What is General Due Diligence in Anti-Money Laundering?

Definition

General Due Diligence in Anti-Money Laundering (AML) refers to the foundational set of processes and procedures that financial institutions and regulated entities implement to identify, verify, and assess their customers at the outset and throughout the business relationship to prevent and detect money laundering and terrorist financing activities. It involves gathering essential information about customers, understanding the nature of their activities, and assessing their risk profile to ensure their transactions and behavior comply with AML regulations.

Purpose and Regulatory Basis

The primary purpose of General Due Diligence is to establish the legitimacy of customers and their funds, prevent financial crimes, and maintain the integrity of the financial system. It serves as the first line of defense in combating money laundering by enabling institutions to detect and report suspicious activities.

General Due Diligence is embedded within global and national AML regulatory frameworks, including:

• Financial Action Task Force (FATF) Recommendations: International standards mandating customer identification and ongoing monitoring.
• USA PATRIOT Act (U.S.): Enforces Customer Identification Programs (CIP) and AML compliance requirements.
• European Union Anti-Money Laundering Directives (AMLD): Establish comprehensive due diligence and reporting obligations for financial entities across the EU.
• Other national regulations tailor these principles to specific jurisdictions.

Compliance with these regulations demands institutions conduct not only initial due diligence but also ongoing monitoring to manage risk effectively.

When and How it Applies

General Due Diligence applies chiefly at the customer onboarding stage but extends throughout the lifecycle of the business relationship. In practice:

• When a customer opens an account or initiates a business relationship, institutions must collect and verify identity data.
• It is applied before processing financial transactions to ensure legitimacy.
• Ongoing monitoring is conducted to detect changes in customer behavior or risk profile.
• Triggers may include unusual transaction patterns, customer profile changes, or alerts from sanction lists.

For example, banks conduct General Due Diligence when opening new client accounts by verifying identity documents and understanding the purpose of the relationship. Similarly, investment firms use it to assess new clients’ sources of funds and business intentions.

Types or Variants

General Due Diligence is often categorized as a baseline due diligence level, distinguished from more intensive forms such as:

• Simplified Due Diligence (SDD): Applied for low-risk customers needing less stringent verification.
• Enhanced Due Diligence (EDD): Required for high-risk customers, such as politically exposed persons (PEPs) or those from high-risk jurisdictions, involving deeper investigations and more frequent reviews.
• Ongoing Due Diligence: Continuous monitoring through the relationship.
• Event-driven Due Diligence: Triggered by specific suspicious activities or changes in circumstances.

General Due Diligence corresponds most closely to what is typically called Standard Due Diligence, applied to the majority of customers.

Procedures and Implementation

To comply with General Due Diligence requirements, institutions generally follow these steps:

1. Customer Identification and Verification: Collecting documents such as passports, national IDs, or corporate registration papers and verifying their authenticity using reliable sources.
2. Risk Assessment: Evaluating customer’s risk level based on factors such as their country of origin, occupation, transaction types, and sources of funds.
3. Understanding Customer Purpose: Documenting the intended nature and purpose of the business relationship.
4. Ongoing Monitoring: Implementing systems and controls for transaction monitoring, periodic review, and updating customer information.
5. Record-Keeping: Maintaining comprehensive records of due diligence efforts and customer data to meet regulatory audits and investigations.

Systems typically include automated screening against sanctions and PEP lists, transaction monitoring software, and risk-based approaches tailored to organizational policies.

Impact on Customers/Clients

From the customer’s perspective, General Due Diligence involves:

• Providing personal or corporate identification documents during onboarding.
• Answering questions about the nature and purpose of their business relationship.
• Complying with requests for additional information if risk factors arise.
• Undergoing periodic reviews and verification updates.
• Experiencing certain restrictions if flagged as high-risk, which might include enhanced scrutiny, limited transaction types, or account restrictions.

Customers have the right to privacy and data protection, but their cooperation is essential for institutions to fulfill AML obligations.

Duration, Review, and Resolution

General Due Diligence is an ongoing obligation, not a one-time event:

• Initial due diligence is completed before or at account opening.
• Periodic reviews are conducted based on risk levels (for example, annually or every few years).
• Additional due diligence may be conducted when significant changes occur, e.g., changes in beneficial ownership or transaction patterns.
• If risks are identified that cannot be mitigated satisfactorily, institutions may end the business relationship.

Duration and frequency of reviews are dictated by internal policies and regulatory requirements, with higher-risk customers reviewed more frequently.

Reporting and Compliance Duties

Institutions must ensure that their due diligence processes are documented and auditable. This includes:

• Filing Suspicious Activity Reports (SARs) or Suspicious Transaction Reports (STRs) when suspicious transactions are detected.
• Reporting large transactions as per regulatory thresholds.
• Maintaining accurate records of customer identity verification, risk assessments, and monitoring outcomes.
• Training employees on AML policies.
• Facing penalties, including fines and business restrictions, for non-compliance.

Regulators expect institutions to have robust governance and internal controls overseen by designated compliance officers.

Related AML Terms

General Due Diligence connects closely with:

• Know Your Customer (KYC): The process of verifying customer identity and information.
• Customer Due Diligence (CDD): The overall practice of assessing and managing customer risk, encompassing identification, verification, and monitoring.
• Enhanced Due Diligence (EDD): Heightened scrutiny for higher-risk customers.
• Transaction Monitoring: Tracking financial transactions to detect suspicious activity.
• Beneficial Ownership: Identifying the individuals who ultimately own or control a legal entity.

Challenges and Best Practices

Common challenges include:

• Balancing thoroughness with customer experience and privacy considerations.
• Keeping up with evolving regulatory requirements.
• Managing false positives in automated screening systems.
• Ensuring the accuracy and timeliness of customer information.

Best practices recommend:

• Adopting a risk-based approach to allocate resources efficiently.
• Continual training for staff to recognize red flags.
• Leveraging technology to enhance efficiency and accuracy.
• Regularly updating policies in line with regulatory guidance.
• Ensuring strong internal controls and independent audits.

Recent Developments

Recent trends impacting General Due Diligence include:

• Increased use of artificial intelligence and machine learning for more effective risk assessment and transaction monitoring.
• Enhanced regulatory scrutiny and harmonization efforts globally, especially with the establishment of entities like the EU’s Anti-Money Laundering Authority (AMLA).
• Greater emphasis on beneficial ownership transparency and non-face-to-face customer onboarding modalities.
• Expanding AML frameworks to cover virtual assets and emerging financial technologies.

General Due Diligence is a cornerstone of AML compliance designed to identify and verify customers, assess their risk, and detect suspicious activities. Anchored in global standards like FATF, the USA PATRIOT Act, and the EU AMLD, it guides financial institutions in safeguarding against money laundering and terrorism financing. Through comprehensive procedures, ongoing monitoring, and strict reporting duties, General Due Diligence protects the integrity of the financial system, ensures regulatory compliance, and fosters customer trust.