Banks Seek RBI Approval to Freeze Accounts Involved in Illicit Transactions: Here’s What’s Proposed

Banks Urge RBI for Power to Freeze Fraudulent Accounts | Measures to Curb Money Laundering

Banks are pushing for RBI approval to freeze accounts linked to illegal transactions. Proposals include EC database verification, use of Form 60, and AI-based monitoring.

In a move aimed at strengthening the fight against financial fraud and cybercrime, Indian banks are seeking the Reserve Bank of India’s (RBI) nod to independently freeze customer accounts involved in illicit transactions. The proposal, backed by the Indian Banks’ Association (IBA), outlines several measures to tackle the growing menace of money laundering and fraud-related activities.

Currently, under the Prevention of Money Laundering Act (PMLA), banks can block accounts based on internal red flags but lack the legal authority to freeze them without directives from law enforcement agencies or a court order. “In light of this, we may propose this as a suggestion for further consideration by the RBI,” a report by an IBA-constituted working group stated.

Why Are Banks Requesting Freezing Powers?

The proposal comes amid rising concerns over the misuse of “mule accounts” — bank accounts used by fraudsters to move illicit funds, often without the knowledge of the account holder. These accounts play a central role in money laundering operations and cyber scams.

The IBA emphasized that giving banks the authority to immediately freeze suspicious accounts would save critical response time and help curb financial crime more effectively.

What Are Mule Accounts?

Mule accounts are often opened using falsified documents or identity loopholes, and are used to channel illegal money across various platforms. Despite banks freezing thousands of such accounts each year, fraudsters continue to exploit gaps in the system to open new ones. The IBA report noted that targeted verification and monitoring of high-risk accounts could help reduce such vulnerabilities.

Proposed Verification and Monitoring Measures

To bolster security and streamline the verification process, banks have proposed:

• Using the Election Commission’s database to authenticate individuals opening accounts with voter ID cards.
• Permitting the use of Form 60 when a PAN card is not available.
• Capping transaction limits on accounts flagged as high-risk or suspicious.
• Deploying AI and Machine Learning (ML) technologies to proactively monitor transaction patterns and detect fraud in real time.

The report suggests that these steps, along with better staff training and inter-agency collaboration, can significantly strengthen the financial system’s defenses.

Path Forward

Implementing these recommendations would require coordinated efforts between financial institutions, regulators, law enforcement, and technology partners. The IBA has urged that a technology-driven, multi-stakeholder approach is essential to maintain the integrity and safety of India’s financial ecosystem.

As banks await the RBI’s decision, the proposal marks a significant step toward empowering financial institutions to take proactive action against evolving financial threats.