Should Banks Be Permitted To Freeze a Running Bank Account, for KYC?
It is over a decade now that, we, Indians have been putting up with the harassment, humiliation and mental agony of banks arrogantly freezing savings and current accounts for technical reasons, the most common one being non-compliance with frequent updation of know-your-customer (KYC) documents mandated by the government. Banks blame it on the Reserve Bank of India (RBI). RBI washes its hands off any responsibility by pointing to the Prevention of Money Laundering Act, 2002 (PMLA) and the rules for maintenance of records framed in 2005. 
 
Logically, if the government genuinely has reason to suspect that the money in a bank account or lockers represents the fruit of criminal activity, money laundering or tax avoided income, it can demand explanations and ask banks to freeze the account. But there is something drastically wrong when the power to freeze money, deposited in trust with a bank, is delegated to branch-level staff, who can wreak havoc with the lives and livelihoods of people based on technicalities or wrong understanding of rules. 
 
Freezing a bank account often amounts to inflicting ‘financial death’ of an individual or entity, with a lot of other consequences. Such drastic action (even partially freezing a bank account) should be permitted only after a court order and that too when there are reasonable grounds to suspect criminal activity or tax evasion. Instead, this draconian action is routinely inflicted on ordinary, law-abiding people and long-running bank accounts for routine business activities when there is absolutely no suspicious activity. It is almost always for technicalities, often wrongly interpreted and arbitrarily implemented. At the same time, real cheats seem to dodge the rules with impunity. In the past couple of years, one notorious family alone—the Wadhawans—has inflicted losses running into thousands of crores of rupees on innocent depositors and investors without RBI or the financial intelligence unit of the Union finance ministry having a clue. Dewan Housing and Finance Corporation Ltd (DHFL) was able to keep a whole set of accounts (the infamous Bandra Books) hidden from statutory auditors, while the Wadhawans of HDIL (Housing Development and Infrastructure Ltd) managed to bankrupt Punjab and Maharashtra Cooperative Bank (PMC Bank).
 
But ordinary people, with genuine issues, are put through untold hardship and nobody cares. Here are three examples which probably represent tens of thousands of sufferers.
A retired central excise officer in his 80s, living alone in Bengaluru, had his account with a top private bank frozen because his biometrics could not be read. His son was able to get it restored because he knows the senior-most officials at the bank. Fortunately, mandatory Aadhaar linkage has been put on hold.
 
In the middle of the pandemic, a UK-based non-resident Indian (NRI) doctor received a notification to update his KYC with just four weeks for compliance. When he asked for the basis for this, RBI asked him to refer to ‘Master Directions’ of RBI which are frequently updated and provide little clarity for individual cases. In this case, the NRI did comply, to the best of his ability, by providing scanned copies of KYC documents, but the bank insisted on ‘self-attested’ documents. One can imagine the hardship this would cause to senior citizens who are not net-savvy, in the middle of a global pandemic and worldwide lock-down. This NRI wrote to RBI’s customer services department (CSD) about how the bank was refusing to process documents without attestation while holding out the threat of suspension. CSD merely informed him that his queries had been ‘forwarded to the concerned regulatory department’ without going into his grievance about the ‘unfairness’ of the bank’s demand.  
 
The third case was that of Moneylife itself. Despite our knowledge and activism on depositor issues, just four days before salaries were to be paid, Axis Bank froze our main bank account (operational since 2009) at the end of September 2020 because one of our shareholders had not submitted a ‘beneficial ownership’ declaration. Worse, the requirement itself was wrongly understood and demanded by the Bank. The action was preceded by a long correspondence over Axis Bank’s faulty understanding of who was a beneficial owner (in this case, the person lives abroad and is neither a director nor a signatory to the account). But repeated emails and messages to the Bank’s customer service department, public relations team, head of retail as well as the managing director and CEO did not elicit any response, until we escalated the matter to the central bank. 
 
Most banks operate on the principle that the customer is always wrong or trying to dodge the rules. Despite core banking software and extensive use of technology, nobody at the Bank paused to consider that this account existed for over a decade; we have six other accounts at the same branch and we were in the middle of a pandemic, with limited access to staff. One official at the Bank refused to touch the resubmitted papers or discuss the issue, while the branch-head used to summon our accounts manager and give him vague oral instructions, refusing to put things in writing. If this happens to a media organisation (which usually get a response), one can only imagine what happens to customers with no access. But more on this later. 
 
The issue is serious, because unilaterally freezing an account would have a series of consequences on standing instructions, for loan repayments, credit card payments or utilities bill payments which may get cancelled or bounce. A senior citizen living on a pension may be made helpless for no fault. Or  an organisation, like ours, could have defaulted on paying salaries without any reason, in turn, impacting payments by employees. Surely, there ought to be consequences to inflicting such damage on law-abiding people? As an activist organisation, involved in financial literacy, we decided to find out the circumstances in which banks are allowed to freeze legitimate accounts and how many accounts had been frozen by Indian banks so far.
 
My colleague, Yogesh Sapkale, filed an application under Right to Information (RTI) Act asking RBI for specific regulations or guidelines with regard to freezing customer accounts by banks. The answer: “We have not issued any specific instructions in this regard.” It, however, directed us to the ‘Master Directions’ issued in 2016 and amended repeatedly, including ‘partial freezing’ and payment of interest available on its website.
 
 
He also asked RBI for the total number of accounts and deposit balances, bank-wise, of accounts frozen by all nationalised banks and private banks from 2017 until end-2020. The answer: “We do not have any specific information in this regard.”
 
 
In a nutshell, RBI is clueless about the havoc caused by its ‘master directions’ and couldn’t be bothered to collate any data on the hardship caused or extent of money blocked and the implications of these on ordinary, law-abiding people. This is done in the name of preventing money laundering which seems to continue with impunity. 
 
Our Resolution
In our case, I, finally, connected with someone very senior at RBI who can’t be named. I explained that Axis Bank’s understanding of beneficial ownership was not shared by a larger bank with which also we had an account. I was also at pains to explain that we were not avoiding compliance, but complying with Axis Bank’s faulty demand; the Bank was forcing a wrong declaration from us. Gratifyingly, I was heard and things began to move rapidly after that. Multiple calls from Axis Bank followed, even at 10pm and the account was unfrozen in a couple of days. 
 
Once it was done, we followed the policy that Moneylife had always advocated—to vote with our feet when an organisation is so callous about customer service. We closed all six of our accounts with Axis Bank, since it was clear that going all the way to the top was also useless and we cannot always ask RBI to intervene. Closing a bank account in India and opening a new one is a long and tedious process that took nearly three months to complete. Bank account portability is possible today; but is not being implemented, to help banks. However, that is the subject of a separate column. 
 
Ideally, aggrieved customers should be in a position to demand compensation for such harassment; but this involves expensive litigation which gives banks a huge advantage in a judicial system that neither awards exemplary damages nor allows lawyers to handle cases on a contingency-fee basis. 
 
Note: If you have experiences like these, please write to us at [email protected]. We want to take up this issue systematically.
 
 

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    COMMENTS

    hemanta.sharma

    1 month ago

    The entire banking system is so customer unfriendly and convoluted. Very recently when my grandmother expired, I came across a few of her assets in MF and a Dena Bank a/c with no nomination. None of the investments were more than a lakh or so. Settling the account with the MFs was a breeze while Dena Bank (now BoB) makes me keep doing the rounds for a minor sum of 20,000. Insisting verbally that I need to get a Legal Heir Certificate even though the website had no mention of the same. Raising the issue on the bank's online complaint system is also a waste of time as it seems to be more of an eyewash than a complaint resolution system

    REPLY

    Newme

    In Reply to hemanta.sharma 1 month ago

    I will slide with the Banks. What if your Grandmother had more than one child? How will the Banks know the number of sons daughters and grandkids your grandmother had? If they gave you your grandmother deposits, what will happen if others in her family file case against Banks for not following due diligence?
    Without nomination or will, such situation arises.

    glnprasad52

    1 month ago

    There should be two sets of savings accounts one for without KYC where the turnover is limited to less than Rs.1lakh per annum, and the other for exceeding Rs.1 lakh. Can you believe that even banks' own pensioners (Bank's credit pension to the savings bank account of their own pensioners), insist KYC? When there was a long-term deposit account matured, for opening, another KYC is required for opening a savings bank account for withdrawal as the past deposit is not backed by KYC? Was this money laundering really stopped due to KYC norms and was there any review of such benefits. Previously there was an introduction and verification by the bank staff itself.

    vibhava

    1 month ago

    Banks push out letters requesting for updating KYC with no confirmation post submission on whether the details have been updated or the documents have been put in a bin; moreover, I wonder what happens to the millions of paper documents that land up on the tables of bank officials.....is there not a stronger possibility of misuse of these documents if they land up in the hands of the wrong people....do bank officials even shred documents submitted for their reference and record. This senseless waste of time and resource of citizens should stop!!!!

    umeshs62

    1 month ago

    Why is the need to submit every year ? If a person is filing IT returns then submitting proof of it should be sufficient. Moreover, banks don’t even acknowledge receipt of KYC documents,. Every now and then, threats keep coming from banks. Why none of this worked for fugitives ? Watch dogs are always sleeping. Without any concrete action, one fine day you would get a message that matter has been sorted out. The system needs complete overhaul.

    RVR

    1 month ago

    KYC and Re-KYC should be handled by a central organisation like CDSL

    Since Aadhaar is not mandated, the PAN and other KYC documents required should be standardised for Residents & Non-Residents respectively.

    Why harass the citizen to repeat the KYC documentation for each and every bank account ? This is so 19th century.

    One the subject of AXIS Bank my experience with them has also never been good.

    Meenal Mamdani

    1 month ago

    ML Foundation is carrying on the fight for so many of us.
    It is high time that bank customers create watch dog groups for each bank branch, whether private or PSB.
    Each month this watchdog group should meet to hear the grievances of customers, suggest solutions, and if the grievance is not corrected then demand a meeting with the bank manager. If the branch manager is unable to resolve the issue satisfacorily, then the entire interaction should be recorded and sent on to ML Foundation.
    ML Foundation will then have enough documentation to take it up with powers-that-be.
    Unfortunately, I found that Indians in general like to grouse but do not wish to take up the matter with higher authorities.
    This example is not with financial institutions but an even more important matter, the person's health care. A few years ago, my husband and I had opened a Second Opinion service for medical issues in Pune. People would come to vent their anger but they wanted us to confront their doctors and get them justice but wanted us to leave them out of the whole process.
    Unless this attitude changes, unreasonable, even illegal practices will continue.

    sucheta

    1 month ago

    We will not permit abusive and foul language and bigotry on this platform. Please note all such messages will be removed and those who persist after the first removal will be blocked. Secondly, many of you have very kindly posted your experiences here. May I request you to email us at [email protected] Moneylife Foundation is a separate entity and it will be taking this forward after compilation into a memorandum. Thank you

    sureshtb4246

    1 month ago

    Thanks for publishing "regulations" my experience - THE BRANCH OF SBI, " CLOSE" SCSS accounts OF customer BEFORE MATURITY, WITHOUT ANY DETAILS TO CUSTOMER, NOTHING IN WRITING, BY SENDING SMS AND TRANSFERRING FUNDS TO SB A/C, BANKING OMBUDSMAN, Bangalore, THOUGH FOUND THE BANK ON THE WRONG SIDE, AND THE appellate AUTHORITY BANKING OMBUDSMAN REPLIED AFTER ABOUT 200 DAYS "NOT APPEALABLE" HAVE APPROACHED CONSUMER COURT UNDER CONSUMER PROTECTION ACT, EVEN WHOLE OF FINANCE MINISTRY NOT RESPONDING. IF YOU WISH, I CAN SEND THE DOCUMENTS ,- [email protected] IN. Thanks regards

    REPLY

    BR

    In Reply to sureshtb4246 1 month ago

    RBI Ombudsman rules are in website. Pl. read. It says no Principles of Natural Justice are to be followed. Both parties are heard but RBI fors not give to complainant,the reply of the bank so,complainant cannot know it & explain further or counter the bank. RBI does not ask bank for evidence of its claims or statements or reasons for replies. RBI gives its one sided order. It cannot be appealed against. Why should there be no appeal? These two points must be opposed by writing to govt.

    ssbh.dceo

    1 month ago

    EVERY REGULATOR WANTS TO PLAY SAFE IRRESPECTIVE OF THE HARASSMENT CAUSED TO CUSTOMER, WITHOUT WHOM THEY DO NOT SURVIVE.

    Newme

    1 month ago

    Why Banks are doing this? After BJP came to power in the last five years, it has stopped huge money transactions in accounts which are used for religious conversions especially Christian missionary and Islamic studies. So called NGOs are starved of funds. Instead of few gateway accounts, they are now transacting through thousands of accounts in small amounts. I didn\'t vote for BJP but you have to give devil it\'s due. The conversion activities has reduced in India especially in villages. Converting for religious or spiritual reason is fine but using money as trap causes social upheaval.

    KYC:
    1. Only if the account has suspicious money coming in and going out they should enforce strict time bound KYC.
    2. Give sufficient time for the account holders to respond especially if they are stuck abroad or senior citizens.
    3. Moving to on-site and coming back is pretty common nowadays. We need to have simpler ways of handling the changes to bank and demat.
    4. I agree fully with one comment here. Don\'t put all your money and shares in one Bank. Spread it out into multiple accounts.

    hamungel

    1 month ago

    Most bank officials are half-baked. They are more loyal than their king, the RBI. RBI believes that all customers of banks are fraudsters and therefore its enemies. But RBI itself is a third rate organisation. Most private banks are fourth rate while amongst them axis bank is fifth rate. [My own experience]

    sundaras1957

    1 month ago

    I totally disagree with the article on the following grounds:
    1 KYC is a baby of the Government and RBI. As regulators they are imposing the KYC norms time and again since 2004.
    2 Banks are forced to follow the guidelines. Myriad of times one come across RBI imposing hefty penalties on the Banks for not following the KYC norms.
    3 At operational level every employee know the hardships faced by the customers. However, they are helpless as accounts will be “looked after” mainly by the System without manual intervention. Blaming hapless employees will be of no use.
    4 KYC norms have to be followed not only by Banks but in all financial and sometimes non-financial entities also.
    5 It is really painful that easily available commodity for the writers, journalists, media personal etc are operational bankers.

    The writer should have directed his grouse against the Government and RBI.

    REPLY

    BR

    In Reply to sundaras1957 1 month ago

    Why did you not suggest that commercial banks must oppose the RBI &Govt? Do they think that the wrong rules must be followed?

    Dilip Modi

    In Reply to sundaras1957 1 month ago

    I think your conclusions are not quite correct. My reading of the RBI Master Document for KYC etc clearly sets out the following.
    1 Every account at the time of opening shall be subjected to due diligence by the bank. This will be further monitored/assessed through transactions and interactions with account holders /their representatives. All such interactions/data obtained shall be recorded and made available for a period of time even after the closure of the account.
    2 From 1 above, a Risk category will be assigned to the account.
    3 From 2 above, the RBI directs banks to carry out updation of KYC every 2 years for High Risk, every 8 years for Medium Risk, and every 10 years for Low-Risk category accounts.
    4There is a further provision, that states, in case of low-risk customers when there is no change in status with respect to their identities and addresses, a self-certification to that effect shall be obtained. (Thus obviating the need for a full-blown KYC.)
    5 there is no provision of self-attestation of Passports, Driving licenses, and such documents issued by Govt or its agencies under the title of Official Valid Document (OVD). (It is just another additional burden for account holders to print sot copies, sign the same, scan, compress the copy to meet with the file size stipulated by the bank, to be acceptable to the Bank's server. Of course, all bank customers must now have the necessary equipment and the skills to do so)

    Thus it is the overzealous banks that instigate such KYC updates / FATCA-CRS initiatives because they have not bothered to keep their records up to date or differentiate between various Risk Categories. So much easier to do carpet bombing.

    Finally, who in their right mind will initiate a RE-KYC exercise in the middle of a Covid 19 Pandemic for NRI account holders who are sitting 4000 miles away? But it has happened.

    Both parties, RBI and the Banks need to introspect. and the account holders have to complaint by all possible means to get these harassments stopped.

    narayansa

    In Reply to Dilip Modi 1 month ago

    If this is what the RBI master document says, then with this as a base a legal notice needs to be sent by a counsel to Indian Banks Association and the RBI as to how all banks instead of following the guidelines in spirit and letter are harassing all customers no end.
    Hopefully amends may be triggered by RBI with banks.

    a_h_mehta

    1 month ago

    I find that the banks want re-KYC to be done even when there is no change in my personal details. Thus I have to submit copies of my documents to the bank which are already with them. Makes no sense to submit copies of documents which have been already submitted to them. Wonder what purpose it serves.

    sanjay.khandkar

    1 month ago

    Thank you for your article. I have often wondered about the same questions that you have raised. Ordinary people are made to suffer for no fault whereas powerful people are able to abuse the system. I keep wondering about this laughable question - did Dena Bank ask Neerav Modi for his Aadhaar card and KYC before transferring Rs 15,000+ crores!!!

    I also wonder - is there a scenario or a story where there was a real benefit that was realized due to the enforcement of KYC norms - as far as I see it - we have blindly introduced these norms without giving any thought to its benefits - it has now become a monster that feeds itself may be. If poweful people have repeatedly abused the process, only these people should prosecuted and everyone should NOT be made to suffer.

    It appears that this kind of regulation is the result of abuses by few select people.

    Are we essentially a a lawless nation? Since we do not seem to be able to enforce laws or enforce them in a way that makes sense. I recollect that the cases from 1990s scam are still going on ... My guess is that most of KYC norms originated from these days.

    Isn't it time we looked at the entire KYC mechanicm and have the guts to get rid of it?

    Atul vora

    1 month ago

    Kotak Mahindra Bank Andheri West branch refused to accept even self attested photo copies for rekyc. They wanted originals!! Absolutes craziness

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