INTRODUCTION
The Kerala High Court has recently issued a significant guidelines regarding the power of the banks to immediately freeze suspicious accounts even without a formal request from law-enforcement authorities. The Court has also directed the Reserve Bank of India (RBI), to frame a comprehensive Standard Operating Procedure (SOP) to help banks uniformly address suspicious or irregular transaction. This move comes in the backdrop of rising financial fraud and cyber-crime cases in India.
BACKGROUND
The matter arose from writ petitions filed by account holders of South Indian Banks whose accounts were frozen over “unusual transaction” inconsistent with their declared income. Importantly, the bank had acted of its own without receiving any freezing direction from a competent authority. The RBI informed the Court that the current regulatory framework does not explicitly empower banks to impose such freezes independently. Observing the growing, complexity of financial crimes, especially involving digital payments, the High Court held that RBI under section 35A of the of the Banking Regulation Act, 1949 has a statutory responsibility to maintain the stability and responsibility of the banking system. The Court therefore stepped into provide interim guidelines until the RBI formalizes an SOP.
KEY POINTS
Banks may immediately impose a debit freeze on an account when there is reasonable suspicion of unusual or fraudulent transaction. An intimation must be done on the same day to the account holders by SMS and registered post. The bank must promptly notify the jurisdictional cyber-crime police authority as per existing RBI norms.
Account holders may submit an explanation and the banks must explain within one week. If the explanation is unsatisfactory or if not provided the freeze may continue for a maximum period of three months, pending action by an investigating agency. If no authority explains within three-month then the freeze must be lifted after which the bank may allow operations or ask the customer to close the account. Account holders may legally challenge their bank if their explanation is rejected without justification.
Any order from a competent law enforcement authority must be complied with immediately.
The guidelines are interim directions and shall remain in force until the RBI publishes a formal SOP.
RECENT DEVELOPMENTS
Following the judgement, the Kerala High Court instructed, South Indian Bank to immediately inform the competent authorities regarding the freeze already imposed in the cases before the Court and directed it to strictly comply with the newly issued guidelines. The Court emphasized the urgency for the RBI to frame a uniform SOP to regulate the freezing of suspicious bank accounts, given the rising number of online financial frauds. The order is expected to influence the banking practices across the country, prompting banks to revise their internal compliance mechanisms until the RBI’s SOP is finalized.
CONCLUSION
The Kerala High Court’s judgement offers much-needed clarity on the powers of the banks to freeze any suspicious accounts in the absence of the statutory guidance. By regulating this need for swift and preventive action with procedural safeguards for account holders, the Court has managed to fill an important regulatory gap. The upcoming RBI SOP, once issued, is expected to further streamline the process and create uniformity across all banks. This judgment marks a proactive judicial intervention in protecting the financial system while also ensuring fair treatment of customers.
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WRITTEN BY- SOUMITA CHAKRABORTY
