Bank account freezing requires lawful authority; suspicious transaction reporting alone does not permit unilateral restrictions.

A bank cannot freeze a customer's current account merely on an alleged suspicious transaction or on the basis of a suspicious transaction report. Section 12 of the Prevention of Money Laundering Act, 2002 imposes record-keeping, confidentiality and reporting duties on a reporting entity, but does not authorise unilateral account freezing, and the RBI circular on suspicious transaction reporting likewise does not permit restrictions on account operations. Freezing is justified only when backed by lawful authority, such as action by an investigating agency or a valid lien. The Allahabad HC held the freeze illegal and unsustainable, and directed that the account be de-frozen so the customers could continue operating it.

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Issues: Whether a bank could freeze a customer's current account on its own, on the basis of an alleged suspicious transaction, and whether Section 12 of the Prevention of Money Laundering Act, 2002 or the Reserve Bank of India circular on suspicious transaction reporting authorized such freezing.

Analysis: The account was frozen without any FIR, complaint, or order of a competent authority. The statutory provisions relied upon by the bank dealt with maintenance of records, confidentiality, and reporting obligations of a reporting entity, and did not confer a power on the bank to unilaterally freeze an account. The cited RBI circular clarified that filing of a suspicious transaction report does not justify placing restrictions on account operations. The Court further held that freezing of an account can be justified only when supported by lawful authority, such as action by an investigating agency or a lawful lien, and that a bank cannot assume the role of an investigating agency or act on unverified suspicion.

Conclusion: The freezing of the account was illegal and unsustainable. The petitioners were entitled to de-freezing and to continue operating the account.

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