Transaction frozen, now what? Handling fraud disputes and customer liability in MSBs

For Money Services Businesses (MSBs), including money transmitters, currency exchange businesses, cheque cashers, payment institutions and similar firms, handling a frozen transaction requires more than simply releasing or rejecting a payment. Firms need to balance customer communication, fraud prevention, regulatory obligations, transaction monitoring, and potential customer liability while ensuring decisions are properly documented.

In this blog, we explore what happens when a transaction is frozen, why transactions may be placed on hold, how MSBs should manage fraud disputes, and how customer liability may be considered. We also look at practical steps businesses can take to investigate concerns, communicate with customers, manage risk, and strengthen their fraud and transaction-monitoring controls.

Whether you are dealing with a suspected fraud case, a disputed transfer, or a transaction flagged by your monitoring systems, understanding the correct process can help your MSB respond consistently, protect customers, and maintain effective compliance controls.

1. Why transactions get frozen?

MSBs freeze or hold transactions for several common and legitimate reasons:

• Automated monitoring systems detect unusual patterns, such as unexpected amounts, unusual destinations, rapid successive transfers, or activity that does not match the customer’s normal behaviour.
• A customer reports that a transfer was unauthorised or that they believe they were scammed.
• Information is received from another financial institution, a payment network, or law enforcement.
• Sanctions screening or other compliance checks raise a concern about a name, location or party involved.
• The firm has reasonable grounds to suspect fraud, money laundering or other financial crime.

MSBs are required to have systems that identify and manage these risks. Firms can delay or refuse a payment where they have reasonable grounds for concern, but they must also follow strict rules about “tipping off”, they generally cannot tell the customer that a suspicious activity report has been, or may be, submitted to the relevant authorities.

A freeze is usually a temporary risk-management measure while the firm investigates. It does not automatically mean the customer has done anything wrong.

2. Immediate steps when a transaction is frozen

Consistent and well-documented action is essential. Recommended steps include:

1. Secure the funds if they have not yet been paid out. Once money leaves your system and reaches the beneficiary, recovery becomes significantly more difficult.
2. Open a case file immediately. Record the date, time, amount, parties involved, how the freeze was triggered, and the staff member responsible.
3. Review available records. Examine customer due diligence information, transaction history, any available device or location data, and previous communications with the customer.
4. Contact the customer when appropriate. Explain that the transaction is under review and request supporting information. Keep the conversation factual and calm. Avoid any language that could reveal internal monitoring methods or the existence of a suspicious activity report.
5. Reach a decision within a reasonable timeframe. Possible outcomes include releasing the funds, reversing the transaction if still possible, continuing to hold the funds while gathering more information, or escalating the matter to law enforcement when warranted.

Having a clear written internal procedure helps ensure every case is handled consistently and in line with regulatory expectations.

3. The two main types of customer claims

Customers typically raise one of two categories of disputes. Treating them the same way creates confusion and inconsistency.

Unauthorised transactions

These occur when someone other than the customer initiates the transfer without the customer’s permission. Common examples include account takeover, stolen login credentials, or SIM-swap fraud.

Authorised but fraudulent transactions

In these cases, the customer themselves sends the money after being deceived. Frequent examples include romance scams, fake investment opportunities, business email compromise, and imposters claiming to be relatives or officials in urgent need of funds.

The distinction between these two types is central to determining liability and the correct response.

4. Customer Liability – Who usually bears the loss?

Liability depends heavily on whether the customer authorised the transfer and on the specific rules and terms that apply to the service.

Unauthorised transactions

In many cases, the payment service provider is required to refund an unauthorised payment transaction promptly once it becomes aware of the issue, subject to certain conditions.

Customer liability is often limited:

• A relatively low maximum amount (commonly around £35) may apply in cases involving a lost or stolen payment instrument or misappropriation of the instrument.
• Full liability can apply if the customer has acted fraudulently, or has intentionally or with gross negligence failed to keep personalised security credentials safe.

Customers are generally expected to notify the firm without undue delay (and within a set period, often 13 months) to be entitled to redress.

Authorised but fraudulent transactions (scams)

When a customer has authorised the payment, even if they were tricked, the starting position is often different. In many situations the loss remains with the customer unless specific reimbursement rules or voluntary schemes apply.

Where mandatory or industry reimbursement arrangements exist for certain domestic payments:

• Eligible customers may be reimbursed up to a set maximum as per claim in some regimes.
• Firms may be allowed to apply a small excess.
• Reimbursement is usually not required where the customer has acted fraudulently or with gross negligence. “Gross negligence” requires a significant degree of carelessness, ordinary carelessness is not enough. The burden of proof typically lies with the firm.
• Vulnerable customers often receive stronger protection.

These arrangements usually do not cover international payments, payments made for unlawful purposes, or pure civil disputes (for example, where a customer paid a legitimate supplier but is unhappy with the goods or services).

Clear terms and conditions and consistent application of policy are essential.

5. Managing the dispute process effectively

A strong dispute process is fair, documented and timely. Key elements include:

• Acknowledging the customer’s report promptly, preferably in writing.
• Requesting specific supporting information (transaction details, screenshots of communications with the alleged scammer, proof of identity, etc.).
• Investigating thoroughly but efficiently.
• Providing the customer with clear updates and realistic timelines.
• Closing the case with a written decision that explains the outcome in straightforward language.
• Keeping full records, as regulators or dispute resolution bodies may later request them.

Empathy remains important. Customers who have been scammed often feel embarrassed, angry or desperate. A calm and respectful approach reduces the chance of escalation, even when a full refund is not possible.

6. Best practices that strengthen handling of frozen transactions

Daily habits and clear systems make a significant difference:

• Maintain a written fraud and dispute-handling procedure that staff can follow easily and that reflects current regulatory expectations.
• Operate robust customer due diligence and transaction monitoring programmes so issues are detected early.
• Document every step of every dispute thoroughly.
• Review terms and conditions regularly so they remain aligned with current risks and legal requirements.
• Educate customers about common scams that target money-transfer users.
• Train staff consistently so responses remain uniform across the organisation.
• Cooperate appropriately with law enforcement and retain required records.
• Periodically test internal procedures through exercises so teams stay prepared.
• Monitor developments in regulation and industry guidance, as the rules around fraud and customer protection continue to evolve.

7. Quick Operational Checklist

When a transaction is frozen or a dispute is raised:

• Secure or stop the funds if still possible
• Open a case file and document all details (including amounts in pounds)
• Review customer and transaction records
• Contact the customer with clear, factual questions
• Determine whether the transfer was unauthorised or authorised (scam)
• Apply relevant rules and company policy consistently
• Communicate the decision in writing
• File a suspicious activity report if the activity meets the reporting threshold
• Close the case and retain records properly
• Be prepared for possible further review by a dispute resolution body

Closing Perspective

Frozen transactions are an unavoidable part of operating a money services business. When handled with clear procedures, careful documentation, honest communication and realistic expectations about liability, they become manageable rather than disruptive.

Firms that approach these situations consistently protect their customers, reduce complaints, strengthen their compliance culture, and support the integrity of the wider money services sector.

Stay prepared. Stay factual. Stay consistent.

Disclaimer

This article is intended for general informational purposes only and does not constitute legal advice. Money services businesses should consult their own legal counsel and carefully review the specific regulatory requirements and industry rules that apply to their operations.