De-freezing bank accounts of crypto P2P traders: A Legal primer

Introduction

Peer-to-Peer (P2P) crypto transactions executed by Indian traders have reportedly increased significantly in the last few years. These P2P transactions are executed between users of the exchange whereas the exchange only provides the platform and is not a party to the transaction. Most of the exchanges only allow verified users to trade through P2P, therefore, individual traders sometimes do not collect KYC documents of the other party.

One of the most common problem faced by P2P traders in India is freezing of bank accounts pursuant to an order of the police or other investigation agencies. 

When and how are the bank accounts frozen?

 

In our experience, interestingly, the bank account frozen by the police mostly belongs to the seller in a P2P transaction. Why so? It seems that many online scammers, fraudsters and persons engaged in other illegal activities including hacking, phishing and debit card / credit card frauds, rush to convert the ill gotten money into crypto to avoid tracing or freezing of their funds. When a P2P seller trades with any such scammer, he receives the tainted money from the bank account of the scammer.

When the victim of the scammer files a cyber crime or police complaint, the police track movement of funds between bank accounts and can see that the P2P seller received money from the scammer. Consequently, police order the bank of the P2P seller to freeze his bank account on the account of suspicion. In few cases, the account of the buyer in a P2P transaction may also get frozen.

Power of the police to freeze bank accounts

Section 102 of Criminal Procedure Code (CrPC) provides that any police officer may seize any property which may be alleged or suspected to have been stolen, or which may be found under circumstances which create suspicion of the commission of any offence. The objective of Section 102 is to secure the property which has been or suspected to be stolen or involved in any offence from being disposed of or destroyed.

While considering the issue of whether ‘bank accounts’ fall within the scope of Section 102 of the CrPC, in State of Maharashtra vs. Tapas D. Neogy the Hon’ble Supreme Court observed that even bank accounts fall within the phrase ‘any property’ under Section 102 of the CrPC and could, therefore, be frozen by the investigating authorities, if found to have a nexus with the commission of an offence.

Powers of ED under PMLA

Section 17 of Prevention of Money-laundering Act, 2002 (PMLA) empowers ED officer to make search and seizure only on the basis of information in his possession along with reason to believe that the suspected individual has a nexus with offence alleged under PMLA. Bank account of P2P traders are also freezed by an order of ED, if the money received has a nexus with commission of any offence.

On juxtaposing the provisions of CrPC and PMLA, the power of seizure under PMLA seems relatively narrow as it requires enough evidence to form a “reason to believe” that the person is guilty of money laundering while the pre-requisite required for making order of seizure under Section 102 CrPC is merely suspicion which bestows wide powers on police officers to order seizure of ‘any property’.

Scope of suspicion justifying freezing of bank accounts

Considering the broad language used in Section 102, police tend to seize bank accounts which are even at layer 4 or layer 5 in the chain of transaction (see figure below). Similarly, we have also seen cases whether all the bank account of the person or the company has been freezed by the police if the alleged tainted money is credited to any one bank account of the person or company.  

Police also tend to check the available balance and may freeze the bank account which has the maximum available balance.

Consequences / seriousness of a frozen bank account

A frozen bank account is only the symptom and the seriousness of the disease for the P2P trader depends on the allegations made by the victim in the criminal / cyber complaint. Depending on the extent of the fraud and seriousness of the alleged crime, the issue of frozen bank account must be handled carefully and strategically. Consulting a legal professional is advised.

The burden of proof to rebut suspicion

P2P trader must explain the transaction and produce evidence of the relevant transaction from his account on the exchange to rebut any suspicion of his involvement in the alleged crime. The trader must produce screenshot or email notification containing the date of the transaction, name and volume of virtual digital asset traded and the amount of money paid by the buyer. Unfortunately, Indian police are not well versed with functioning of blockchain and it is even more troubling that they often summarily reject the offered explanation hinting that everyone involved in crypto trading is engaged in some illicit activity.

Is there any obligation to collect KYC details for every P2P trade?

As a matter of practice, P2P traders should collect KYC details and PAN number of the other party for every transaction and should submit these documents to the police to further corroborate the nature of transaction through which tainted amount was received in the account of the trader. However, there seems to be no specific provision of law requiring a seller of virtual digital assets to obtain the identity related details of the buyer. In any case, if the KYC documents are not available with the P2P trader, a request should be made to the police to obtain such documents either from the crypto exchange or from the bank which the account which was used to make payment.

Can the Police keep the account frozen indefinitely?

Exercise of power under Section 102 by the Police must not be manifestly unjust. Suspicion of the account being involved in commission of an offence is not sufficient to keep the account freezed if the investigation is unduly delayed. Moreover, in Teesta Atul Setalvad and Ors. vs. The State of Gujarat and Ors., the Supreme Court clarified that ‘at an appropriate stage or upon completion of the investigation, if the Investigating Officer is satisfied with the explanation offered by the Appellants and is of the opinion that continuance of the seizure of the stated bank accounts or any one of them is not necessary, he will be well advised to issue instruction in that behalf.’

Power of the police to de-freeze the bank account

Albeit police have the power to de-freeze the account, obtaining such an order is not bereft of challenges. Invariably, the suggestion by the police is to pay the victim irrespective of trader’s involvement in the alleged offence. Further, in cases where KYC details of the other party is not available with the trader, the police insists on producing these documents without appreciating that the crypto exchange or the bank only share such details pursuant to an order from the law enforcement agencies and not to any other person.

Power of the court to de-freeze bank accounts

Criminal court has the power, under Section 451 or Section 457 of the CrPC, to order on custody and disposal of a seized property. Courts may order to de-freeze a bank account either on production of satisfactory evidence that the property was not involved in the alleged offence or even subject to imposing certain conditions as the court may deem fit. For instance, the court may de-freeze the bank account subject to executing a bond or providing an affidavit to produce the disputed amount of funds when directed by the court.

Unfamiliarity with the technical aspects and an unsaid taboo around cryptocurrency related transactions make it challenging to obtain relief from the court. Irrespective of the nature of the alleged offence, the prosecution may portray the case to be complex and serious merely as it involves crypto.

Freeze vs. Lien

Access to banking services is the lifeline of any business or trader and freezing the bank account causes severe financial stress and hardship. In case police do not agree to de-freeze the account, a request may be made to de-freeze the account subject to marking a lien on the account equivalent to the amount of disputed transaction. As lien ensures that funds equal to the disputed amount will remain in the account, it equally serves the intended purpose of securing the custody of disputed amount.

Conclusion

Trader should fully cooperate and provide all documentary evidence to the police explaining the transaction so that a no-objection may be issued by the police itself. Courts may not be inclined to provide any relief during the early stage of investigation. Traders may also receive notice or summon to appear before the police officer along with required details and not responding to such notice/summon or non-appearance may have serious consequences. It is crucial to share all available details with the police at the earliest as the Police may also make the trader a co-accused on ground of non-cooperation if no explanation or justification is provided to the satisfaction of the police.

 

Disclaimer: Nothing contained in this blog constitues legal advice as the details are only shared for educational and informative purposes.

Authors: Purushottam Anand and Mihir Vashishtha