AML due diligence: Requirements, risks, and best practices

The flow of illicit money in the worldwide financial markets is staggering, reaching $3 trillion in 2023. As financial crime becomes more sophisticated, companies face mounting pressure to detect and prevent suspicious activity before it results in significant financial, legal, or reputational damage. 

This growing challenge has fueled demand for anti-money laundering (AML) solutions. The global AML market is projected to grow from $3.1 billion in 2024 to $6.7 billion by 2029.

One effective tool for dealmakers and M&A professionals is AML due diligence. It enables the early identification of red flags and helps protect the interests of all parties involved in a deal.

This article walks through the specifics of due diligence AML, outlines key AML due diligence requirements, and highlights how effective data management supports a smooth and secure investigation process.

What is AML due diligence?

AML due diligence refers to the process of verifying the identity of customers, business partners, or investment targets, ensuring their funds originate from legitimate sources, and confirming their adherence to AML compliance obligations., These include standards and regulations issued by bodies such as Financial Action Task Force (FATF), Bank Secrecy Act (BSA), and Financial Crimes Enforcement Network (FinCEN).

It plays a crucial role in helping financial institutions and regulated organizations prevent money laundering, terrorist financing, and other forms of financial crime.

Importantly, AML due diligence forms a central part of broader customer due diligence (CDD) and enhanced due diligence (EDD) processes. While CDD and EDD focus on identifying and understanding customers, AML due diligence introduces a risk-based approach to detect potential connections to criminal activity..

AML due diligence is typically required when:

• Establishing a business relationship with customers in industries known for higher money laundering risks, such as real estate, cryptocurrency, or offshore finance
• Initiating an M&A deal involving a target operating in high-cash or high-risk sectors that lacks transparency in its financial reporting
• Dealing with businesses located in or associated with high-risk jurisdictions or countries subject to  sanctions, such as Iran or Mali
• Interacting with politically exposed persons (PEPs) or their close associates, which necessitates the use of enhanced due diligence AML
• Reviewing large cash transactions or complex wire transfers that do not align with the customer’s known risk profile or the stated purpose of their account
• Responding to internal alerts triggered by suspicious transactions or unusual account activity that requires further investigation

AML due diligence requirements by type of customer

As mentioned, AML due diligence falls under the wider umbrella of customer due diligence and enhanced due diligence. It can also be implemented during standard due diligence (SDD), depending on the level of risk involved in a business relationship or transaction.

Each type of due diligence involves a different level of scrutiny based on the customer’s or target’s risk profile:

• Standard due diligence — Applied to low-risk customers and partners
• Customer due diligence — Used for medium risk customers and partners
• Enhanced due diligence — Required for high-risk customers and partners

Below is a comparison of each due diligence type and the role of AML within it:

Data management in AML due diligence

Whether conducting ongoing customer due diligence, enhanced due diligence, and AML due diligence, organizations must collect and review sensitive documents, including customer information, corporate ownership records, compliance reports, and transaction data.

Improper handling of this data can lead to oversight, delayed investigations, or non-compliance with AML regulations. To avoid these issues, it’s essential to ensure that all data is properly organized, securely stored, and easily accessible for internal review or regulatory audits.

A virtual data room (VDR) is one of the most effective tools for managing documentation during the due diligence process.. A dedicated data room for due diligence allows sharing of confidential documents between internal teams, legal counsel, and regulatory stakeholders, and ensures that all data used for AML due diligence remains secure. 

Key benefits of using a virtual data room for AML due diligence include:

• Centralized access to critical AML documents
  All key files, including customer onboarding records, customer’s account activity, and internal AML policies, are stored in one place. This makes it easier to assess whether the target meets key compliance benchmarks, such as beneficial ownership disclosures or AML risk assessments.
• Secure sharing with access controls
  VDRs ensure that only authorized users can access sensitive data. Role-based permissions protect confidential documents while allowing compliance teams, legal advisors, and external stakeholders to collaborate securely.
• Full audit trails and version control
  Every action taken in a VDR is logged, helping deal teams demonstrate transparency and control. This is especially useful when responding to regulators or proving adherence to AML regulations and supervisory guidance.
• Faster collaboration across teams
  Compliance, legal, and financial stakeholders can work in parallel, reviewing and flagging issues in real time. This reduces bottlenecks and ensures that any concerns, such as missing Know Your Customer (KYC) records or outdated customer risk profiles, are identified early.
• Improved risk visibility and oversight
  Organized folder structures and searchable metadata help identify red flags, including inconsistencies in customer identification programs or failure to escalate suspicious transactions.

Key challenges and how to overcome them

Conducting AML due diligence during an M&A transaction can be challenging, particularly when large datasets, international targets, and high-risk sectors are involved. Below are some of the most common challenges that deal teams might face and how to address them effectively.

Data inconsistency and inaccessibility

M&A teams often deal with incomplete, outdated, or poorly organized records, which makes it difficult to verify the customer’s identity or assess a company’s AML posture.

• Potential solution:
  Use virtual data rooms to centralize document storage and enable real-time access. Additionally, adopt compliance automation tools to streamline document collection and ensure consistent data quality.

Difficulty tracking beneficial ownership

Identifying the ultimate beneficial owner can be challenging, especially when complex offshore structures are involved.

• Potential solution:
  Require enhanced disclosures early in the due diligence process, and apply risk-based procedures in alignment with AML due diligence requirements.

Manual verification bottlenecks

Relying on manual checks to confirm records or detect red flags can slow down the due diligence process and increase the chance of missing unusual or suspicious activity.

• Potential solution:
  Adopt AML compliance tools that help automate steps during screening, identity verification, and document review — for example, VDRs. These tools also support ongoing due diligence post-acquisition, ensuring continuous oversight.

Global regulatory complexity

Cross-border M&A deals are subject to a patchwork of AML laws and standards, increasing complexity.

• Potential solution:
  Stay aligned with global frameworks like FATF and consult with local legal counsel to navigate jurisdictional differences.

AML due diligence checklist

The following AML checklist provides a step-by-step approach to help ensure effective due diligence during M&A or onboarding processes:

Key takeaways

• AML due diligence is a part of customer due diligence and enhanced due diligence, adding a risk-focused layer to detect potential money laundering or terrorist financing activity.
• It’s necessary when establishing business relationships in high-risk industries, launching M&A deals with opaque financials, dealing with high-risk jurisdictions, interacting with PEPs, processing large or unusual transactions, or investigating internal alerts.
• Common challenges in AML due diligence include inconsistent data, hidden ownership structures, manual verification delays, and navigating global regulations.
• Using secure tools like virtual data rooms and compliance automation solutions helps improve oversight, enhance collaboration, and maintain strong AML compliance throughout the due diligence lifecycle.