The Reserve Bank of India (RBI) has issued a directive for banks to expedite the process of activating inoperative or frozen accounts, with a focus on simplifying the Know Your Customer (KYC) update process. The move comes in response to the increasing misuse of dormant accounts for laundering illicit funds.

Fraudsters are exploiting frozen accounts to launder money through complex, rapid transactions.

According to Dhiraj Gupta, Co-Founder and CTO of mFilterIt, “The misuse of inoperative bank accounts has become a sophisticated tool for laundering mule money. Fraudsters exploit these dormant accounts to route funds through hundreds of accounts in a short span, making it nearly impossible for investigative agencies to trace and freeze the illicit money.”

He further noted that accounts opened under initiatives like the PM Jan-Dhan Yojana, often without proper documentation, are now a major loophole facilitating cybercrime.
Banks, alongside fintech firms, are taking decisive actions to address these vulnerabilities.

Shikhar Aggarwal, Chairman of BLS E-Services, emphasised the importance of efficient KYC processes, noting, “The recent directive by the Finance Ministry to major PSU banks to speed up pending re-KYC processes highlights the significance of efficient KYC processes.”

He believes technology and a risk-based approach could significantly reduce customer hassle while enhancing compliance and mitigating regulatory risks.

By utilising digital platforms for document submission and verification, banks can minimise paperwork and in-person visits.

On the other hand, failure to complete KYC requirements can have dire consequences, including regulatory penalties, reputational damage, and customer attrition.

Shikhar Aggarwal further stated, “Banks that embrace automation for periodic KYC updates can reduce manual efforts, enhance customer experience, and better comply with anti-money laundering regulations. AI-powered systems, in particular, can boost efficiency and streamline compliance efforts, strengthening the banking sector.”