Amid Rising Digital Transactions and Cybercrime, Banks Granted Powers; Account Holders Entitled to Timely Notice and Response
Cochin – The Kerala High Court has issued detailed guidelines empowering banks to temporarily freeze suspicious customer accounts, even without prior notice, while simultaneously directing the Reserve Bank of India (RBI) to develop a comprehensive Standard Operating Procedure (SOP) for handling such accounts.
Justice M.A. Abdul Hakhim delivered the order while disposing of two writ petitions filed by account holders of South Indian Bank, whose accounts had been frozen due to unusual transactions inconsistent with their declared income profiles. Both petitioners asserted that their transactions were legitimate business activities and challenged the bank’s action as arbitrary and unjustified.
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Bank Action and RBI Response
The petitioners’ accounts had been frozen more than a year ago, without any requisition from law enforcement agencies. While the bank had reported suspicious transactions and the account freezes to the RBI, the central bank contended that banks do not have the authority to freeze accounts in the absence of requisitions from law enforcement agencies or courts.
Rising Threat of Cybercrime and Digital Payments
The court noted that the country is witnessing an alarming surge in cyber financial crimes facilitated through digital payment systems such as UPI. It was observed that the RBI, under Section 35A of the Banking Regulation Act, has a statutory duty to safeguard the nation’s financial system.
“The misuse of bank accounts in cybercrime is escalating rapidly. The RBI, as the central bank responsible for managing the country’s currency and banking operations, possesses wide-ranging powers to protect the banking system and the economy,” the court stated.
Accordingly, the court directed the RBI to urgently formulate an SOP defining the powers and limitations of banks in freezing suspicious accounts.
“It is incumbent upon the RBI, given its expertise, to clearly define the powers of banks to freeze suspicious accounts in order to prevent financial cybercrime,” the judgment added.
Banks’ Responsibility and Legal Obligation
The court emphasized that even though not all banks are strictly public authorities, they have an obligation to assist the government in preventing financial misuse.
“Banks have a duty to ensure that their accounts are not used to commit offences. Failure to take timely and appropriate action could render the bank an accomplice in the crime,” the court noted.
High Court Guidelines for Freezing Accounts
The court analyzed RBI circulars related to KYC compliance and information suppression, observing that banks have the power to identify suspicious transactions but lack a clear procedural framework. To address this, the court issued the following guidelines:
1. Banks may impose an immediate debit freeze if there is reasonable suspicion of irregular activity.
2. Account holders must be notified of the freeze on the same day via SMS and registered post.
3. The freeze must be reported to the jurisdictional Cyber Crime Police Authority as per RBI guidelines.
4. Account holders can submit an explanation to the bank, which must respond within one week.
5. If the explanation is unsatisfactory, the bank may continue the freeze for a maximum of three months.
6. Banks must comply immediately with instructions from law enforcement authorities.
7. If no agency responds within three months, the bank must lift the freeze, allowing account operations, while informing the account holder.
8. Account holders can legally challenge if the bank improperly rejects their explanation.
Impact and Forward Procedure
The court directed South Indian Bank to immediately notify relevant authorities about the frozen accounts and follow the new procedural framework. RBI was instructed to develop a formal SOP to prevent financial cybercrimes.
Additionally, it was clarified that if accounts are later unfrozen, the bank may request account closure or re-impose a freeze if there is reasonable suspicion regarding future transactions.
