Supreme Court seeks compensation for digital fraud victims if banks fail due diligence

The Supreme Court on Thursday said banks should be held accountable for digital fraud losses and that victims of scams, including so-called digital arrests, should receive compensation of at least the amount lost if the fraud is found to have resulted from a financial institution’s failure to exercise due diligence.

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

The bench stressed that the proposed framework must provide for suitable compensation when financial institutions are found to have failed in their due diligence obligations.

Supreme Court flags preventive measures against digital fraud

The court reiterated the need for mandatory safeguards, including temporarily suspending unusual transactions that deviate from an account holder’s established pattern, automated reporting of suspicious activity and physical verification to establish the genuineness of transactions.

It also said banks should alert neighbouring police stations about unusual transactions involving customers who may have fallen victim to digital arrest scams.

The bench directed the RBI to submit a list of all authorised financial institutions covered by the proposed framework by the next hearing. It said directions could be issued to all such institutions without necessarily impleading individual banks in the proceedings.

The RBI was also asked to provide details of the institutions that would fall within the proposed guidelines and the measures being considered to compensate victims.

Digital arrest losses near ₹800 crore this year

During the hearing, Attorney General R Venkataramani, appearing for the Centre and other authorities, told the court that reported digital arrest cases had declined by around 50% from the previous year. He attributed the reduction to the court’s intervention, coordinated action by government ministries and departments, and public awareness campaigns.

Chief Justice Surya Kant, however, pointed out that losses from such offences had still reached nearly ₹800 crore this year.

The CJI identified two key areas requiring further intervention: accountability of banks and the problem of mule accounts, which are often 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 efforts to strengthen the institutional response to cyber-enabled financial fraud.