Court: Merchant bank accounts cannot be frozen for fraud payments

The Andhra Pradesh High Court has ruled that authorities cannot freeze a merchant's bank account simply because it received a UPI payment from an individual accused of fraud. The court stated that "the vendor cannot verify the credentials of such an individual" before accepting digital payments.

The case involved Sri Sai Wines, a liquor retailer in Guntur, whose current account was frozen after a customer allegedly involved in a cheating case paid Rs 1,000 (approximately $12) via UPI. The retailer challenged the freeze, arguing their account containing Rs 8.26 lakh (approximately $9,900) was blocked without notice and without establishing the merchant's involvement in the alleged offense.

The court found the account was frozen without due process and without establishing the merchant's involvement in the alleged crime. The High Court subsequently quashed the freeze and directed the bank to restore access to the account. The judgment emphasized that merchants cannot reasonably verify every UPI user's credentials before accepting payment.

This ruling by the Andhra Pradesh High Court aligns with previous judgments from Rajasthan and Kerala High Courts, which cautioned against indiscriminate freezing of bank accounts in cyber fraud investigations. These rulings highlight that blanket freezes are disproportionate and can undermine public confidence in payment systems unless the account holder's complicity is proven.

However, experts point to persistent systemic gaps in fraud prevention. Critics argue that regulators need to address issues like "acquirers' lack of due diligence/compliance" and consider capping certain payment modes to enhance user safety. Transparency surrounding account freezes and actual recovery rates for fraud victims remain areas of concern.