Definition
Ongoing Due Diligence (ODD) in Anti-Money Laundering (AML) refers to the continuous process by which financial institutions and regulated entities monitor and assess their customers and business relationships after the initial onboarding stage. Unlike the initial Know Your Customer (KYC) checks that occur at the start of a relationship, ongoing due diligence involves regularly reviewing customer transactions, behaviors, and updated information to identify and mitigate risks such as money laundering and terrorism financing. It ensures that a customer’s risk profile, source of funds, and transactional activities remain consistent with the institution’s risk appetite and regulatory requirements throughout the business relationship.
Purpose and Regulatory Basis
Role in AML
The primary purpose of ongoing due diligence is to maintain up-to-date and accurate knowledge of the customer’s risk profile. It helps institutions detect suspicious activities or changes in customer behavior that might indicate illicit financing. This ongoing scrutiny supports the risk-based approach (RBA) mandated globally, allowing firms to focus their resources on higher-risk customers and transactions while maintaining compliant oversight of all clients.
Why It Matters
Money laundering methods are increasingly sophisticated and dynamic. Without continuous monitoring, initial due diligence data can become obsolete, leaving institutions vulnerable to facilitating illegal activities unknowingly. Ongoing due diligence allows early detection of inconsistencies, suspicious transactions, or changes in customer circumstances that could pose AML risks.
Key Global and National Regulations
Ongoing Due Diligence is a core requirement under major AML frameworks worldwide:
- Financial Action Task Force (FATF): Sets global standards requiring continuous customer monitoring proportional to risk.
- USA PATRIOT Act: Mandates financial institutions to implement ongoing transaction monitoring and update customer information regularly.
- European Union AML Directives (AMLD): Require periodic review of customer risk and continuous enhancement of due diligence for higher-risk categories.
Many national regulators incorporate these principles, emphasizing ongoing due diligence as a mandatory component of effective AML compliance programs.
When and How it Applies
Real-World Use Cases
Ongoing due diligence applies throughout the lifetime of customer relationships in banking, insurance, investment services, and other financial activities. Real-world triggers for increased monitoring or review include:
- Unusual or large transactions that deviate from expected customer behavior.
- Changes in the customer’s risk profile, such as new business lines, geopolitical exposure, or changes in beneficial ownership.
- Periodic scheduled reviews based on customer risk ratings.
- Post-alert investigations following transaction monitoring system flags.
Examples
- A bank continuously monitoring a corporate client’s transactions and identifying transfers inconsistent with their industry profile.
- Enhanced due diligence applied to politically exposed persons (PEPs) requiring more frequent reviews.
- Automatic alerts triggered by sudden spikes in account activity prompting manual investigation.
Types or Variants
Standard Ongoing Due Diligence
Routine monitoring applied to most customers to ensure consistency and accuracy of their profiles and transactions.
Enhanced Due Diligence (EDD)
Applied to higher risk customers or situations, involving deeper investigations into source of funds, wealth, and ongoing scrutiny.
Simplified Due Diligence (SDD)
For low-risk customers, institutions may apply lighter monitoring but still perform periodic reviews consistent with regulatory expectations.
Procedures and Implementation
Steps for Compliance
- Risk-Based Customer Segmentation: Classify customers based on risk profiles to determine the extent and frequency of ongoing scrutiny.
- Continuous Transaction Monitoring: Use automated systems and AI algorithms to detect suspicious patterns or anomalies.
- Periodic Customer Reviews: Update KYC information, verify source of funds, and reassess risk ratings at scheduled intervals.
- Investigations and Escalations: Assess flagged transactions or behavioral changes to decide if further actions, such as filing Suspicious Activity Reports (SARs), are required.
- Documentation and Reporting: Maintain detailed records of due diligence activities, reviews, and outcomes for regulatory audits.
Systems and Controls
Institutions deploy integrated AML software platforms combining customer data management, transaction monitoring, and case management to streamline ongoing due diligence processes.
Impact on Customers/Clients
Rights and Restrictions
Customers typically must cooperate by providing updated identification, documentation, and explanations for unusual activities when requested. While ongoing due diligence ensures their accounts are secure and compliant, some may experience enhanced scrutiny or delays if flagged for review.
Customer Interactions
Clear communication about ongoing monitoring policies builds trust, while transparent procedures help minimize disruptions. Customers identified as higher risk may face enhanced verification requirements or transaction limitations.
Duration, Review, and Resolution
Ongoing due diligence persists throughout the lifetime of a financial relationship. The frequency of reviews depends on the risk level — low-risk customers might be reviewed annually, whereas high-risk profiles might require quarterly or more frequent assessments.
When issues arise, institutions must resolve them through investigations, potentially terminating relationships if risks cannot be mitigated or suspicious activities confirmed.
Reporting and Compliance Duties
Financial institutions have explicit responsibilities:
- Maintaining up-to-date records of ongoing due diligence activities.
- Reporting suspicious transactions to relevant authorities promptly.
- Conducting internal audits to ensure effectiveness.
- Facing penalties including fines and sanctions for non-compliance or failure to maintain adequate ongoing due diligence programs.
Related AML Terms
Ongoing Due Diligence is closely related to:
- Know Your Customer (KYC): The initial customer identification and verification step.
- Customer Due Diligence (CDD): Ongoing assessment and verification.
- Enhanced Due Diligence (EDD): Heightened scrutiny for high-risk customers.
- Transaction Monitoring: The process of analyzing transactions for suspicious activity.
- Suspicious Activity Reporting (SAR): Reporting mechanisms triggered by findings through due diligence.
Challenges and Best Practices
Common Issues
- Maintaining accurate, current customer data amid changing circumstances.
- Balancing customer experience with rigorous monitoring.
- Managing vast volumes of transaction data and reducing false positive alerts.
- Ensuring staff training and system upgrades keep pace with evolving risks.
Best Practices
- Adopting risk-based approaches tailored to customer profiles.
- Utilizing advanced technology such as AI and machine learning for efficient monitoring.
- Regularly reviewing and updating policies to reflect regulatory changes.
- Fostering a culture of compliance through continuous staff education.
Recent Developments
Innovations in regulatory technology (RegTech) are driving improvements in ongoing due diligence, including:
- AI-powered behavior analytics for real-time risk detection.
- Enhanced integration of blockchain and digital assets monitoring.
- Adoption of global data-sharing initiatives supporting cross-border customer verification.
- Evolving regulations expanding due diligence to newer sectors like cryptocurrency and fintech.
Ongoing Due Diligence is a foundational pillar of AML compliance, vital to keeping financial institutions informed about their customers throughout their business relationship. Continuous monitoring helps detect evolving risks, ensures regulatory adherence, protects the integrity of financial systems, and prevents the facilitation of money laundering and terrorism financing. Successful implementation requires robust systems, risk-based approaches, trained personnel, and a commitment to continuous improvement.