Kerala HC flags plight of co-op banks whose mirror accounts are frozen for cyberfraud by a few customers

The Kerala High Court recently took note of the difficulties faced by co-operative banks when entire mirror accounts held by them with commercial banks are frozen amid cyber fraud investigations into some of the account holders [Thalakkad Service Co-operative Bank Ltd v Union of India & ors].

Justice MA Abdul Hakhim made the observation while dealing with a plea filed by Thalakkad Service Co-operative Bank Ltd.

The bank submitted that its mirror account maintained with the ICICI bank was repeatedly subjected to freeze and lien orders because some of its account holders were allegedly involved in financial fraud.

Mirror (or pool) accounts are settlement accounts that service co-operative banks maintain with scheduled commercial banks to process online transactions such as NEFT, RTGS, IMPS and UPI.

Since these accounts act as a common gateway for all customers' digital transactions, freezing a mirror account over suspected fraud by a few customers can disrupt online banking services for the entire co-operative bank.

The Court noted that a co-operative bank processes online fund transfers for its customers through such a mirror account maintained with a scheduled bank. Whenever an individual account holder is suspected of cyber fraud, investigating agencies freeze or place a lien on the bank's mirror account instead.

As a result, the bank itself suffers financial losses and its services are disrupted. The Court added that the delay in identifying the actual offenders often enables such offenders to withdraw the fraud proceeds before any action can be taken against them, leaving only the bank to suffer the consequences of the bank freeze.

"The Petitioner (coo-op bank) is losing large amounts on account of this and the Petitioner is unable to proceed against the offending account holders, as, by the time they are identified with the details provided by the Respondent No.4, they might have withdrawn the disputed amounts from their account," the Court said.

The present petition was filed by the cooperative bank over repeated freezing of its mirror account.

The petitioner bank referred to a complaint filed before the police, by which four persons were accused of opening accounts with the bank solely to facilitate financial cyber fraud.

The petitioner bank stated that ₹11.57 lakh out of the ₹32.45 lakh that had passed through fraudulent transactions involving its mirror account had been traced to accounts maintained by these four persons.

Despite receiving the complaint, the bank alleged that no action had been taken by the police.

Taking note of the bank's grievance and observing that the allegations disclosed cognizable offences, including Section 111 (organised crime) of the Bharatiya Nyaya Sanhita, 2023 (BNS), the Court directed the Tirur Police to register an FIR against the four mule account holders and investigate the matter.

Earlier, on June 1, the Court passed an interim order directing ICICI bank not to transfer any money from the petitioner's mirror account without first giving advance notice to the bank.

When the matter was taken up today, the Court extended the interim order by two months and posted the matter for further hearing on August 18.

Advocates Manas P Hameed, Ipsita Ojal and Laya Simon appeared for the co-operative bank.

Additional Solicitor General P Sreekumar appeared for the Union of India.

Standing counsel Lal K Joseph represented ICICI Bank.

[Read Order]