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Blocked Funds Definition
A blocked fund is defined as money or capital realized when a foreign operation involving the transfer of funds is blocked as a result of regulations imposed by the government of the country where the money was generated. When a fund is suspected to be generated from illegal activities or criminal acts, the government can impose certain regulations hindering the money from being be transferred. The fund then becomes a blocked fund.
A Little More on What are Blocked Funds
There are quite a number of reasons why foreign operations involving the transfer of funds may be blocked, thereby becoming blocked funds. The major reasons are trade violations, criminal or illegal activities, political reasons and regulations in foreign currencies.
When a nation is faced with a situation of emergency, blocked funds might occur, political reasons can also motivate regulations imposed on foreign operations resulting in blocked funds.
A financial institution might be mandated to hold particular funds if they are suspected to be generated from criminal activities. Questionable transactions are investigated but funds involved are held until investigations are complete. For example, recently, the Justice Department in the U. S asked Visa and PayPal to block fund transfers to offshore gambling Web sites until it is satisfied that no illegality has occurred. Funds can also be restricted when trade violations occur.
If the government of a nation decides a certain funds should be blocked, financial institutions in charge of the funds are contacted to effect this. The institution then freezes the funds until investigations are complete and it is certain that no illegality occurred. However, during this period, the funds are put in interest-bearing accounts where they can generate interests which are returned to the holder of the funds once they are unfrozen or unblocked.
Some professionals specialize in trading blocked funds, they are mostly banks and brokers. They trade these funds in exchange for profits, they often request discounts or make profits through currency conversion rates.
References for Blocked Funds
Academic Research on Blocked Funds
International R&D: the establishment and evolution of research and development abroad by seven US multinationals, Ronstadt, R. C. (1978). Journal of International Business Studies, 9(1), 7-24.
Legality and market reform in Soviet-type economies, Litwack, J. M. (1991). Journal of Economic Perspectives, 5(4), 77-89.
Capital budgeting for the multinational corporation, Shapiro, A. C. (1983). In International Accounting and Transnational Decisions (pp. 335-344).
Public footprints in private markets: Sovereign wealth funds and the world economy, Kimmitt, R. M. (2008). Foreign Affairs, 119-130.
Exchange control and the blocked rand mechanism, Gidlow, R. M. (1976). South African Journal of Economics, 44(1), 52-58.
Using countertrade as a competitive management tool, Cho, K. R. (1987). Management International Review, 50-57.
Housing finance for lower income urban households in Zimbabwe, Rakodi, C. (1995). Housing Studies, 10(2), 199-227.
The ADR: An Instrument of International Finance and a Tool of Arbitrage, Moxley, R. E. (1963). Vill. L. Rev., 8, 19.
The role of financial relationships in the history of American corporate finance, Calomiris, C. W., & Ramirez, C. D. (1996). Journal of Applied Corporate Finance, 9(2), 52-73.
Transnational strategies of protection and defense by multinational corporations: Spreading the risk and raising the cost for nationalization in natural resources, Moran, T. H. (1973). International Organization, 27(2), 273-287.