'Banks May Impose Immediate Debit Freeze On Suspicious Accounts': Kerala High Court Issues Guidelines, Asks RBI To Frame SOP

Kerala High Court has issued a detailed set of guidelines authorising banks to temporarily freeze suspicious customer accounts, even without prior notice, while simultaneously directing the Reserve Bank of India (RBI) to frame a comprehensive Standard Operating Procedure (SOP) for the Banks to deal with suspicious accounts.Justice M.A. Abdul Hakhim delivered judgment while disposing of two writ petitions filed by account holders of South Indian Bank whose accounts had been frozen on the grounds of unusual transactions not matching their declared income profiles. Both petitioners claimed legitimate business activity and challenged the bank's action as arbitrary.The Bank froze the accounts of the petitioners without any requisition from any of the law-enforcing agencies more than a year ago. There has been no requisition from any law enforcement agencies till date even though the Bank has reported suspicious transactions in the accounts and the freezing of accounts to RBI. RBI, in its counter stated that the banks have no authority to freeze accounts in the absence of any requisition from law-enforcing agency or Court. Citing the alarming rise of financial cybercrimes facilitated by digital payments systems like UPI, the Court observed that RBI, as the Country's banking regulator has a statutory duty under Section 35 A of the Banking Regulation Act to protect the financial system of the Country. “The country is now flooded with cybercrimes involving the misuse of bank accounts. The RBI, as the central bank responsible for managing the nation's currency and banking system, has wide powers under Section 35A of the Banking Regulation Act to protect the banking system and the economy.” the Court noted. The Court directed the RBI to urgently formulate an SOP defining the powers and limits of banks in freezing suspicious accounts.“It is incumbent upon the RBI, with its expertise, to take up this issue and formulate a concrete Standard Operating Procedure clearly defining the powers of Banks to freeze suspicious accounts in order to prevent financial cybercrimes.” the court added. The Court further noted that even though all Banks are not strictly public authorities, it has an obligation to assist the Government to prevent financial abuse. “Banks have a duty to ensure that no offence is committed using the accounts maintained by them. If the Banks do not take timely, appropriate actions, they also can be termed as accomplices to the crime, facilitating the commission of offences by their Account Holders.” Court added. The Court analysed the guidelines issued by RBI for freezing bank accounts on failure to update KYC details or suppressed material information and examined whether the Banks have the right to freeze the operations in an account when the Bank finds unusual and suspicious transactions in the account of its customers. The Court concluded that the circulars aims at identifying suspicious accounts, fraudulent transactions, and misuse of Bank accounts, but it does not specifically state the course of action to be taken by the Banks on identification of the same to prevent it. The Court further noted that the Bank is a reporting entity under Section 2(1) of the Prevention of Money-Laundering Act. The Court observed that in order to achieve the object of the PMLA Act, the Banks are to be conferred the power to freeze the operations in the suspicious accounts for a reasonable period without prior notice to the Account Holders, when the Bank has reasonable grounds for suspicion. The Court thus issued a set of guidelines regarding the freezing of operation in the account when the Bank finds suspicious activities in the account. The guidelines are as follows: Banks may impose an immediate debit freeze on accounts if there is reasonable suspicion on the transaction in the account. Banks shall inform the freezing account to the Account Holder by SMS and registered post on the date of freezing itself. The freezing of accounts must be notified to the jurisdictional Cyber Crime Police Authority under RBI Guidelines. Account holder may submit an Explanation to the Bank regarding the suspicion entertained by the Bank and the Bank shall consider the same and pass appropriate orders within a period of one week. In the absence of explanation or if the explanation is unsatisfactory, the bank may continue the freeze only for up to three months after the communication of freezing to the concerned authorities. The Bank receives any instructions from law enforcement authorities, it has to be complied without delay.If no agency responds within three months, the bank must lift the freeze, allowing the account holder to deal with the credit balance and intimate the same to the Account Holder and thereafter the Bank may permit the operation of the Account or demand closure of the account. The Account holder can legally challenge, if the Bank has illegally rejected the Explanation submitted before the Bank. These guidelines issued...

'Banks May Impose Immediate Debit Freeze On Suspicious Accounts': Kerala High Court Issues Guidelines, Asks RBI To Frame SOP

Anamika MJ

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