anyone who receives distributions.
- Understanding of the source of funds for significant asset purchases, and of any links between buyers and former owners.
- Sanctions and politically exposed person screening, with documented review.
- Reporting of suspicion in line with the rules, including matters found in the company's records, and care not to alert the people involved.
- Training, record keeping and independent testing proportionate to the firm.
Red flags to watch
- A purchaser who offers cash for valuable assets.
- A buyer with links to the former owners or directors.
- Large transfers out of the company just before it failed.
- Creditor claims from related parties that are inflated or unsupported.
- Directors who are not cooperating or who destroy records.
- Payment instructions that change just before a distribution.
A worked example
A discounted sale of company assets
During a liquidation, a buyer offers a cash payment for the company's equipment at a price below valuation. Checks show the buyer is a newly formed company owned through a nominee, and that a former director of the failed company has an interest. The practitioner refuses to deal until it has identified the real owner and source of funds, records its enquiries and, given the links to the former management, considers whether the matter indicates wrongdoing that should be reported.
How Adventant helps
Questions answered
Why do insolvency practitioners have AML duties?
Because they handle assets, deal with buyers and creditors and see records that may reveal wrongdoing. They are in a position to prevent a failed business from being used to launder money.
Do we need to check every creditor?
In proportion to the risk. Significant claims, claims from related parties and claims that look unusual should be checked more closely.
What should we do if we find evidence of laundering in the records?
Escalate to the compliance officer, preserve the records and consider a report. Do not warn the people concerned.
Can we accept cash for assets?
It is higher risk. Many practitioners refuse it or set a low limit. If you accept it, check the buyer and the source of funds and record the reason.
Who is responsible if a purchaser is a front?
The practitioner has a duty to carry out checks and can be criticised if they are not done. The checks should be recorded and repeated if circumstances change.