Author: Maryna Pokotylo, Partner at F&P
In today’s environment of increased attention to financial compliance and sanctions risks, businesses are increasingly facing situations where bank payments are suspended or do not go through at all. This can happen both in domestic banks and in foreign payment systems or in international transfers, and has its own legal grounds, consequences and algorithms for business.
Blocking a payment does not always mean a “ban” or a violation on the part of the client – it is more often the result of banks’ use of financial monitoring systems, AML/KYC checks and sanctions screening, which are mandatory requirements of both national and international law, as well as internal bank policies and correspondent bank requirements.
1. Causes of payment freezes
Compliance risks and internal monitoring systems of the bank. Commercial and international banks are required to control the movement of funds in accordance with AML (Anti-Money Laundering) and KYC (Know Your Customer) requirements. This means that any payment may be stopped if the bank finds inconsistencies in the data, inconsistencies in the client’s profile or atypical transactions, inconsistencies in the transaction with the client’s normal business activities, or insufficient documentary evidence of the economic content of the transaction.
Sanctions risks arise if the payment is related to a counterparty that is potentially or actually on sanctions lists (national or international). In practice, the risk may also arise if the payment is linked to a sanctioned jurisdiction, correspondent bank, beneficiary, commodity or purpose that is subject to sanctions restrictions or screening triggers.Banks automatically block or suspend transactions that fall under sanctions regimes to avoid fines and loss of access to financial markets.
Incorrect details or incorrect payment data – for example, inaccurate SWIFT codes, incorrect company names, or inaccurate payment purpose are also very common causes of hang-ups, especially in international transfers, where automated verification systems are sensitive to formal inconsistencies.
2. How business should act: a clear algorithm of steps
1) Find out why the payment was blocked
The first step should always be communication with the bank servicing the account:
- Ask in writing, through which mechanism and on what legal grounds the payment was stopped.
- The request should contain clarifications:
– which transaction is considered risky,
– which data or transactions are suspicious;
– whether it is financial monitoring, sanctions screening, currency control, internal compliance checks, or a request from a correspondent bank.
The bank is obliged to provide justification or at least indicate which documents must be provided for verification, to the extent permitted by law and internal disclosure procedures.
2) Prepare a list of basic documents for the bank
To ensure that the payment is unblocked, the business needs to provide a clear legal and economic basis for the transaction. The standard list of documents includes:
- Contracts and agreements with the recipient of funds (with translation if the payment is international), as well as additional agreements, specifications, orders, and other documents that specify the subject matter and terms of the transaction.
- Invoices, certificates of work performed/services rendered (Invoice, Bill of Lading, etc.), shipping documents, customs documents (if any), transportation documents, certificates of origin or quality (if necessary).
- An explanatory note setting out
the purpose of the payment with a description of the economic content,
compliance with the agreement and legislation (wording without legal jargon),
the logic of the business transaction, its connection with the company’s core business, the grounds for choosing a counterparty, and the practical purpose of the payment. - Extracts from the registers, KYC documents of the counterparty, including statements on beneficial owners, ownership structure, registration documents, confirmation of the actual location and, if possible, absence of the counterparty from the relevant sanctions lists.
- Documents confirming the legitimacy of the source of funds (financial statements, payment documents, budget certificates), as well as documents confirming the business purpose and financial capacity of the transaction.
- If necessary: internal company documents (compliance policies, counterparty verification procedures, authorization questionnaire, due diligence results) if the bank requests confirmation of the appropriate level of internal control.
Tip: It is important to prepare all documents in the formats accepted by the bank and coordinate the list with the bank’s financial monitoring specialist in advance, as well as submit them in one structured package with a cover letter and a list of attachments.
3. Sanctions risks as a separate area of compliance
Sanctions compliance management is a separate branch of risk management that involves verification:
- whether the counterparty is on any sanctions lists (UN, EU, OFAC, etc.).
- whether it has any hidden beneficiaries related to sanctioned persons.
- whether the transaction or business structure does not create grounds for blocking payments due to sanctions risks;
- whether the payment goes through banks, jurisdictions or supply chains that may be classified by the bank as high-risk.
Even an unconfirmed suspicion about a counterparty can lead to a blocked transaction, and bank compliance systems often operate on the principle of “better to stop and double-check,” which, from a practical point of view, requires businesses to prepare an evidence base in advance regarding the transparency of the counterparty and the economic substance of the transaction.
4. What to do if the blocking lasts longer than the set time limit
If a payment is being blocked, it is advisable for businesses to act consistently and with proper documentation of each step.
In this situation, you should:
– contact the bank again in writing with a request to provide clarification on the status of the transaction and the list of documents required to complete the audit;
– clarify the stage of the review (internal audit of the bank, additional compliance analysis, review by a correspondent bank, etc.);
– submit documents in one structured package with a cover letter and a list of attachments;
– record all communication with the bank (letters, responses, requests, list of submitted documents, dates of sending and receiving).
If the bank does not provide a meaningful response or the audit continues without proper communication, it is advisable to proceed to pre-trial settlement:
– send an official complaint to the bank;
– contact the bank’s compliance/financial monitoring unit separately;
– if necessary, initiate consideration of the appeal through the bank’s management or the relevant customer complaints unit.
At the same time, it is important to note that in certain cases, a bank may be restricted from disclosing full information on the grounds for suspending a transaction due to the requirements of financial monitoring legislation and internal compliance procedures.
If there is no result after the pre-trial stage, the business may consider judicial protection of its rights, in particular, regarding the proper fulfillment of contractual obligations by the bank, provision of information within the scope of permissible disclosure and removal of unlawful restrictions on the transaction. In this case, a properly formed evidence base and a complete chronology of interaction with the bank will be of key importance.
5. Risk prevention: how to avoid problems with payments
- Implementing internal compliance in business is not a formality, but an effective mechanism to prevent the risks of blocking payments and other negative consequences.
- Regular checks of counterparties against sanctions lists and transparency of ownership structure significantly reduce the risk of delays, especially for international transactions, new counterparties, and atypical payments.
- Having a clear AML/KYC policy in place increases bank confidence and facilitates internal financial monitoring procedures, as well as reduces the time required to prepare a response to a bank’s request.
- It is practical to form a “compliance file” for key counterparties in advance: a package of registration, corporate, authorization and operational documents that can be promptly provided to the bank without wasting time.
Conclusion.
Compliance and sanctions risks have become an integral part of financial relations in modern business. If a payment is delayed, it is not the end of the world, but a signal to act: to analyze, prepare documents and communicate clearly with the bank. The key task of a business in such a situation is not only to formally submit documents, but also to provide proper legal justification for the economic content of the transaction, its compliance with the company’s business profile, and the absence of sanctions triggers. Legal support at every stage will help not only to unblock the transaction but also to create an internal system that will help avoid similar situations in the future.
