Merchants' bank accounts can't be frozen for UPI payments from fraudsters: Andhra HC
The Andhra Pradesh High Court has ruled that authorities cannot freeze a merchant's bank account merely because it received a UPI payment from a person accused of fraud. The court observed that merchants cannot verify every UPI customer before accepting digital payments.
Intelligence analysis by Llama
The Andhra Pradesh High Court has held that authorities cannot freeze a merchant's bank account for receiving a UPI payment from a person accused of fraud. The court observed that merchants cannot verify every UPI customer before accepting digital payments.
Imagine you own a small shop and someone pays you using a phone app. The court said that just because the person who paid you might have done something wrong, you can't freeze your bank account. The court wants to make sure that people who are innocent aren't hurt by mistakes.
Analysis
A Blow to Indiscriminate Freezes
The Andhra Pradesh High Court's ruling is a significant development in the ongoing debate over the implementation of fraud prevention measures in India. The court's observation that merchants cannot verify every UPI customer before accepting digital payments is a crucial one. It highlights the need for due process in cyber fraud investigations and underscores the importance of not crippling legitimate businesses while investigating fraud.
The court's ruling is not an isolated incident. Recently, the Rajasthan High Court held that a bank account is an indispensable tool for earning a livelihood and ruled that authorities cannot freeze an entire account merely because of a suspicious transaction. Similarly, in October 2023, the Kerala High Court directed banks to freeze only the disputed amount rather than entire accounts, observing that merchants receiving legitimate UPI payments cannot be treated as accused unless investigators establish their complicity.
The repeated court rulings point to systemic gaps in the implementation of fraud prevention. Srikanth L. of Cashless Consumer told MediaNama that repeated court rulings point to systemic gaps in the implementation of fraud prevention. He said, "The Merchant Category Code (MCC) categorisation/Know Your Customer (KYC) for merchant gaps exists in UPI" but remains overlooked because of "0 MDR and lack of incentives." He added that regulators should act against "acquirers' lack of due diligence/compliance" and "put caps on P2P2M mode/auto-onboarding of merchants" to build "a safety layer for users" that is currently missing.
The lack of transparency around account freezes is also a significant issue. Srikanth said that the "real suffering and scale of the problem is not coming to light" because blocked accounts are not publicly reported. Similarly, "What is still not reported is the recovery rate," making it difficult to assess whether indiscriminate freezes are actually effective.
The National Payments Corporation of India's (NPCI) transaction risk scoring is also a "black box" that "hurts consumers too while also not combating fraud effectively". He also argued that the RBI's recent approach of "refunding a fraudulent amount once to the customer from its own funds" amounts to "refusing to deal with real problems", adding that "repeated judgements now highlight the lack of true fixes to the problem of fraud." As a solution, Srikanth said the RBI, NPCI, and the Indian Cyber Crime Coordination Centre (I4C) should publish detailed data on "fraud prevention, law enforcement response, and recovery".
Key points
- The Andhra Pradesh High Court has ruled that authorities cannot freeze a merchant's bank account merely because it received a UPI payment from a person accused of fraud.
- The court observed that merchants cannot verify every UPI customer before accepting digital payments.
- The ruling highlights the need for due process in cyber fraud investigations and underscores the importance of not crippling legitimate businesses while investigating fraud.
- Repeated court rulings point to systemic gaps in the implementation of fraud prevention.
- The lack of transparency around account freezes is a significant issue.
- The National Payments Corporation of India's (NPCI) transaction risk scoring is a "black box" that "hurts consumers too while also not combating fraud effectively".
The court's ruling could lead to more transparency and accountability in the implementation of fraud prevention measures. It could also lead to the development of more effective and targeted solutions to combat cyber fraud.
The lack of transparency around account freezes and the lack of effective solutions to combat cyber fraud could continue to harm innocent businesses and individuals. The court's ruling may not be enough to address the systemic gaps in the implementation of fraud prevention.
