Curbing Cyber Fraud: Banks Push for Swift Account-Freezing Powers to Combat Cyber Fraud

Cyber fraud is on the rise in India, with banks increasingly facing challenges from mule accounts—bank accounts used by fraudsters to move and disguise illicit funds. These accounts often belong to unsuspecting individuals or are opened using forged documents. Despite identifying and freezing thousands of such accounts annually, banks report that fraudsters continually create new ones, exploiting loopholes in the system.

Legal Roadblocks in Freezing Illicit Accounts

Currently, banks rely on internal triggers to block or monitor suspicious accounts. However, under the Prevention of Money Laundering Act (PMLA), they lack the statutory power to freeze accounts independently. Freezing a customer’s bank account requires permission from a court or law enforcement authority, leading to delays that fraudsters take advantage of to shift funds and erase digital footprints.

IBA’s Working Group Suggests Regulatory Reform

A working group formed by the Indian Banks’ Association (IBA) has suggested that the Reserve Bank of India (RBI) consider granting banks immediate authority to freeze mule accounts involved in suspicious transactions. The report notes that this would streamline banks’ ability to act quickly and reduce the time lost in securing external permissions, which is often critical in tracking cyber fraud.

Strengthening Verification of Vulnerable Accounts

The report also recommends bolstering account verification mechanisms. One proposal involves using the Election Commission’s database to cross-check individuals who open accounts using voter ID cards and Form 60, which is typically used when a Permanent Account Number (PAN) is unavailable. To reduce misuse, banks may also consider capping the number of transactions allowed on such accounts.

Integrating Technology to Detect Illicit Activity

To stay ahead of evolving criminal tactics, the report stresses the importance of a technology-led approach. By incorporating Artificial Intelligence (AI) and Machine Learning (ML) into transaction monitoring systems, banks can detect suspicious patterns, pre-empt fraud, and enhance their response to emerging threats. These technologies can help address current gaps and refine the systems used to identify mule activity.

A Collaborative, Multi-Pronged Strategy

Tackling cyber fraud and mule accounts will require more than just new rules. The report calls for a unified approach involving financial institutions, regulatory bodies, law enforcement agencies, and technology firms. It highlights the need for significant investment in technology infrastructure, continuous staff training, and active information sharing across stakeholders.

Conclusion

The working group’s findings outline a strategic blueprint to curb the proliferation of mule accounts and protect the banking system. While the proposed reforms require regulatory approvals and system-wide collaboration, they reflect a growing consensus on the need to fortify the financial ecosystem against cyber fraud.

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