Activation-induced deaminase (AID) mutates the immunoglobulin (Ig) genes to initiate somatic hypermutation (SHM) and class switch recombination (CSR) in B cells, thus underpinning antibody responses. AID mutates a few hundred other loci, but most AID-occupied genes are spared. The mechanisms underlying productive deamination versus non-productive AID targeting are unclear. Here we show that three clustered arginine residues define a functional AID domain required for SHM, CSR, and off-target activity in B cells without affecting AID deaminase activity or Escherichia coli mutagenesis. Both wt AID and mutants with single amino acid replacements in this domain broadly associate with Spt5 and chromatin and occupy the promoter of AID target genes. However, mutant AID fails to occupy the corresponding gene bodies and loses association with transcription elongation factors. Thus AID mutagenic activity is determined not by locus occupancy but by a licensing mechanism, which couples AID to transcription elongation.