In this article, Suyash Sahai of Faculty of Law, University of Allahabad discusses the status of Freezing of Bank Account under International Law and Indian Law.

Introduction

Freezing of Bank account is considered to be one of the Economic Measure and this measure is imposed in response to other Country’s Human Right Abuse. Freezing of bank account may also enable the international community or the States to inflict retribution upon target states for past human rights violations and also to deter future violations. This economic measure can be imposed unilaterally or by the group of States with the authorization from Security Council. U.S officials has recognized bank freeze as Punitive and emphasize that deterrence and retribution are the main objective of it but some States has characterize that International bank freeze is coercive. It is also to be noted that by employing such measure of bank freeze States gets a powerful bargaining chip which is used to extract  humanitarian concessions from a foreign state and such coercive asset freeze can be imposed for variety of humanitarian purpose. For eg.  Asset freeze has been done by U.S for facilitating the release of American hostages in Iran, securing reparations for victims of Libyan terrorist attacks, and incentivizing target states to accept human rights monitors.

Freezing of bank account can also be imposed by the court order of one State having jurisdiction, it can be imposed by the executive order of the State and also by an Security Council as punishment. But Freezing can also be done by the bank itself when it is found that account holder being declared bankrupt or insufficient funds in the account or who has not paid back the debt while dealing in offshore banking. A bank account may also be frozen if the bank is notified about a dispute concerning the ownership of funds or account operation, or to protect the account holder, the bank or a third party who has a reasonable interest in the account. However it can be imposed by the bank of any Country against the account holders of their country.

Under International Law

What is Offshore Banking?

Before coming into International Freezing of Bank account it is necessary to know about Offshore Banking System. An offshore bank is a bank located in a jurisdiction different from that where its depositors reside and offshore banking is the practice of dealing and transacting in Foreign Banks which gets its authorization by the Bilateral Investment Treaty between  the States.

It’s Advantages

• Provide favorable tax structure.
• Interest on this account usually is non-taxable.
• It maintains confidentiality regarding customer identities and other details.
• Provide accessibility of foreign investment opportunities and banking products.
• Provide multi-currency account facility.

It’s Disadvantages

• • The main problem is that offshore banking has been associated with the underground economy and organized crime through money laundering.
  • It encourages tax evasion by providing an attractive place to deposit their hidden income.
  • It requires a high minimum deposit.
  • Deposits may not be protected in the event of financial crisis.
• Their lies a danger of account freeze

Is Freezing of Bank Account a Countermeasure?

Countermeasures in response to an internationally wrongful act are intrinsically unlawful but are justified by the alleged initial failing to which they were the response. And Countermeasures against an offending state for violation of an International Law may be taken by the offender through Joint or Parallel action. Thus Freezing is legal when it is qualified as countermeasure.  Freezing of Bank assets also comes under the category of pacific sanction which also includes travel bans, trade embargos and also account freeze. The freezing in this sense is punitive in nature in response to other State’s default.

And apart from countermeasure, host states have also frozen foreign  other country’s assets to preserve them from misappropriation or spoliation and international asset freezes have been used to combat public corruption, preserving a target state’s national patrimony to ensure that misappropriated public funds would be available to advance international human rights for foreign people. (Source- Swiss Freeze $1bn in Gaddafi, Mubarak, Ben Ali Assets’, BBC News Middle East, 3 May 2011)

Legality and Recognition of Freezing of Bank Account of Other Country

International Law Commission has recognized in it Draft Article on State Responsibility under Article. 22 which permits states and regional organizations to freeze foreign assets, suspend trade agreements, and impose other non-forcible measures as necessary to address another state’s breach of international law and the same is also recognized by  Draft Articles on the Responsibility of International Organizations and Customary international law.

Freezing is also considered as Reprisal which means measures of coercion, derogating from the ordinary rule of International Law, decided and taken by a State in response to wrongful act committed against it by another state and intended to impose on it by pressure exerted through injury, the return to legality.

Account freezing also complies with Article 2(4) of U.N Charter which says that all Member States shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state, or in any other manner inconsistent with the Purposes of the United Nations.

Thus account freezes, as purely economic measures, do not involve the ‘use of force’ under Article 2(4) of the U.N Charter. It sidestep some of the thorny legal and ethical issues associated with military intervention. Nonetheless, international asset freezes qualify as a form of ‘humanitarian intervention’ to the extent that states freezing foreign assets (‘host states’) purposefully interfere in the domestic affairs of a foreign state (the ‘target state’), undermining the target state’s political independence and transgressing legal protections for the fair and equitable treatment of foreign investment, in order to promote cosmopolitan humanitarian values abroad and is considered as an economic and pacific measure which is considered as coercive method or tool for the settlement of dispute under International Law.

What are its Objectives?

• Punishment

As mentioned above, measure of account freeze is punitive in nature emphasizing on deterrence and retribution as its main objective. It acts as a tool for punishing where host states may seek to freeze foreign assets to punish target states or individual foreign nationals for violating human rights. International asset freezes have expressive power as a signal that the international community condemns a target state’s behaviour. In theory, asset freezes may also enable the international community to inflict retribution upon target states for past human rights violations and deter future violations. Punitive freezing is different from Coercive because it aims to bolster the rule of law by imposing a penalty for past violations and discouraging future violations rather than compelling the violator to change its current practices.

• Preservation

Its objective also lies in preserving the assets in the account where the  host states freeze the  foreign assets to preserve them from misappropriation or spoliation. The main example of it is that  shortly after the outbreak of World War II, many countries in North and South America froze the assets of Denmark and Norway to ensure that those assets would not fall into the hands of Nazi Germany.

• Compensation

Seeking Compensation from the Offending State is also one of its objective. Compensatory asset freezes differ from coercive asset freezes to the extent that they do not seek to compel a target state to act or refrain from acting in any particular manner. For example, when US courts froze assets of former-Philippine President Ferdinand Marcos to ensure that victims of human rights abuse in the Philippines could obtain compensation in civil actions.

• Incapacitation

Account freeze is also done with the view to incapacitate the offender State. It is used to limit or restrict the destructive capacity of the violators of Human Rights Abroad. It can be done with the view to combat terrorism also as such freezing will stop the evil activities of State Sponsored Terrorism or Terrorist Financing.

• Coercion

It is also done with the view to coerce the violator State and compelling the offender State to withdraw practicing of evil activities. By this the host states acquire a powerful bargaining chip and thus use it to extract humanitarian concessions from a foreign state. It is done for achieving the Humanitarian Purposes for example the Financial Measure took by USA for facilitating the release of American hostages in Iran, securing reparations for victims of Libyan terrorist attacks, and incentivizing target states to accept human rights monitors.

What are its Conditions?

• Their must be a wrong – Their must be a wrong occurred on the part of an offender State. And in response of such wrong by an offender State the affected State individually or collectively by the help of other State and by the authorization of Security Council can impose such measure.

• It must be proportionate – The measure must be proportionate to the wrong. It means that one cannot permanently freeze the account  in response to the wrong which are trivial in nature.
• It must be done out of necessity – The measure must be taken out of necessity which means their must be an imminent peril or an imminent danger to apply the measure of account freeze. Unless the measure is the only means of safeguarding an essential interest of the State against a grave and imminent peril such measure will not be treated legally valid under International Law.

Is Account Freezing an Intervention?

The principle of non-intervention is part of customary international law and founded upon the concept of respect for the territorial sovereignty of states. Intervention is prohibited where it bears upon matters in which each state is permitted to decide freely by virtue of the principle of state sovereignty. Now the question arise is account freezing an intervention?. Humanitarian asset freezes require special legal justification because they represent a form of ‘dictatorial interference’ that violates general principles of international legal.

Although, on December 21, 1965, in resolution, 2131, the General Assembly adopted a Declaration on the inadmissibility of intervention in the domestic affairs of the state and the protection of their independence and sovereignty. It asserted that “no state has the right to intervene directly or indirectly for any reason whatever in the internal or external affairs of any other state”. Freezing of bank account thus intervention becomes wrongful when it uses methods of coercion in regard to such choices, which must be free ones. Even such non-forcible interference i.e asset freeze arguably transgresses customary principles of external self-determination and non-intervention that are embedded in the UN Charter.

By the support of these authorities, I conclude by saying that yes it is an intervention but it require special legal justification, it is mostly imposed by the powerful countries who are in the position to dominate the will of weak or developing countries who use it as a powerful bargaining chip.

What is the difference between Expropriation of Property and freezing of Bank Account?

Expropriation is the act of a government in taking privately owned property, ostensibly to be used for purposes designed to benefit the overall public. concerns related to government expropriation are the rule of law, questions of due process and the issue of compensation. It is important that laws specifically delineate a government’s rights to expropriate property and there are adequate due process channels available for citizens to appeal a proposed expropriation

Where as Freezing is only restricting the account holder to transact in the  bank, it is not taking the possession of the account asset but it is just freezing against the transaction. A frozen bank account is a bank account that you cannot access because a creditor has placed a restraint on it.  When your bank account is frozen, you can put money into it, but you can’t take money out.

Freezing of Bank Account by Swiss Bank

The evolution of Swiss law on asset freezing in recent years has given some valuable tools and protection to creditors and defrauded parties seeking to recover funds from their evasive counterparties. Since 1980’s people use to hide their dishonestly because they knew that their own State laws does not enforced by the Swiss Courts and Government.

But in the recent years swiss bank has started taking into consideration and started enforcing and now swiss banks have become more are to comply with international asset recovery efforts, even in civil proceedings.

However, In October Swiss Government passed the Restitution of Illicit Asset Act Which allows Swiss Cabinet to freeze asset even though the other country has not formally asked the Swiss Government to do so.

Swiss Bank has frozen the account of the imminent personalities such as  Egyptian President Hosni Mubarak, Laurent Gbagbo the Former President of Cote d’ lvorie and Zine El Abidine Ben Ali, Former President of Tunisia.

Frozen bank account – Indian Perspective

Why Bank freezes accounts in India?

If the bank feels that transaction in account is specious, then the bank can freeze the account after giving the proper notice to the account holder. The reasons of such freezing of bank account can be:

• Money laundering
• Unpaid private loans
• Terrorist financing
• Tax dues (For example, the account of Sahara and Kingfisher Airlines has been frozen for non payment of tax dues)
• Unpaid money to a organisation/individual.
• Use of the account for illegal activities
• Suspicious activities in the account

What you should do if bank freezes your account?

When a bank freeze bank account, it has a solid reason to take such action. And the bank within their rights freeze the account when an illegal purpose of account comes into the knowledge of the bank. And if you think that you have not transacting for the illegal purpose or are not coming under the above mentioned reasons then you can approach the bank personally yo contact them or if the bank could not be able to understand your reasons then you may approach to Reserve Bank of India (RBI)

Who has the right to order account freeze in India?

• Reserve Bank of India
• Securities and Exchange Board of India (SEBI)
• Income-tax authorities
• Indian Courts

Non Compliance with Foreign Account Tax Compliance Act (FATCA) shall result into Freezing of Bank Account

On account of making our Indian Economic System more clear Foreign Account Tax Compliance Act (FATCA) has been introduced by the Government in the Indian Banking System. It meant that Bank account holders, mutual fund investors as well as people who have invested in insurance schemes have to make their bank accounts compliant with FATCA, or their accounts will freeze on 1st May 2017, FATCA is basically a sort of income declaration by people who invest in Mutual Funds, insurance and other schemes. The account holders are required to provide a self-declaration about the tax residency to their financial institution.

Frozen bank account – How to unfreeze a bank account?

According to Reserve Bank of India (RBI) rules, it is mandatory for bank account holders to provide their PAN or Form 60. In a circular issued in December 2016, RBI instructed all banks to disallow debit transactions in accounts where PAN or Form 60 (in terms of Rule 114B of the Income Tax Rules) had not been provided.

• Scope

Debit freeze for non updation of PAN Form 60 may be done only in the following cases: Account balance is `5 lakh or more.

Total deposits made after 9 November 2016 exceed `2 lakh.

• Unfreezing debit freeze

In order to unfreeze the debit freeze on one’s account, the account holder must forthwith furnish PAN Form 60 (as applicable) to the bank.

• Visit to the branch

The account holder can visit the nearest bank branch and fill up a designated form for updation of customer details. Self attested copy of PAN or Form 60 shall be attached to the form and submitted.Original PAN should also be carried along at the time of submission.

• Online method

Banks also provide an online method to carry out this procedure. The account holder can log in to the Net banking portal of the bank and click on the “Update PAN” section. The account holder will have to key in his PAN details and upload the PAN or Form 60 as applicable. Once the documents are uploaded successfully the account will be unfrozen by the bank.

• Email

Alternatively, the account holder can write an email to the designated customer services email id quoting the PAN or Form 60 details and upload the PAN or Form 60 (as applicable). Once the email is sent, the documents are verified by the bank and account is unfrozen.

No withdrawals or debits in any form will be possible (not even electronically), once the account is frozen for debits. Some banks also allow updation of PAN details on their mobile banking portals.