Indian banks have approached the Reserve Bank of India (RBI) seeking regulatory clearance to freeze customer accounts suspected of illegal activities—without the lengthy process of court orders or law enforcement clearance. The demand, driven by the increasing misuse of mule accounts to move illicit money, reflects the challenges banks face in a digital financial ecosystem vulnerable to exploitation.
Currently, banks act on internal red flags to restrict transactions but are limited by the Prevention of Money Laundering Act (PMLA), which mandates legal or investigative agency approval for full account freezes. The proposed framework aims to empower banks with limited authority under RBI oversight to prevent further misuse before the funds disappear.
The Mule Account Loophole: An Exploiter’s Gateway
Mule accounts—often created using fake documents or operated unknowingly by low-income individuals—have become a favorite tool for cybercriminals. According to industry insiders, despite thousands of accounts being frozen each year, fraudsters simply shift to new ones, exploiting regulatory delays and identity verification gaps.
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The Indian Banks’ Association (IBA) noted that many of these accounts are registered using Form 60, in the absence of valid PAN numbers or voter IDs, allowing fraudsters to bypass scrutiny. In response, banks have proposed tighter verification protocols using the Election Commission’s database to cross-check identities at the account-opening stage and enforce stricter transaction caps.
Balancing Risk, Regulation, and Rapid Action
Banks argue that the current legal framework, while well-intentioned, delays critical action during fast-moving fraud incidents. “By the time authorization is secured, the money is already siphoned off,” said a member of the RBI working group. In light of this, the group is evaluating suggestions for controlled decentralization—allowing banks to temporarily freeze suspicious accounts during real-time fraud detection.
This initiative, if accepted, would represent a significant shift in India’s cyber risk management model, possibly setting a precedent for financial fraud prevention without judicial delays. However, privacy advocates warn that such powers must be balanced with safeguards to prevent arbitrary misuse or wrongful targeting of innocent customers.