Bank Cannot Freeze Account On Its Own By Invoking PMLA Without Order From Competent Authority: Allahabad High Court

The Court further held that Section 12 of the Prevention of Money Laundering Act, 2002 does not authorise banks to freeze accounts and only imposes duties upon banks as reporting entities to maintain records and furnish information.

The Court was hearing a writ petition seeking de-freezing of a bank account which had been frozen by the bank on the ground of “suspicious transactions” after an amount of ₹23 lakh was credited into the petitioner’s current account. The petitioner contended that there was neither any FIR nor any order from a competent authority directing freezing of the account.

The Division Bench of Justice Shekhar B. Saraf and Justice Abdhesh Kumar Chaudhary observed: “This Court is rather amused as to how Section 12(2) or for that matter any of the sub-Sections of Section 12 of the Prevention of Money Laundering Act, 2002 has been sought to be made applicable and pressed into action. The said Section does not in any manner authorise or remotely concerns freezing of a bank account by the banking company itself.”

The Court further observed: “It should be well understood that under the provisions of Section 12 merely a duty is cast on the Bank as a reporting entity to maintain records and at time may not permit a particular (specified) transaction only, because the freezing of Bank Account is always under Section 17 of the Act and that too by the Competent Authority, after the twin test of (i) information being in possession and (ii) reasons to believe, is satisfied to the core”.

Advocates Shrikant Mishra and Mansi Saxena appeared for the petitioners. Advocate Vinay Shankar appeared for the respondents.

Background

The petitioner firm maintained a current account with the respondent bank and claimed to be engaged in lawful business activities relating to fisheries machinery. During business operations, an amount of ₹23 lakh was transferred into the petitioner’s account through RTGS. On attempting subsequent withdrawals, the petitioner was orally informed that the account had been frozen.

According to the petitioner, repeated requests for unfreezing the account were ignored, and no written order, notice or reasons for freezing the account were ever supplied. The petitioner alleged that the freezing of the account had caused severe disruption to business operations and financial losses.

The respondent bank defended its action, contending that the account reflected suspicious transactions because the petitioner had declared a comparatively lower annual income at the time of opening the account. The bank also relied upon Section 12(2) of the Prevention of Money Laundering Act, 2002, to justify the freezing of the account.

Court’s Observation

The High Court found that the bank had failed to demonstrate any statutory provision empowering it to freeze the account merely because a large transaction had taken place. The Court noted that there was no complaint, FIR, judicial order or material on record indicating any fraudulent activity involving the petitioner.

The Court strongly disapproved of the conduct of the bank in independently investigating the source of the transaction and treating itself as an investigating authority.

The Bench observed: “This Court fails to understand, in the first instance, under what law could the Bank start a self-declared investigation without there being any Complaint lodged by anyone.”

Examining Section 12 of the Prevention of Money Laundering Act, 2002, the Court held that the provision only casts obligations upon reporting entities to maintain records and preserve confidentiality.

The Court observed: “Under the provisions of Section 12, merely a duty is cast on the Bank as a reporting entity to maintain records.”

The Bench clarified that freezing of accounts under the PMLA is specifically governed by Section 17 of the Act and can only be exercised by the competent authority after satisfaction of statutory conditions, including “reasons to believe.”

“In any case, this Court is clear in its mind that there ought to be some order from a competent authority like the investigating agency (Police), who have been authorised to freeze bank account during investigation in terms of Section 102 of the erstwhile Code of Criminal Procedure, 1973”, the Court added.

The Court also considered RBI guidelines regarding Suspicious Transaction Reports and noted that the RBI itself had directed that banks should not place restrictions on the operation of accounts merely because an STR had been made.

The Bench further observed that permitting banks to freeze accounts at their own discretion merely by branding transactions as suspicious would create a “havoc-like situation” and undermine the financial system.

The Court reiterated that the relationship between a bank and its customer is one of trust and that a bank acts as a trustee of the customer’s money. The Court observed: “The duty of the bank is that of a trustee and not of any investigative agency with a roving eye.”

The Bench also held that freezing of accounts without notice and without authority of law directly affects the customer’s right to livelihood under Article 21 and the freedom to carry on business under Article 19(1)(g) of the Constitution.

Referring to the Supreme Court decision in OPTO Circuits (India) Ltd. v. Axis Bank (2021), the Court observed that freezing of accounts cannot be undertaken casually and that blanket freezing of accounts of persons who are not accused or suspects is manifestly arbitrary.

Conclusion

The Allahabad High Court held that the freezing of the petitioner’s bank account by the respondent bank was illegal and unsupported by law.

The Court directed the respondent bank to immediately unfreeze the petitioner’s bank account and permit normal operations in accordance with RBI guidelines.

The Court also imposed costs of ₹50,000 upon the respondent bank, observing that indiscriminate freezing of accounts adversely affects business operations, commercial goodwill and the right to livelihood.

Cause Title: M/S S. A. Enterprises v. Reserve Bank of India & Ors. (Neutral Citation: 2026:AHC-LKO:30793-DB)

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