Can the bank exercise a freeze on the CASA account, and refuse to maturity amount for non-compliance with the KYC review?

[shivaprasad chhatre]

My two articles requested to publish the same day on a similar subject may create confusion in the minds of readers. Whether both mean and convey the same?

I wish to clarify that both articles have a different theme and should be looked at independently to understand it.

As in the case of another article, if I am to give a two-line response to the subject being discussed herein I may respond as under:

Neither RBI on its own can direct, a partial or total freeze of Re-KYC due (non-compliant) bank account nor it can delegate such authority to any bank/branch to impose such a freeze. RBI has formally confirmed that the directions it had given in Sept 2014 were applicable before the amendment on 20^th April 2018.

What is stated in the write-up is a detailed current status with appropriate commentary. I wonder, why not RBI stop misdirecting and also correct the banks on the subject of freezing SB/CD/FD accounts (where a review of KYC is pending Re-KYC is due) and direct the Integrated Ombudsman to take up the complaint cases, guide customers correctly?

Fourth Bi-Monthly Monetary Policy Statement, 2014-15, announced on September 30, 2014 (Points 31 and 32) dealt with easing norms to be followed during periodic KYC updation. It spoke about the introduction of ‘partial freezing’ on KYC non-compliant accounts by the customers despite repeated reminders by banks. The directions issued then did not refer to a partial freeze (Debit/ Credit or total) on account due to the pendency of periodic ‘Re-KYC’ or ‘KYC review’.

RTI query, RBI responded clearly (text below). However, it has been responding differently through its circulars issued during the COVID-19 times. Circulars issued during the ‘COVID-19’ read something along these lines:

“in terms of which Regulated Entities (REs) have to carry out periodic updating of KYC of existing customers. Keeping in view the current COVID-19-related restrictions in various parts of the country, REs are advised that in respect of the customer accounts where periodic updation of KYC is due and pending as of date, no restrictions on operations of such account shall be imposed till December 31, 2021, for this reason alone, unless warranted under instructions of any regulator/ enforcement agency/court of law, the  etc.”

On the subject, RTI query was raised. RBI replied in the following manner.

RTI Query and formal response from RBI:

RTI Queries

Concerning rules and regulations and Guidelines framed by RBI regarding freezing a bank account of the customer the following information was sought:

Copy of Rules, Regulations, Guidelines that enumerate the circumstances, and situations under which banks are allowed to freeze SB and CD accounts of a customer.

Copy of Rules, Regulations, and Guidelines that shows delegation of power to freeze a customer SB, CD account

Copy of Rules, Regulations, Guidelines circular and notification, if any issued by RBI that stipulates due process checks and balances and time-frame for freezing an SB, CD account of existing customer.

RBI’s Reply:

We have not issued any specific instructions in this regard. However you may refer to sections 10(b) 10(c ) and 54 of our Master Direction on Know Your Customer (KYC) dated February 25, 2016, as amended on April 20, 2020, available on our website www.rbi.org.in under the link 'Notifications'.

**It may also be noted that provisions on 'partial freezing' were applicable prior to the amendment on April 20, 2018, to Master Direction on Know Your Customer (KYC), dated February 25, 2016.

You may also refer to para 5.8.9 on 'Payment of interest on accounts frozen by banks' of our Master Circular DBR No.Leg.BC21/09.07.006/ 2015-16 dated July I, 2015 on "Customer Service in Banks", available on our website mvw.rbi.org.in under the link 'Notifications'.

My observation:

**RBI stated that provisions of partial freezing are no more applicable (since April 20, 2018). RBI did not come out with any new directions post that. No information is available in the public domain. I wonder if that was the case why RBI circulars issued on the subject (including during COVID19) were with a legend “where periodic updation of KYC is due and pending as on date, no restrictions on operations of such account shall be imposed till December 31, 2021, for this reason alone, unless warranted under instructions of any regulator/ enforcement agency/court of law” etc. FAQ on RBI’s website continues to specify the procedure to follow for account partial freeze (it becomes full freeze after a certain time frame and following process)

Instead of taking a unified/consistent stand in consultation with the government, post a few High Court judgments questioning the authority of RBI, if RBI keeps it ambiguous (through its uncoordinated actions) allow Regulated Entities (REs) for them to interpret conveniently and cause undue harassment to the bank depositors holding Current, Savings and FD account/s.

It will not be out of place to mention that one Pvt bank refused to carry out my maturity payout instructions till the KYC review is done to its satisfaction. It appears concerned people have lost sight of the object of PMLA and started harassing the common man. The matter, these days, is not limited to Banks but has spread across (NBFCs, mobile wallet companies)

I request RBI to direct the authorities to arrest autocratic acts of illegally freezing the operations in re-KYC due to accounts of customers. Integrated Ombudsman (IO) may be advised to start taking complaints of this nature and direct payment of damages rather than dismissing them by stating that the case does not cover under the IO Scheme 2021.

Banks are freezing the re-KYC due account without proper protocol that RBI prescribed in 2014 (subject to the fact’ whether such right RBI had, in the first place and ‘it subsist now’ (in view of RTI formal clarification). Even if such a right was assumed to have been given to RBI in the past, a question remains,  was RBI allowed to delegate it to down-the-line bank branch staff overlooking the safety protocols?

Doing Re-KYC by submitting the same papers the bank had is very problematic for those who are disabled, old, out of state/country, or sick.

The threat of freezing inoperative, and KYC non-compliant accounts, is serious. Not so well-informed bank customers are afraid of a/c freezing. It is the mother of many KYC frauds. To avoid the possible wrath of RBI mobile wallet providers have also started freezing operations in KYC review pending wallets, unmindful of the associated problems the customer may face. The origin of the majority of KYC frauds perpetuated by miscreants is by taking the advantage of this fear of the consumer community.

A bank account cannot be blocked unless there is the appropriate direction from judicial authority and or law enforcement agency under applicable provisions under the Act like Section 51A of Unlawful Activities (Prevention) Act, 1967.

Is Freezing of Bank Account by a  bank legal and feasible?

Rule 3 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 obligates the banks to keep KYC records and track their bank accounts and transactions. It obligates the banks to update KYC records: keep on updating such KYC information every 2 years for high-risk customers, every 8 years for medium-risk customers, and every 10 years for low-risk customers. But this result in harassment of the customers to keep on asking them now and then same details and proof for records. Freezing the account if KYC/ReKYC papers are not submitted to REs satisfaction is quite understandable.

One may peruse the case of the State Bank of India vs. Ashvin Chaturbhai Parmar Gujarat High Court No. 5100 of 2012.

In this case, the respondent’s bank account was frozen by the Bank as the KYC formalities were not complied with. A petition was then filed with the Gujarat High Court and the court held that the bank does not have any right to freeze the account or stop the checkbook and ATM facility due to non-compliance with KYC requirements.

The court pronounced that the bank would have the right to close the account with prior intimation and notice to the customer that if the documents are not submitted, then the account will be closed following due process.

The bank had pleaded with the court to revisit the judgment as freezing the account is more feasible than closing down the account completely.

The court then took up the matter again to review the order and held that the freezing of the account is not more feasible than closing the account because the customer is deprived of his own money while the account is frozen and any cheque drawn on him during that period will land him in a criminal suit for the dishonor of cheque, in spite having sufficient funds with himself to honor the cheque.

In court warned the bank to not freeze any accounts illegally and that such an act in the future would lead to strict actions by the Reserve Bank of India and Banking Ombudsman.

This judgment highlighted some key issues with the KYC process. This protects the customers from regular harassment by the bank employees for repeated demands of KYC document submission, even when the same has been done. Though the above judgment gave relief to the customers, the banks indulge in the practice of humiliating and harassing their customers for the updation of KYC details.

Account closure is relatively simpler and legitimate. One may wonder if RBI is aware of this and why it is continuing to give deaf ears to specific complaints of the customer community and allow customers to get harassed on this count (it neither educates consumers through its communication channels nor it directs banks and other regulated entities (REs) not to take the law into their hands.

What aggrieved customers have to do and compel regulators to do?

The system of class action suits is not prevalent in India. Individual suits are costly and time-consuming. Moreover, the judiciary will get further overburdened with many individual suits.

Compel RBI to bring the matter into the ambit of the Integrated Ombudsman and seek penalties for mental agony etc 9until banks get legislation’s approval to have this kind of right subject to adhering to certain strict protocols).

One should know that lawmakers will not give the powers to freeze accounts to ‘Tom Dick and Harry and see anybody’s financial fate sealed through the freezing of bank accounts for this petty matter. The object behind freezing should be evaluated against the odds and hardships that the community may face.

Just like one can do the activation of an inoperative account through simple process clients should be guided to do for Re-KYC using various options and such options should be documented in RE’s KYC policy. In many cases, Re-KYC can be done through a simple letter or letter coupled with a self-attested copy of the proof of a change of address, etc or a CKYC reference number allotted by the CKYC registry (14-digit number) and less complex methods rather than compelling the clients to visit in person to nearest or base branch of the said bank causing great hardship. As the article is not aimed to cover CKYC aspects I desist from elaborating further.

Few PSU banks and Coop banks have started accepting ‘CKYC numbers’ in place of OVDs for Re-KYC. Many banks like Axis Bank, and ICICI Bank couple of others, totally disregard law of the land on the CKYC registry and RBI’s directions to them as a valid mode for KYC. A serious follow-up with RBI on this to ensure these banks fall in the line with directions is not taken by RBI seriously. RBI is not taking any action against erring entities. The purpose of setting up the registry with a huge database has become a waste of national resources.

To put pressure on senior citizens and less informed, less educated people fraudulent people always use a trick they say that your ATM card, bank account, or internet banking would be blocked if you do not do re-KYC. The threat of account freeze is behind many banking frauds. A person is shown a threat to block his/her account and to share KYC data & other vital details to perpetrate fraud. If such a/c freezing threats from Regulated entities (REs) are stopped there will be a considerable fall in the instances of cheating/fraud. The purpose of KYC (done to prevent the banks and financial institutions from being the hub of criminal activities, such as money laundering or finances of terrorist activities) ReKYC is lost sight of by all and the focus is now on compliance in the manner RE deems fit, by hook or crook.

KYC-related punishment now practiced by banks is not only illegitimate but deprives the customer of access to their own money, entrusted with banks. Freezing of bank accounts inflicts extreme hardship, and sometimes means the financial death of honest, law-abiding depositors. It also means treating them worse than hard-core criminals or those accused of financial fraud.

If freezing of account, as an action, is formally done away with:

Once the regulated entities are made clear that they can no longer resort to the strategy of threatening and adopting legitimate ways of freezing the accounts they will look for simple easier recordable ways to update that KYC database individually and collectively which can be consolidated by RBI and give one a formal clearance in consultation with the government many frauds emanated on account of KYC threat would get reduced and customers will have relief from the nightmare/harassment.

Banks may have to proactively find different ways to keep the KYC records updated. Use different channels to get required inputs/confirmation like from SERSAI, customers from banking customers instead of resorting to freezing the accounts illegally. It is easily possible to periodically update the data to comply with PMLA requirements through the usage of CKYC etc. Banks have to take up the matter with RBI and get approval for the new ways of collecting authentic information from the customer with supporting evidence for the Re-KYC.

Through an Act (of parliament) SERSAI had been mandated by the government to build a Central database that can be shared between the member entities regulated by RBI, SEBI, IRDA, and PFRDA among others. This was done to simplify the process of KYC and sharing KYC data for simplification of processes and wiring duplication of days are sort by each regulated entities of these agencies paper reports 35 crores of database removing depletion and it can be shared authentically between the member and it is on demand.

These things are not limited to KYC/RE-KYC. Many banks/wallets have started implementing partial freeze (debit/credit) to inoperative accounts/wallets unmindful of the lack of any authority and regulatory directions to the contrary.

I shall be sharing my experience of PSU bank bouncing a cheque drawn on an inoperative/dormant account where the KYC review was not due. These days banks ask for KYC papers fresh to operationalize inoperative accounts. Complete confusion over the basic concepts in the banks at a supervisory level. The same confusion is getting reflected at Ombudsman Office, CEPD(RBI) over this matter, which makes me wonder where are we heading.

Those interested in reading on another theme may peruse my other article on the subject (being simultaneously published).

 Can Bank Freez Inoperative-Dormant Account not be due for KYC? Can the bank bounce cheque is drawn by a customer on an inoperative account?

Is the act of banks to not accept customers' simple written requests to make it active/operationalize without token credit (in non-KYC due cases) and also insist on re-KYC, not terrible/atrocious/disgraceful?

Summing up:

While trying to explore the reasons behind banks acting in this manner I felt In the current business model of banks is responsible.  The front office of the bank i.e branches that faces the customers collect the papers and forward the same to the back office for record keeping and processing. As a result, routinely front office started seeking the papers, and data processing teams started recording the data, and papers received. Bank started routinely demanding these papers to satisfy the needs of the back office. These teams often followed structured processes and had no flexibility, authority to probe etc. Harassment of customers started there.

The unskilled data entry staff started dictating the terms and stuck to old laid down processes, the front office started submitting to it and insisted customers provide the documentary proof so demanded by back office, even if that means the multiplicity of paper submissions.

When an aggrieved customer approaches the branch, he is told by the bank that their hands are tied as it is the RBI’s + PMLA (Act) guidelines or Back office of the bank demands and they have to follow the same. No one asserts either internally or externally.

The entities believe RBI has powers under PMLA and the executive power of freezing the account has been delegated by it to the bank employees. This has created havoc.

The bank where the account is maintained could thus make or break a person, as the savings of his life come at stake when the bank freezes the account for non-compliance to a petty & non-serious thing.

Banks should be focussing suspicious transactions in the account, on noticing the same reasonable ground that some illegal or criminal activity happening through the account, in absence of a satisfactory explanation it can recommend freezing of debit/credit to the appropriate agency having authority through STRs etc. The decision should be left to the judiciary or the appropriate agency and the banks should freeze the accounts only once the court has ordered or an agency having appropriate authority has directed specifically to it.

In reality money, launders know ways to dodge the process. It is the innocent account holders who get trapped unnecessarily even after abiding by all the requirements and having no suspicious activity in the account.

Many of us have noticed that the REs insist on 12-digit Aadhar numbers. Unmasked Aadhar or virtual Aadhar is not accepted for KYYC or KYC review. Where a driving license is given KYC banks insist the customers give information about driving license numbers etc. These numbers don't form an integral part of the opening or maintaining of a bank account. Many banks refuse to accept ID documents other than PAN or Aadhar for KYC/Re-KYC.

RBI is aware that the PMLA does not give it punitive powers like freezing. It also does not give any authority to delegate such powers to the bank/branch or its officials.

Closing undesirable accounts is treated as the best practical solution. Despite that Banks continue with their threatening actions of debit freeze followed by credit freeze (total freeze) that too without giving appropriate notice.

Whenever the case is taken up by the aggrieved client of RE(say a bank) to CEPD, RBI pushes the matter to Integrated Ombudsman (earlier Banking Ombudsman). Ombudsman directs the client to file a case on the IO’s website with all proper supporting papers. IO later dismisses the case stating that it is not on the grounds of complaint covered under the IO scheme/BO Scheme. The dismissal is always without a right to appeal. Thus, it gives a systematic burial to the complaint within RBI’s spectrum.

Instead of doing this RBI should find a better way to address the matter, in consultation with Govt. Make the process of KYC review simpler **

• Using CKYC number and data
• SMS-based KYC in specific cases
• Internet-based Re-KYC, KYC review through a customer signed a letter with CKYC number,
• Not compelling customers to visit the bank/branch and many more.

 

Conclusion:

RBI should stop issuing contradicting its directions and initiate steps against the regulated entity doing excesses/overindulgences to stop the abuse of the position of a bank and reduce hardship to customers

RTI responses given every month/Quarter that have bearing on public good could be compiled and published on the official website of RBI (as SEBI does).

RBI may give clear directions to all banks and other regulated entities on the non-feasibility of ‘partial’ and or Debit + Credit (total) freeze [introduced in the year 2014 but coolly withdrawn (without a formal communication in the public domain) the post 20th April 2018] reiterate the need for re-KYC through investor education, suggesting banks engaging special agency for the purpose, staff training on KYC review, prizes for best performer etc.

RBI may pool the talent from REs and suggest different positive ways to update  KYC. Banks should be encouraged to use the CKYC database (number) etc. It may encourage positive methods to update KYC rather than making banks/REs pay huge fines for not updating their records, and making customers suffer.

Investor association collectively should file a case appealing the court to direct RBI to formally withdraw its directions of Sept,2014 which inter alia formalized the process of freezing bank accounts for non-compliance of KYC/KYC review

For readers interested in knowing RBI’s directions on ‘partial freezing’ :

RBI advised banks to enforce ‘a partial freeze’ after observing the following process:

1. Banks have to give due notice of three months initially to the customers before exercising the option of ‘partial freezing.
2. After that, a reminder for a further period of three months will be issued.
3. Thereafter, banks shall impose ‘partial freezing’ by allowing all credits and disallowing all debits with the freedom to close the accounts.
4. If the accounts are still KYC non-compliant after six months of imposing initial ‘partial freezing’ banks shall disallow all debits and credits from/to the accounts, classifying them as inoperative.

While doing so at any time customer was allowed to close the account and walk away. Banks however do not allow ‘mandated exist’ till the Re-KYC was done. This was unjust.

 

I did a small follow–up on the RTI reply. I had perused the complete circular more specifically annexure –II, clauses 10(b) 10(c), and 54 of RBI’s Master Direction on Know Your Customer (KYC) dated February 25, 2016, as amended on April 20, 2020, freezing of assets under Section 51A of Unlawful Activities (Prevention) Act, 1967. Nowhere I could find any reference to RBI having the authority to freeze the account for non-compliance of KYC or non-compliance of KYC review (Re-KYC).

On the contrary under point 38 of Master Direction on February 25, 2016, RBI had stated that Regulated entities (REs) shall ensure that their internal KYC policy and processes on periodic updation of KYC are transparent and adverse actions against the customers should be avoided, unless warranted by specific regulatory requirements. The board-approved policy on KYC, among others, should be periodically updated and displayed on banks web site along with the date, etc. as mandatory policy,

Shivaprasad Laxman Chhatre, Pune