Banks cannot freeze accounts solely on suspected mule activity absent evidence or statutory authority.

The petitioner, a sole proprietor of “Sanjeev Vyapaar,” maintained Current Account No. 43061577012 with the State Bank of India (“SBI”). On 19 March 2026, SBI partially froze the account, preventing its normal operation, allegedly pursuant to an identification by the Proactive Risk Management Cell, Patna, of the account as a suspected “mule account”.

SBI subsequently conducted physical verification of the petitioner’s office and godown and alleged that the petitioner’s actual business differed from the activities reflected in his trade licences and GST records.

The bank further relied upon a request from Ninja Ferro Tec Private Limited claiming that ₹10,00,000 had been erroneously transferred to the petitioner’s account and seeking reversal of that amount. The bank stated that the account balance on the date of freezing was ₹10,01,509.14, including the disputed ₹10,00,000.

The petitioner sought restoration of the account and disclosure of the reasons for the freeze, but SBI declined to provide complete details, citing statutory restrictions relating to suspicious transaction reporting.

The petitioner therefore approached the High Court under Article 226 of the Constitution.

Whether SBI was justified in partially freezing the petitioner’s bank account on the basis of a suspicion that it was being operated as a “mule account,” without establishing any fraudulent or illegal transaction and without prior notice to the petitioner?

Whether Clause 59 of the RBI Master Direction dated 25 February 2016 authorises a bank to freeze a customer’s account merely upon suspicion of mule-account activity?

Whether the disputed sum of ₹10,00,000 could be protected by retaining it under lien while permitting the petitioner to operate the remaining account balance?

The Court applied Clause 59 of the RBI’s Master Direction DBR.AML.BC. No.81/14.01.001/2015-16 dated 25 February 2016, which requires banks to undertake due diligence and meticulous monitoring to identify accounts operated as “money mules” and to take appropriate action, including filing Suspicious Transaction Reports (“STRs”) with the Financial Intelligence Unit–India.

The Court held that although the provision permits diligence, monitoring and reporting of suspicious transactions, it does not expressly authorise the freezing of a bank account merely on suspicion.

The Court also applied the principles of procedural fairness and non-arbitrariness, holding that adverse action affecting the operation of a bank account must be supported by material establishing the alleged wrongdoing and cannot be sustained solely on an unsubstantiated suspicion.

The Court found that SBI had frozen the account on 19 March 2026, before conducting its physical verification, and without giving the petitioner prior notice.

Although the bank alleged that the petitioner’s actual business differed from his trade licences and GST records, that discrepancy did not establish that the account had been used for fraud, money laundering, or any illegal transaction.

The Court further noted that there was no report from SBI or any investigating agency identifying a fraudulent transaction in the petitioner’s account, and that the bank had not produced evidence establishing that the petitioner operated a mule account.

The alleged erroneous transfer of ₹10,00,000 justified safeguarding that specific amount, but SBI had not independently corresponded with or heard the petitioner to determine whether the transfer was genuinely erroneous or arose from a legitimate business transaction.

Consequently, the broader partial freeze was disproportionate and unsupported by Clause 59, though the disputed sum could reasonably remain protected pending determination of the competing claims.

SBI was directed to immediately defreeze the account and permit the petitioner to operate it, while retaining ₹10,00,000 under lien.

SBI was further directed to decide the entitlement to that amount after giving an opportunity of hearing to both the petitioner and Ninja Ferro Tec Private Limited, within six weeks from receipt of the order.

The writ petition was accordingly disposed of.