Calcutta HC: Banks Cannot Freeze Accounts Indefinitely Without Evidence of Fraud

The High Court at Calcutta has reprimanded the practice of arbitrary banking restrictions, ruling that financial institutions cannot maintain a debit freeze on accounts based on unsubstantiated suspicions of 'money mule' activities without concrete evidence of fraud. This decision safeguards account holders from administrative overreach by banks that fail to comply with procedural transparency while exercising regulatory powers under Master Direction DBR.AML.BC. No.81/14.01.001/2015-16 dated 25th February, 2016.

Justice Krishna Rao presided over the matter, where the petitioner challenged the State Bank of India's decision to partially freeze a current account on the pretext of proactive risk management. The Court scrutinized whether a bank could halt financial operations indefinitely without serving notice or establishing a definitive link to illegal transactions.

Key Takeaways

Procedural Fairness Mandatory

Banks must serve notice or conduct proper enquiries before freezing accounts, ensuring that the account holder's right to operate their business remains protected from arbitrary pauses.

Limits of Regulatory Instructions

While Master Direction DBR.AML.BC. No.81/14.01.001/2015-16 dated 25th February, 2016 empowers banks to monitor suspicious activities, these directions do not grant an absolute license to freeze accounts without initiating formal reporting to the Financial Intelligence Unit (FIU-IND).

Burden of Proof on Banks

Financial institutions must collect and present credible evidence of fraud or 'money mule' operations to justify restrictive actions; mere suspicion or business diversification is insufficient grounds for a debit freeze.

Court Observations and Directions

The Court observed that while the bank suspected the account of being a "Money Mule" an account used by criminals to launder illegally acquired money it failed to provide any investigative report or evidence of a fraudulent transaction. The Court, in its reasoning, observed: "The bank in the present case has not submitted any Suspicious Transaction Report. Even though the said provision enables the bank to take appropriate action, including suspicious transactions to FIU-IND but it does not specifically authorize freezing of accounts."

The Court further noted that the bank's verification process, which highlighted differences in the nature of business compared to trade licenses, did not constitute proof of criminal activity. The Court has following directions:

"The bank is directed to immediately defreeze the account of the petitioner and to allow the petitioner to operate the bank account by keeping the disputed amount of Rs. 10,00,000/- in lien. The bank is also directed to take appropriate decision with regard to the amount of Rs. 10,00,000/- after giving an opportunity of hearing to the petitioner and Ninja Ferro Tec Private Limited within a period of six weeks from the date of receipt of this order."

Ratio

A bank account cannot be kept frozen indefinitely on the mere allegation of being a 'Money Mule' if the bank fails to collect evidence of fraud or file a Suspicious Transaction Report (STR) as mandated by regulatory guidelines. Statutory instructions for monitoring transactions do not automatically authorize the freezing of accounts without established proof of illegal activity or adherence to principles of natural justice.

Background

The petitioner, a sole proprietor of "Sanjeev Vyapaar," found his current account with the State Bank of India partially frozen on March 19, 2026. Despite multiple enquiries and a physical verification of premises, the bank refused to restore operations, eventually citing a "suspected mule transaction" identified by its Proactive Risk Management Cell. The bank contended that the petitioner's business activities in scrap trading deviated from the textiles and iron/steel trade licenses held by the firm.

Furthermore, the bank claimed an erroneous transfer of Rs. 10 Lakhs from a third party, Ninja Ferro Tec Private Limited, necessitated the freeze. However, the Court found that the bank had not made any correspondence with the petitioner to verify the nature of this transfer nor had it followed the specific diligence measures under Clause 59 of the Master Direction DBR.AML.BC. No.81/14.01.001/2015-16 dated 25th February, 2016 issued by the Reserve Bank of India. Consequently, the Court disposed of the writ petition with directions to defreeze the account while maintaining a lien on the disputed amount.

Case Details:
Case No.: W.P.A. No. 13210 of 2026
Case Title: Sanjiv Kumar Dalmia Vs. State Bank of India & Ors.
Appearances:
For the Petitioner(s): Mr. Sashwat Nayak, Mr. Sandeep Joshi, Mr. Kajal Dutta
For the Respondent(s): Mr. Subrata Sinha, Mr. Debashis Saha, Mr. Avirup Roy Sanyal, Ms. Sucheta Pal, Mr. Jyotishman Sarkar (for SBI); Mr. Debabrata Das, Mr. A. Sarkar, Mr. Pratik Acharjee (for RBI)

Source: 2026 CaseBase(CAL) 2561