But you don't -- and can't -- know that the payment is illegal. You merely suspect it, and since you are not a court of law, a judge, or a jury, you should have no business arbitrarily cutting off someone's ability to transact.
And there are also cases in which you can clearly know something is illegal. Someone purchasing guns in a country where guns are not legal doesn't need a judge, jury, and court process for a payment processor to decide they don't want to be involved. It's not arbitrary. And your right to make purchases using a credit card is not a basic human right.