TaxTMI 
TaxTMI 
TaxTMI 
2025 (11) TMI 1636
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion with respect to the transactions in the account by itself in the absence of any requisition to do so from a law enforcement agency. This question has emerged on account of the recent rampant increase in financial cyber fraud. The present situation has led to the filing of a large number of cases involving the account freezing of persons involved in the fraud and innocent persons in this Court. Every day this Court is dealing with nearly 200 cases. It is observed that a large number of transactions involving Crores of Rupees over a short period are present in several accounts belonging to young persons and persons from the lower strata of society. In such cases, it is clear that the accounts are used either for financial cyber fraud or for money mules. It is a challenging task for this Court to determine whether the Petitioner is an offender or a victim. This Court also considers the pattern of transactions to identify the offender and the victim while exercising its discretion under Article 226 of the Constitution of India to give relief to the Petitioners. Should the Bank remain a silent spectator when there are reasons to believe that its Account Holders have been using the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Banking Regulation Act, 1949. The Petitioner in W.P.(C) No. 32516/2024 filed a Reply Affidavit to the Counter Affidavit filed by the Bank. The Reserve Bank of India filed a Counter Affidavit producing a copy of the Master Direction (MD) on Know Your Customer (KYC) dated 25.02.2016, updated on 14.08.2025, and contending that RBI has not issued any specific instruction regarding freezing of accounts of individuals/institutions except under the said Circular. 8. I heard the learned Senior Counsel for the Petitioners, Adv. Sri. S. Sreekumar, instructed by Adv. Sri. Albin A. Joseph, Adv. Sri. Sunil Shanker, who appeared for the South Indian Bank, and Adv. Smt. Akhila Nambiar, who appeared for the RBI. 9. The learned Senior Counsel for the Petitioners contended that the Bank has no right to freeze the operations in the accounts of the Petitioners in the absence of a requisition for the same from any of the law-enforcing agencies. The learned Counsel invited my attention to various provisions in Ext.P6 Master Circular dated 01.07.2015 issued by the RBI and Ext.R2(a) Circular produced along with the Counter Affidavit of the RBI. The contention of the learned Senior Counsel is that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unts maintained by it. The Bank has frozen the accounts of the Petitioners only to ensure the same. If the Petitioners had offered sufficient explanations for the unusual transactions in their accounts, the Bank would have permitted them to operate the accounts. They have not offered any explanation for transactions involving large amounts, even in this Court. The learned Counsel invited my attention to Ext.R4(A) Account Opening Form submitted by the Petitioner in W.P.(C) No. 32516/2024, in which he has stated that his monthly income is only below Rs.5,000/-. Ext.R4(B) Statement of Account would show that for the period from 03.04.2024 to 13.08.2024, there have been deposits of Rs. 1,90,26,665.86 and withdrawals of Rs. 1,56,26,413.84. Likewise, the Petitioner in W.P.(C) No. 32291/2024 declared in the KYC details that he is having an annual income between Rs.5 lakh and Rs.10 lakh. The account was opened on 16.07.2024. Between the period from 24.07.2024 to 13.08.2024, there have been deposits of Rs. 2,74,24,025/- and withdrawals of Rs. 2,54,23,635/- as revealed from Ext.R4(A) Statement of Account. The learned Counsel invited my attention to the various provisions in the guidelines is....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... so modifying or cancelling any direction may impose such a condition as it thinks fit, subject to which the modification or cancellation shall have effect." 14. The said provision provides wide powers to the RBI to issue direction to regulate banking business in the public interest or in the interest of Banking policy or to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the Banking company or to secure the proper management of any Banking company generally. Prevention of financial cyber fraud would come under the aforesaid clauses in Section 35A. The rate of cybercrimes has increased at an alarming pace following the implementation of UPI transactions by the Central Government, which were introduced with the laudable objective of promoting a cashless economy. UPI enables 24/7 transfers between bank accounts, making transactions speedy, convenient, and transparent with enhanced security. However, this has also made the commission of cybercrimes much easier. The country is now flooded with cybercrimes involving the misuse of bank accounts. The RBI, as the central ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wledgement, I find that Ext.P8 Acknowledgement would show that the Income Tax Return was submitted on 14.03.2025, subsequent to Ext.P1 dated 16.08.2024 freezing his account. The said Income Tax Return is submitted after the filing of the Writ Petition in order to justify the high-value transactions. The Petitioner in W.P.(C) No. 32516/2024 does not have any case that he has filed any Income Tax Return earlier. Even Ext. P8 would show that the total income declared is only Rs. 7,02,790/-, whereas the transactions for the short period of nearly four months in Ext.R4(B) are deposits of more than Rs. 1.90 Crores and withdrawals of more than 1.50 Crores. Even before this Court, the Petitioners have not satisfactorily explained the high-value transactions in the account. The Petitioners have not even disclosed the nature of the business undertaken by them. On these grounds, I can easily dismiss these Writ Petitions, refusing to exercise my discretionary jurisdiction under Article 226 of the Constitution of India. But, there is also a question that confronts me as to how long the Bank will continue freezing the account, what will happen to the amounts lying in the Petitioners' account....
X X X X Extracts X X X X
X X X X Extracts X X X X
....zing. 18. Let me examine the guidelines issued by the RBI, which are placed on record by the parties to substantiate their contentions, to verify 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 Respondent/Bank relies on Clause No.2.10 of the Master Circular - Know Your Customer (KYC) Norms / Anti-Money Laundering (AML) Standards / Combating of Financing of Terrorism (CFT) / Obligation of Banks under PMLA, 2002 dated 02.07.2012 issued by RBI, dealing with monitoring of transactions. On going through the said provision, it is seen that the said provision is intended for ongoing monitoring as a part of the KYC procedure to control and reduce the risk of the Banks. It only provides for paying special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose; transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract the attention of the Bank. It mandates filing STRs to FIU-IND. It mandates for periodical re....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 38 of Ext.R2(a) also deals with periodical updation of KYC of the customers with reference to the degree of risk. The said provisions do not deal with suspicious accounts or suspicious transactions. 22. Though the learned Counsel for the Bank relied on Clause 3.4 of the Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions updated on 15.07.2024, I find that the said provision only provides for developing and strengthening of Early Warning Signal (EWS) framework for monitoring other Banking/non-credit related transactions for alerting the Bank timely in initiating appropriate measures towards prevention of fraudulent activities including monitoring of transaction/unusual activities specifically in the non-KYC compliant and money mule accounts, etc., to contain unauthorised/fraudulent transactions and to prevent misuse of Banking channel. 23. The Petitioner in W.P.(C) No. 32516/2024 produced Ext.P6 Master Circular - Know Your Customer (KYC) Norms / Anti-Money Laundering (AML) Standards / Combating of Financing of Terrorism (CFT) / Obligation of Banks and Financial Institutions under PMLA, 2002, date....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Ext.R2(a) Circular does not say what course of action is to be taken by the Bank with respect to the money generated in the accounts of the Petitioners out of the suspicious transactions. The advanced notice provided in Ext.R2(a) will defeat the very purpose for which the monitoring of the accounts is done, as it would enable the wrongdoers to withdraw and misappropriate the proceeds of the crime, making the recovery impossible. 25. Bank is a reporting entity as defined under Section 2(1)(wa) of the PMLA. As per Section 12 of PMLA, every reporting entity has to maintain a record of all transactions of all its customers and furnish the same to the authority under PMLA. As per Sub-Section (1) Section 12AA of PMLA dealing with enhanced due diligence of reporting entities, it is the duty of the reporting entity to verify the details of the specified transaction, which includes examination of the identity, ownership, financial position, sources of funds of the client, the purpose behind conducting the specified transaction and the intended nature of the relationship between the transaction parties. Sub-Section (2) provides that if the client fails to fulfill the conditions laid dow....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the debit freezing. 27. Hence, I am of the view that till the time the RBI comes forward with a Standard Operating Procedure for the Banks to deal with suspicious accounts, it is for this Court to intervene and give guidance to the Banks, taking note of the object of the aforesaid Guidelines issued by the RBI. Accordingly, the following guidelines are made for freezing the operations in the account when the Bank entertains suspicion about the operation of the account. 1. If the Bank is having reason to believe suspicious transactions in the account, the Bank is free to effect a debit freeze of the account without notice to the Account Holder. 2. The Bank shall intimate the freezing of the Account to the Account Holder by sending a Communication with reasons for suspicion by SMS and Registered post on the date of freezing itself. 3. The Bank shall send a Communication detailing the freezing of the account with reasons for suspicion to the jurisdictional Cyber Crime Police Authority and all the authorities required under the Guidelines issued by the RBI and ensure its receipt by them. 4. The Account Holder is free to submit a necessary Explanat....