Totally agree. They should either proceed this issue to some authority (including the information about the frozen coins) or return the coins. But the second opinion seems to be not the best one...Below is the answer why.
> Why not just return the funds to the address they were received from? That should settle it.
Imagine that in some time interpol will come to them and ask for the information related to this transaction. This is not a rare case in crypto. What should the exchange answer? "We caught the user, asked him for KYC, he sent fake documents 2 times, we decided to release the funds"? Really? In this case I'm sure the owners of the exchange will end their crypto career as A. Vinnik from ex btc-e.
Good point. You should contact with the law enforcement immediately when you suspect suspicous person.
They will take right action and will bring the justice.
This funds might be gains from cyber ransom or anything.
But this is law enforcement job to find out.