Money laundering is often portrayed in headlines as a problem for banks and large corporations, but in reality, it touches almost every sector of the UK economy. From construction firms to small accountancy practices, compliance with Anti Money Laundering (AML) regulation is now part of everyday business. For payroll providers, self-employed contractors, and companies engaging temporary workers, AML obligations are particularly relevant.

In this guide, we’ll unpack how anti money laundering regulation impacts payroll processes, contractor compliance, and what it means for workers navigating systems like CIS (Construction Industry Scheme) and umbrella payroll models.

What Is Anti Money Laundering Regulation?

Anti money laundering regulation in the UK refers to laws and policies designed to prevent criminals from disguising illicit funds as legitimate income. The Proceeds of Crime Act (POCA) 2002 laid the foundation, but AML rules have since evolved, incorporating EU directives (before Brexit) and aligning with global standards from organisations like the Financial Action Task Force (FATF).

Key AML measures include:

• Customer due diligence (CDD): Verifying the identity of clients, contractors, and subcontractors.
• Enhanced due diligence (EDD): Extra checks for high-risk clients or unusual transactions.
• Record keeping: Retaining proof of identities, contracts, and payment trails.
• Suspicious activity reporting (SARs): Informing the National Crime Agency (NCA) if suspicious transactions are detected.

AML rules don’t just apply to banks. They extend to accountants, solicitors, estate agents, payroll companies, and contractors in industries vulnerable to cash-based transactions.

Why Payroll and Contractors Are in the Spotlight

Payroll services and contractor payments may not be the first place people think of when it comes to financial crime, but they are exposed to AML risks for several reasons:

1. Complex supply chains – In industries like construction, payments can pass through multiple layers of subcontractors. Without proper checks, illegitimate businesses can hide in the chain.
2. Cash flow and irregular earnings – Contractors often have varying income levels, making it harder to spot unusual transactions.
3. Umbrella and payroll companies – These firms act as intermediaries, handling wages, taxes, and compliance. If AML checks are weak, payroll systems could inadvertently facilitate money laundering.
4. Cross-border work – Some contractors may be paid from overseas or through international clients, which raises red flags under AML laws.

The result is that payroll providers, contractors, and even small businesses hiring self-employed workers need to stay aware of AML responsibilities.

The Role of AML in Payroll Compliance

Payroll firms in the UK must now integrate AML checks as part of their services. This includes verifying worker identities, ensuring right-to-work documentation is accurate, and monitoring for inconsistencies in payment patterns.

Examples of AML practices in payroll include:

• Checking that subcontractors under CIS are registered correctly with HMRC.
• Confirming that umbrella employees have valid proof of address and identity.
• Monitoring for “ghost employees” or fraudulent timesheet entries.
• Maintaining clear digital payment trails rather than relying on cash.

Failure to comply can lead not only to financial penalties from HMRC but also reputational damage and legal liability under AML regulations.

How Contractors Are Affected

For contractors, AML compliance often feels invisible—but it has direct implications.

1. Identity verification – Contractors must provide passports, driving licences, or other valid documents before payments are released.
2. Banking checks – Payments are routed through legitimate accounts, not cash handoffs, to ensure transparency.
3. Tax reporting – AML rules overlap with tax compliance, making it harder to hide undeclared income.
4. Contract scrutiny – Contractors may be asked for contracts, invoices, or proof of work to justify payments.

For many self-employed workers, these checks can feel like extra admin. However, they also protect honest contractors by reducing the risk of fraudulent activity in their sector.

AML and the Construction Industry Scheme (CIS)

The CIS is particularly significant in the AML landscape. Construction is considered a high-risk sector because of its reliance on subcontracting and historically high levels of cash work.

Under CIS, contractors must deduct money from subcontractors’ payments and pass it to HMRC as advance tax. Payroll providers and contractors handling CIS must therefore:

• Verify subcontractor registration with HMRC.
• Keep detailed payment records.
• Ensure deductions align with tax rules.

AML compliance strengthens this process by making sure the subcontractor is who they claim to be and that payments aren’t being used to disguise criminal proceeds.

Umbrella Payroll and AML Obligations

Umbrella payroll companies, which employ contractors on behalf of recruitment agencies or end clients, also face strict AML duties. Because they manage tax, National Insurance contributions, and wages, they act as financial intermediaries—making them potential targets for money laundering schemes.

To comply with AML rules, umbrella companies must:

• Run Know Your Customer (KYC) checks on workers.
• Prevent tax avoidance schemes (such as disguised remuneration or offshore payments).
• Report suspicious activity to authorities.

For contractors, this means working with a legitimate, compliant umbrella company is essential. Not only does it protect them from HMRC investigations, but it also ensures their payments are legal and transparent.

Risks of Non-Compliance

AML failures are not just theoretical—they carry real consequences. Businesses and payroll providers that ignore AML duties may face:

• Heavy fines: HMRC and the Financial Conduct Authority (FCA) can impose penalties worth millions.
• Criminal liability: Directors can face prosecution if they enable money laundering.
• Loss of contracts: Companies that can’t demonstrate compliance risk losing access to major supply chains.
• Reputational damage: In industries like construction, being linked to financial crime can destroy business relationships.

Contractors should also be cautious. Associating with non-compliant payroll providers or dodgy umbrella firms can leave them vulnerable to HMRC investigations—even if they had no direct role in wrongdoing.

Best Practices for Payroll and Contractors

To stay compliant with AML rules, UK payroll providers and contractors should adopt the following best practices:

1. Choose compliant providers – Contractors should only work with payroll or umbrella companies that demonstrate AML and HMRC compliance.
2. Keep records – Retain invoices, contracts, and payment confirmations to prove legitimate work.
3. Be transparent – Avoid cash payments or unusual financial arrangements.
4. Stay updated – AML regulations evolve regularly; keeping up with HMRC guidance helps avoid mistakes.
5. Report concerns – If something feels off in the payment chain, it should be flagged to the proper authorities.

Where The Infinity Group Fits In

For contractors and businesses unsure about navigating payroll, CIS, or umbrella arrangements under AML rules, professional guidance can be invaluable. Firms like The Infinity Group, a London-based payroll services specialist, help contractors and construction companies stay compliant with HMRC while ensuring payroll processes meet AML obligations. Their expertise in CIS payroll, umbrella payroll, and IR35 support makes them a trusted resource for UK businesses that want to avoid compliance pitfalls.

Final Thoughts

Anti money laundering regulation may sound like a topic reserved for banks and financial institutions, but its reach extends much further. For contractors, payroll providers, and businesses in sectors like construction, AML compliance is part of day-to-day operations.