Banks seek RBI nod for getting authority to freeze accounts making illegal transactions. Here’s why

Banks are on the quest to get the authority from the RBI to freeze accounts that are used in channelling illicit transactions.

Banks can freeze or block accounts based on internal triggers. However, as per provisions of the Prevention of Money Laundering Act (PMLA), they do not have the authority to freeze or block customer accounts without proper authorisation from a court or law enforcement agencies (LEAs).

“In light of this, we may propose this as a suggestion for further consideration by the RBI,” a working group constituted by the Indian Banks’ Association said in a report.

Why are banks seeking account freezing authority?

Money laundering remains one of the most significant threats to financial ecosystems worldwide. Among the tools employed by criminals, money mule accounts play a critical role in disguising the origins of illicit funds. The IBA said that to minimise attempts of cyber fraud, banks should be given the authority to freeze and block fraudulent accounts.

Besides, the authority will also allow banks to save crucial time in seeking permission from authorities.

What are mule accounts?

Mule accounts are used by fraudsters to move illegal funds through the banking system. They are used by scammers to launder money, often without the knowledge of the person under whose name the account has been opened. Although banks freeze thousands of these accounts every year, fraudsters quickly create new accounts using loopholes in the system.

The report said that banks may look to verify and restrict accounts most vulnerable to misuse as “mule” accounts for channelling illicit money.

How will banks freeze accounts?

Banks have proposed using the Election Commission database to verify individuals who open accounts using voter identification cards, They have also suggested using Form 60in the absence of a permanent account number, or PAN. They have further proposed to cap the number of transactions on such accounts.

The fight against mule accounts demands a dynamic, technology-driven approach. By integrating Artificial Intelligence (AI) and Machine Learning (ML) into transaction monitoring systems, banks can address existing gaps, anticipate criminal strategies, and protect the integrity of the financial ecosystem, the association suggested.

To secure a safer financial environments, stakeholders are likely to make a concentrated effort and invest in technology, staff training, and collaboration.

The IBA said that implementing these measures will require dedication and cooperation from financial institutions, regulators, law enforcement agencies and technology providers.