SC Calls for Banks to Compensate Digital Fraud Victims for Losses

The Supreme Court on Thursday said banks must be held accountable for losses suffered by victims of digital fraud and observed that victims of digital arrest scams should receive compensation of at least the amount lost if the fraud is found to have resulted from a failure of due diligence by the financial institution.

A bench comprising Chief Justice of India Surya Kant and Justices Joymalya Bagchi and V Mohana said it was examining the Reserve Bank of India's proposed Know Your Customer (KYC) Amendment Directions, 2026, which are expected to be notified by November 30 and operationalised by December 31.

The bench stressed that the proposed regulatory framework must provide for suitable compensation to victims where financial institutions are found to have failed in their due diligence obligations. It also called for mandatory preventive measures, including temporarily suspending unusual transactions that deviate from an account holder's established transaction patterns, automated reporting of suspicious activity and physical verification to establish the genuineness of transactions.

The court indicated that it was considering directions requiring banks to compensate victims and face prosecution where digital arrest fraud occurs because of a failure to exercise due diligence. “We are proposing to direct that wherever such fraud takes place, bank will compensate victim and suffer prosecution. It has to be done,” the Chief Justice said.

Directing the RBI to submit a list of all authorised financial institutions by the next date of hearing, the bench said it could issue directions applicable to all such institutions without necessarily impleading individual banks in the proceedings.

The court also emphasised the responsibility of banks to alert neighbouring police stations about unusual transactions involving customers who may be victims of digital arrest scams. It asked the RBI to provide details of the financial institutions that would be covered by the proposed guidelines and the measures being considered to compensate victims for their losses.

CJI Expresses Frustration Over Digital Arrest Scams

During the hearing, the Chief Justice expressed concern over educated people continuing to fall prey to digital arrest scams despite public awareness campaigns, media reports and court interventions. “What is wrong with these victims? How are these victims being trapped like this? They can't understand this basic thing? What's fear of arrest on mobile?” the CJI remarked orally.

“Hit the mobile on wall and arrest goes. Something is wrong with people. God knows what is there. What kind of person you are in democratic country if you think you are getting arrested on mobile,” he added. The observations came after senior advocate N S Nappinai, the amicus curiae in the case, told the court that she continued to receive reports of digital arrest scams despite efforts to curb them. She informed the bench that a woman had lost Rs 2.5 crore in such an incident the previous week.

The Chief Justice said he was frustrated that educated people continued to be duped and suggested that people could verify the authenticity of court orders through the judiciary's official website rather than relying on claims made by fraudsters over mobile phones. The bench said banks should act as a “protective umbrella” for customers vulnerable to such scams.

Digital Arrest Cases Down 50 Per Cent, But Losses Remain High

Attorney General R Venkataramani, appearing for the Centre and other authorities, informed the court that reported digital arrest cases had declined by around 50 per cent compared with the previous year. He attributed the reduction to the court's intervention, coordinated action by government ministries and departments, and public awareness campaigns.

He also said banks were flagging suspicious transactions and that he had held meetings with the RBI regarding the formulation of rules to address the problem. The Chief Justice, however, pointed out that the country had still suffered losses of nearly Rs 800 crore from such offences this year.

The bench identified two key areas requiring further intervention: the accountability of banks and the problem of mule accounts, which are frequently used to receive and transfer proceeds of cybercrime. The matter, titled _In Re: Victims of Digital Arrest Related to Forged Documents_, is being monitored by the Supreme Court as part of its efforts to strengthen the country's institutional response to cyber-enabled financial fraud.

The proposed RBI framework and any directions issued by the court could establish stronger safeguards for suspicious transactions and clarify the responsibilities of financial institutions when customers are targeted by digital arrest scams.

**(EOM)**