What is Restricted Transaction in Anti-Money Laundering?

Definition

In Anti-Money Laundering (AML) terminology, a “Restricted Transaction” refers to a financial transaction that is subject to legal or regulatory limitations due to the involvement of sanctioned individuals, entities, countries, or suspicious activities that may indicate money laundering or terrorist financing. These transactions are either blocked, frozen, or require prior authorization from relevant authorities before they can proceed. The main objective is to prevent illicit funds from moving through the financial system under the guise of legitimate transactions.

Purpose and Regulatory Basis

Restricted Transactions play a critical role in AML frameworks by enforcing restrictions that prevent the flow of funds linked to criminal activities such as terrorism financing, sanctions evasion, tax evasion, and other forms of financial crime. Global and national regulatory authorities enforce these restrictions to protect the integrity of financial systems.

Key regulations and authorities include:

• The Financial Action Task Force (FATF) Recommendations, which set international standards for AML and counter-terrorist financing (CTF).
• The USA PATRIOT Act, which mandates enhanced due diligence, including identification and blocking of transactions involving sanctioned parties.
• The European Union Anti-Money Laundering Directives (AMLD), which require banks and other financial institutions to implement transaction monitoring and sanction screening.
• National sanctions lists (e.g., Office of Foreign Assets Control (OFAC) in the U.S.) which mandate blocking or rejecting transactions involving designated persons or entities.

When and How it Applies

Restricted Transactions typically come into play when a transaction triggers one or more AML risk factors:

• A payment or transfer involves a sanctioned country or individual.
• The amount exceeds regulatory thresholds (e.g., cash transactions over $10,000 in the U.S.).
• Suspicious patterns emerge, such as structuring or layering of cash deposits.
• Politically exposed persons (PEPs) are involved.

Examples include:

• Freezing funds during an investigation on suspicious activity.
• Blocking payments directed to or from entities listed on sanctions or watch lists.
• Holding transactions that involve high-risk jurisdictions pending regulatory approval.

Types or Variants of Restricted Transactions

Restricted Transactions can take various forms depending on the context and regulations:

• Blocked Transactions: Transactions completely prohibited due to sanctions or regulatory orders.
• Frozen Assets/Transactions: Temporary hold on transactions or funds during investigation or regulatory review.
• Conditional Approval Transactions: Transactions allowed only after receiving authorization from regulatory authorities.
• Threshold-triggered Transactions: Transactions flagged and scrutinized based on value exceeding pre-set limits.

Procedures and Implementation

Institutions implement multiple steps and control measures to comply with restrictions on transactions:

• Transaction Screening Systems: Automated tools that check transactions real-time against updated sanctions, PEP, and watchlists.
• Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD): Verification processes to identify risky customers and transactions.
• Transaction Monitoring: Reviewing ongoing transactions for anomalies or suspicious behavior.
• Blocking and Reporting: Immediate freezing or blocking of restricted transactions and filing Suspicious Activity Reports (SARs) with regulators.
• Escalation Protocols: Procedures for compliance staff to review, investigate, and resolve flagged transactions timely.
• Record Keeping: Documentation of all actions related to restricted transactions for audits and regulatory inspections.

Impact on Customers/Clients

From the customer’s perspective, restricted transactions can result in:

• Temporary or permanent blockage of payments or fund transfers.
• Requests for additional documentation or explanations.
• Possible delays in transaction processing.
• Rights to appeal or request review depending on jurisdiction.
  Financial institutions must communicate clearly with customers about the reasons for restrictions while complying with confidentiality rules.

Duration, Review, and Resolution

• The duration of restrictions may vary based on regulatory requirements and investigation status.
• Institutions should conduct periodic reviews of blocked or frozen transactions.
• Once cleared or authorized by regulators, transactions may proceed.
• If suspicion remains, institutions maintain the hold or take further action such as filing reports or terminating accounts.

Reporting and Compliance Duties

Financial institutions are required to:

• Maintain robust AML compliance programs to identify and manage restricted transactions.
• Report restricted and suspicious transactions to relevant regulatory bodies (e.g., FinCEN in the U.S.).
• Retain records of all transaction screenings and compliance decisions.
• Cooperate with regulatory investigations and audits.
• Non-compliance may result in penalties, fines, and reputational damage.

Related AML Terms

Restricted Transactions are closely linked with:

• Sanctions Screening: Filtering transactions against sanctions lists.
• Suspicious Transaction Reports (STRs) / Suspicious Activity Reports (SARs).
• Transaction Monitoring: Ongoing surveillance of transaction patterns.
• Know Your Customer (KYC): Identity verification processes.
• Politically Exposed Persons (PEPs): Individuals posing higher risk in AML.

Challenges and Best Practices

Common challenges in managing restricted transactions include:

• Keeping screening systems updated with real-time sanctions lists.
• Managing false positives to avoid unnecessary customer inconvenience.
• Coordinating across jurisdictions with different regulatory requirements.
  Best practices include conducting regular AML training, using advanced AI-powered screening tools, implementing clear escalation protocols, and maintaining open communication with regulators.

Recent Developments

Technology advancements such as machine learning and artificial intelligence have improved detection accuracy and efficiency in transaction screening. Regulatory bodies have also enhanced requirements for real-time monitoring and reporting, increasing the focus on cross-border AML compliance. New sanctions regimes and increased geopolitical tensions have expanded the scope of restricted transactions globally.

Restricted Transactions are a fundamental AML control to prevent illicit funds from exploiting the financial system. Effective implementation, monitoring, and compliance with regulatory frameworks help financial institutions mitigate risks and uphold global AML standards.