Is it time to rethink your AML/KYC strategy?

Whether it's the FCA's increasing focus on anti-money laundering (AML) controls or FinCEN's expanding compliance requirements in the U.S., regulators are asking for more documentation, more transparency, and faster responses.

As the complexity of compliance grows, firms are evaluating how best to structure their AML and know your customer (KYC) functions.

While some continue to manage compliance in-house, others are turning to outsourcing as a way to enhance efficiency and mitigate risk. Both approaches have their merits, and the right choice depends on a firm's specific needs, resources, and long-term strategy.

Short on time? Here's a quick comparison of the pros and cons:

In-house AML/KYC: Control and institutional knowledge

Managing AML/KYC internally has long been the standard for many firms, particularly those that value direct oversight and institutional knowledge. However, with firms looking to increase efficiency and the evolving regulatory landscape, is there sufficient upside?

1. Cost considerations

Building and sustaining a dedicated compliance team requires significant investment. Costs include recruitment, salaries, benefits, and training, as well as the expense of maintaining office space, compliance tools, and software. These costs are largely long-term fixed costs, regardless of fluctuations in demand.

For firms with a consistent and predictable compliance workload, these investments may be justified. However, for those with variable needs, such as private equity firms managing multiple funds, cost efficiency can become a concern.

U.S., EU, and UK AML regulations require firms to appoint a point person—called a money laundering reporting officer (MLRO) in the UK and a compliance officer in the EU and U.S. It's this person's job to ensure the firm complies with the relevant laws and regulations—depending on where your firm is based and the jurisdictions you are investing in, this role can also be outsourced.

2. Scalability and flexibility

Internal teams provide firms with full control over their AML/KYC processes and the flexibility to deploy those teams on a variety of distinct workstreams. However, scaling these teams to match business growth can be difficult. Hiring and training compliance professionals is often an annual or biannual process that is hugely time-intensive, and market demand for experienced talent remains high.

Firms with expanding global operations or high deal volumes may find that an in-house approach struggles to keep pace with shifting compliance requirements.

3. Expertise and regulatory awareness

An internal team may develop familiarity with the firm's unique risk profile, but its exposure to broader market trends may be limited. Keeping up with international regulatory changes (such as updates from FinCEN, FCA, and other authorities) and market shifts in expectations requires ongoing training and investment in professional development often outside the firm at additional costs.

4. Technology and process efficiency

Many general partner (GP) in-house compliance functions still rely on manual workflows to run key workstreams like AML/KYC counterparty due diligence, responding to inbound queries, and back-office administration recordkeeping. Investing in automation and advanced compliance technology can improve the efficiency of these workstreams significantly, but for many firms, these upgrades are secondary to other business priorities.

Firms that choose to keep AML/KYC in-house should consider whether they have the resources to build a function that remains competitive in terms of speed, accuracy, and risk management.

Outsourcing AML/KYC: A flexible, technology-enabled alternative

Outsourcing AML/KYC functions to a specialist provider offers an alternative model that prioritizes scalability, expertise, and operational efficiency. For firms with global exposure, fluctuating compliance demands, or a need for specialized regulatory insight, this approach can offer significant advantages.

1. Cost efficiency and allocation

One key advantage of outsourcing is the ability to align costs with actual compliance needs. Many asset managers can recharge these costs to their funds, reducing the impact on internal budgets. Unlike in-house teams, where costs remain fixed, an outsourced model allows firms to scale compliance services up or down based on demand.

2. Rapid implementation and scalability

Specialist providers are designed to handle high volumes of AML/KYC processes, making them well-suited for firms experiencing rapid growth or investing across multiple jurisdictions. Where internal hiring and training cycles can take months, outsourced providers can be onboarded in a matter of weeks, providing immediate capacity.

This flexibility is particularly useful for firms with international teams and cross-border investments, where compliance requirements can vary significantly across jurisdictions.

3. Access to specialist expertise

AML/KYC providers work with a broad range of asset managers, giving them a unique perspective on industry best practices and regulatory expectations. This exposure allows them to proactively adapt to changing regulations and implement compliance strategies that reflect the latest developments from authorities such as the FCA and FinCEN.

4. Technology-driven efficiency

Outsourced providers often invest heavily in compliance technology, leveraging automation and AI to streamline workflows. This includes tools that facilitate faster document verification, automated due diligence, and real-time risk assessments.

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While some firms may choose to build similar capabilities in-house, outsourcing provides immediate access to advanced technology without the need for long-term investment.

Industry trends: The shift toward outsourcing

Across the asset management sector, the trend towards outsourcing AML/KYC is becoming increasingly evident. Many firms that initially managed compliance in-house are now opting for specialist providers to enhance efficiency and reduce operational burden.

For firms managing cross-border investments, facing complex regulatory landscapes, or struggling to scale internal compliance teams, outsourcing presents a strong alternative, particularly considering the potential cost savings. However, for firms with smaller teams, sufficient capacity, stable regulatory requirements, and a preference for direct oversight, an in-house approach may still be the right fit.

Conclusion: Finding the right balance

There is no one-size-fits-all approach to AML/KYC compliance. Some asset managers will benefit from the control and familiarity of an in-house function, while others will find that outsourcing provides the scalability, expertise, and technology required to meet evolving regulatory demands.

For firms operating across multiple jurisdictions, experiencing fluctuating compliance workloads, or seeking a more cost-efficient approach, outsourcing is an increasingly attractive option. By carefully evaluating both models, asset managers can build a compliance function that not only meets regulatory expectations but also aligns with their broader business objectives.

This is the fifth entry in Carta Law's series, Private Markets Compliance: The Operational Framework. Read the next entry here.

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