Safiya Malik

The High Court of Kerala Single Bench of Justice M.A. Abdul Hakhim, while disposing of two writ petitions, set out a detailed framework empowering banks to impose temporary debit freezes on accounts exhibiting suspicious activity, even without prior notice, and simultaneously directed the Reserve Bank of India to formulate a comprehensive Standard Operating Procedure to govern such actions. The petitions arose from challenges by two account holders of South Indian Bank whose accounts were blocked after the Bank detected high-value transactions inconsistent with their declared income profiles. Both individuals asserted that the transactions stemmed from legitimate business operations and questioned the legality of the Bank’s unilateral freeze. The Court ultimately required the Bank to notify the competent authorities and act in accordance with the newly issued guidelines.

The banks contended that unusual credits and high-value transactions triggered internal alerts connected to Anti-Money Laundering and fraud-monitoring obligations, and that the freezes were imposed to prevent further risk pending verification. They maintained that the petitioners’ responses were examined but did not dispel concerns arising from internal risk indicators. The Reserve Bank of India submitted its instructions governing bank obligations under the Prevention of Money Laundering Act and KYC norms but acknowledged that no detailed procedure existed for situations where banks independently freeze customer accounts. The matters involved examination of obligations under banking regulations, KYC standards, and risk-monitoring protocols applicable to financial institutions.

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The Court recorded that in all petitions “the bank accounts of the petitioners were straight away frozen by the respective banks based on suspicion alone.” It noted that the banks admitted that “no request was received from any law enforcement agency to freeze the accounts,” and that even after a considerable period, “no agency has come forward stating that the accounts need be frozen.” The Bench stated that banks had taken the position that the freeze was imposed “only because some suspicious transactions were noticed by the Bank.”

The Court observed that the petitioners had produced documents “to satisfy the Bank with respect to the genuine nature of the transactions,” but the accounts continued to remain frozen without further communication. It recorded that the banks had “no case that, after freezing the account, they informed the concerned law enforcement agency about the suspicious transactions.”

Referring to the consequences of freezing, the Court stated that such action “affects not only the right to carry on business but also the right to life of the petitioners.” It added that the power to freeze based solely on suspicion “cannot be an indefinite one and cannot continue for an unlimited period.”

The Bench noted the absence of an established regulatory framework: “there is no Standard Operating Procedure issued by the RBI regarding the manner in which banks should act in such situations.” It observed that banks currently acted “on the basis of their own internal guidelines,” which lacked uniformity.

The Court also stated that “banks cannot sit over the accounts of their customers indefinitely and freeze the accounts without any authority of law,” and that such action “cannot be justified merely on the basis of internal alerts raised by the Bank.” It recorded that banks are expected to report suspected transactions but “cannot assume the role of a law enforcement agency.”

In view of these findings, the Court sets out the following principles to govern how banks may restrict account operations when they have reason to suspect questionable activity

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 Explanation to the Bank regarding the suspicion entertained by the Bank, and on receipt of such an Explanation, the appropriate authority of the Bank shall consider the same and pass appropriate orders within a period of one week from the date of receipt of the Explanation and communicate the same to the Account Holder. If the Bank is satisfied with the Explanation submitted by the Account Holder, the Bank is to de-freeze the account.”

5. “If no Explanation is received from the Account Holder or the Explanation submitted by the Account Holder is not satisfactory to the Bank, the Bank can continue with the freezing of the account for a period of three months from the last date of delivery of the communication of freezing to the aforesaid authorities mentioned in Point No.3.”

6. “If the Bank receives any instruction/order from any of the aforesaid authorities mentioned in Point No.3, the Bank has to comply with it and communicate the same to the Account Holder without delay.”

7. “If no communication is received within a period of three months from the last date of delivery of the communication of freezing to the aforesaid authorities mentioned in Point No.3, the Bank shall lift the freezing of the account, allowing the Account Holder to deal with the credit balance and intimate the same to the Account Holder and thereafter the Bank may either permit the operation of the account or demand closure of the account.”

8. “If the Account Holder has a grievance that the Bank has illegally rejected the Explanation submitted by the Bank, the Account Holder is free to challenge the same in accordance with law.”

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The Court directed the bank to immediately communicate the existing freeze on the petitioners’ accounts to the cybercrime authority and all other agencies identified under the Court’s guidelines, and to thereafter proceed strictly in accordance with those guidelines. The Court also instructed the Reserve Bank of India to formulate a comprehensive Standard Operating Procedure establishing the scope and limits of a bank’s power to temporarily block accounts flagged for suspicious activity, so as to strengthen measures against financial cybercrime. In addition, the Court clarified that if an account is eventually defreezed, the bank may still require the account to be closed or may impose a fresh freeze if future transactional patterns give rise to renewed suspicion.

Advocates Representing the Parties

For the Petitioners: C.S. Ajay, Advocate; V. Madhusudhanan, Advocate; George Poonthottam, Senior Advocate; Jeena Jose, Advocate;
For the Respondents: Sri. Tavisil T.N., standing counsel for the banks; Sri. M. Gopikrishnan Nambiar, Standing Counsel for the Reserve Bank of India;

Case Title: Abdul Azeez v Union of India and Ors. and connected case
Neutral Citation: 2025:KER: 88312
Case Number: WPC Nos.32516 and 32291 of 2024.
Bench: Justice M.A. Abdul Hakhim