What Is Ongoing Customer Due Diligence?

Maintaining the stability and integrity of financial systems is a continuous effort. Businesses, particularly those in financial services, play an important part in safeguarding against financial crime. Ongoing Customer Due Diligence (OCDD) is a fundamental practice that ensures business relationships remain transparent and compliant.

OCDD detects and deters illicit activities that could compromise financial stability. By reviewing customer information and behavior, organizations proactively identify potential risks. OCDD helps protect businesses and consumers from financial misconduct, contributing to a more secure economic environment.

Defining Ongoing Customer Due Diligence

Ongoing Customer Due Diligence (OCDD) is a continuous process for businesses to monitor customer relationships. It is distinct from initial customer due diligence (CDD) performed when a relationship is first established. While initial CDD focuses on verifying identity and understanding the business purpose, OCDD ensures this foundational information remains current, accurate, and relevant throughout the relationship.

The objective of OCDD is to detect and prevent financial crimes, including money laundering and terrorism financing. Criminal organizations evolve their methods, making static customer information a vulnerability. OCDD provides a dynamic view of customer activities and risk profiles, allowing businesses to identify deviations or inconsistencies from expected behavior.

OCDD involves regularly reviewing and updating customer data, such as beneficial ownership details, address changes, or significant shifts in business operations. This continuous assessment confirms that transactions and activities align with the business’s understanding of the customer’s legitimate profile and risk assessment. Maintaining current and accurate customer information protects businesses from legal penalties and reputational harm.

Key Activities of Ongoing Due Diligence

Ongoing Customer Due Diligence involves several activities to maintain a comprehensive understanding of customer relationships and their associated risks. These actions enable businesses to identify and respond to potential illicit financial activities. Each component contributes to a monitoring framework that adapts to evolving customer circumstances and financial crime types.

Transaction Monitoring

Transaction monitoring scrutinizes customer transactions for unusual patterns, large sums, or activities inconsistent with their known profile. Businesses employ systems to analyze transaction data in real-time or near real-time, looking for anomalies such as frequent cash deposits and withdrawals, transactions with high-risk jurisdictions, or unusual payment methods. This identifies transactions that deviate from a customer’s historical behavior or declared business activities, which could indicate money laundering or other illicit financial flows. When a suspicious pattern is detected, it triggers further investigation to determine if reporting is required.

Customer Information Updates

Periodically reviewing and updating customer data is fundamental to ongoing due diligence. This ensures customer information remains current and accurate throughout the business relationship. Businesses must verify details such as address, contact information, and beneficial ownership for corporate entities. Changes in a customer’s business activities, employment status, or stated purpose also necessitate profile updates. Maintaining updated information is essential for accurate risk assessment and aligning with the customer’s current reality.

Screening Against Sanctions and Watchlists

Ongoing due diligence requires continuous screening of customers, their beneficial owners, and associated parties against domestic and international sanctions and politically exposed persons (PEP) lists. This includes lists maintained by government agencies, such as the Office of Foreign Assets Control (OFAC). Regular screening identifies if a customer or related party becomes subject to sanctions or is identified as a PEP, which alters their risk profile. Businesses must implement automated tools and processes to conduct these checks frequently, as sanctions lists are updated regularly. A match requires immediate review and potential asset freezing or reporting to authorities.

Risk Reassessment

Customer risk profiles are not static; they evolve based on new information, changes in behavior, or external factors. Ongoing due diligence requires businesses to regularly reassess a customer’s risk profile, taking into account information from transaction monitoring, data updates, and watchlist screenings. For example, a low-risk customer’s profile might elevate if their transaction volume significantly increases or if adverse media reports surface. This reassessment ensures the level of due diligence applied remains appropriate for the current risk. It allows businesses to adjust monitoring intensity, applying enhanced due diligence measures to higher-risk customers when necessary.

Triggers and Frequency for Ongoing Due Diligence

Ongoing customer due diligence reviews are determined by scheduled periodic assessments and specific events during a customer relationship. This approach ensures businesses maintain an up-to-date understanding of their customers’ risk profiles. The frequency and intensity of these reviews are based on a risk-based approach, meaning higher-risk customers generally receive more frequent scrutiny.

Periodic Reviews

Businesses establish schedules for periodic reviews of their customer base, with frequency correlated to the assessed risk level. High-risk customers might undergo a comprehensive review annually, while medium-risk customers could be reviewed every two to three years. Lower-risk customers may have reviews less frequently, perhaps every five years. This structured approach ensures all customer relationships are systematically re-evaluated over time.

Event-Driven Triggers

Certain events necessitate an immediate, unscheduled review of a customer’s profile, regardless of their periodic review schedule. Significant changes in transactional behavior, such as a sudden increase in volume or a shift in transaction nature, prompt review. Alterations in beneficial ownership or control of an entity, or adverse media findings related to the customer, also trigger immediate reassessment. New information suggesting higher risk, or updates to sanctions lists that might now impact an existing customer, also mandate a prompt due diligence review.

Regulatory Changes

Changes in regulatory guidance or new anti-money laundering (AML) and counter-terrorism financing (CFT) regulations can trigger broader or more intensive ongoing due diligence. These regulatory shifts often require businesses to re-evaluate existing due diligence policies and procedures. Adapting to new compliance requirements ensures alignment with current legal expectations, leading to systemic review of customer data and risk assessments.

Regulatory Expectations and Compliance

Ongoing Customer Due Diligence is a mandated requirement for various entities within the financial sector. Financial institutions, including banks, mutual funds, brokers or dealers in securities, and futures commission merchants, are typically subject to these regulations. Certain non-financial businesses and professions may also fall under these obligations, depending on their activities and jurisdiction.

The broad regulatory landscape mandating OCDD is driven by anti-money laundering (AML) and countering the financing of terrorism (CFT) laws. In the United States, the Bank Secrecy Act (BSA) serves as the foundational statute for AML compliance. The BSA’s Customer Due Diligence (CDD) Final Rule, implemented by the Financial Crimes Enforcement Network (FinCEN), clarifies and strengthens these requirements. It mandates covered institutions to conduct ongoing monitoring to identify and report suspicious transactions and to maintain and update customer information on a risk basis.

Internationally, the Financial Action Task Force (FATF) sets global standards and recommendations for AML/CFT. FATF Recommendation 10 requires financial institutions to conduct ongoing monitoring of transactions and customer relationships to ensure consistency with their knowledge of the customer and their risk profile. These international standards influence domestic regulations, emphasizing a risk-based approach to compliance.

Establishing internal controls, policies, and procedures is important for ensuring compliance. This includes developing written programs that outline how customer identification, beneficial ownership verification, risk profiling, and ongoing monitoring will be conducted. Businesses must also have processes for training staff, independent testing of compliance programs, and designating a compliance officer.

Non-compliance with OCDD regulations can lead to significant consequences. These range from substantial financial penalties, regulatory scrutiny, and severe reputational damage. Such outcomes can disrupt business operations, erode public trust, and result in legal liability.