Periodic KYC Update and an Auto-Freeze on a High-Risk Account
Mr Rao, 68, a retired schoolteacher, has held a savings account since 2012 and a current account for his family jewellery business since 2013. His last KYC update was in 2014. In 2022 the bank rated him high risk because the business is cash-intensive and he deposited ₹22 lakh in cash over four months without invoices. In June 2024 the periodic updater fell due; the bank sent three reminders. He submits Aadhaar and PAN but refuses to give income proof, business turnover or source of funds, saying he is old and 'will not share business details with the bank'. The core system auto-freezes both accounts. A pension credit of ₹45,000 and a medical payment of ₹1.8 lakh are due. The branch manager wants to keep the freeze until full KYC is completed. Mr Rao complains to the branch.
1. Is the auto-freeze appropriate? Explain the KYC and AML considerations.
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A blanket auto-freeze is not automatically appropriate. KYC non-update and suspicion are different. The bank must follow its Board-approved policy and give notice and a reasonable opportunity; RBI has clarified that accounts should not be frozen arbitrarily for KYC non-compliance. Because Mr Rao is high risk and has refused source-of-funds information after large cash deposits, the bank can restrict high-risk operations or require CDD before further cash transactions, but it should not strand legitimate credits such as pension without review. The refusal itself is a red flag: it needs MLRO assessment, not just a tick-box freeze. The bank should document the risk, consider whether the ₹22 lakh cash deposits are consistent with the jewellery business, and if suspicion is established, file an STR. If not suspicious, complete risk-based CDD using alternative documents and record why. Senior management approval is needed for high-risk relationship decisions.
2. What should the branch do about the pension credit and medical payment, and what records should it keep?
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The bank should separate essential or legitimate credits from suspicious activity. Pension credits are regular and identifiable; blocking them may cause hardship and is not required if the account is not subject to a confirmed sanctions freeze. The medical payment should be reviewed against available balance and supporting documents; if the bank has restricted operations, it should allow a legitimate medical payment after verification, or explain in writing why not. The bank should issue a written notice stating what CDD is missing, the consequences of non-compliance, and the channel to submit documents. It should keep the reminders, customer responses, risk assessment, MLRO decision and any STR confidential. If the customer continues to refuse and suspicion remains, consider exit after STR with senior approval; do not close abruptly to avoid reporting. If no suspicion, complete the periodic updater and reset the risk rating with reasons.