Supreme Court Says Banks Must Compensate Digital Fraud Victims If Due Diligence Fails

In a significant observation, the Supreme Court on Thursday said victims of offences like digital arrests 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. The landmark observation by the top court suggests that banks must be made accountable to indemnify losses of victims of digital fraud.

RBI's Proposed Regulatory Framework To Deal With Financial Fraud

The Reserve Bank of India (RBI) has been working to address cyber fraud. The Central bank proposed Know Your Customer (KYC) Amendment Directions, 2026, which are expected to be notified by November 30 and operationalised by December 31. The Supreme Court said the proposed regulatory framework must provide for suitable compensation to victims where financial institutions are found to have failed in their due diligence obligations.

ALSO READ: Noida-Based IT Entrepreneur Prakash Vishwakarma's Waredot Supports Cybercrime Investigation Involving Fraudulent Domains

Need For Mandatory Preventive Measures: SC

A bench comprising Chief Justice Surya Kant and justices Joymalya Bagchi and V Mohana reiterated the need for mandatory preventive measures, including temporarily suspending unusual transactions that deviate from an account holder's established transaction pattern, automated reporting of suspicious activity and physical verification to establish the genuineness of transactions.

ALSO READ: eMudhra Controversy Explained: How Weak Keys Put Website Security At Risk; What It Means For Internet Users

The bench directed the RBI to submit a list of all authorised financial institutions by the next date of hearing, adding that it would issue directions applicable to all institutions without necessarily impleading individual banks in the proceedings.

Bank To Alert Police In Digital Arrest Scam

The court further said that the responsibility of banks to alert neighbouring police stations about unusual transactions involving customers who may be victims of digital arrest scams. The bench 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.

Digital Arrest Cases Declined By Around 50%: Court

During the hearing, 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, attributing the reduction to the court's intervention, coordinated action by government ministries and departments, and public awareness campaigns.

The bench, however, pointed out that the country had still suffered losses of nearly Rs 800 crore from such offences this year. The CJI 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.

(With PTI Inputs)