New Delhi, October 29: The Supreme Court has mandated that banks must compensate victims of digital fraud for their losses, stipulating that such indemnification is required if investigations establish a failure in the bank’s due diligence process. This significant ruling aims to enhance accountability within financial institutions and provide a more robust framework for protecting customers from cyber-enabled financial crimes.
Information was available with The Chenab Times that a bench, presided over by Chief Justice Surya Kant and including Justices Joymalya Bagchi and V. Mohana, observed that despite a reported 50 per cent decrease in cybercrimes, victims have collectively lost approximately Rs 800 crore this year. The court emphasised that the Reserve Bank of India’s (RBI) proposed regulatory framework must include enforceable provisions for compensation, preventive interventions, and institutional accountability.
RBI Framework to Include Compensation Mandate
The Supreme Court indicated that it would first review the proposed Reserve Bank of India (RBI) Know Your Customer (KYC) Amendment Directions, 2026, before allowing the regulatory process to advance. These directions are slated for notification by November 30 and are expected to become operational by December 31. The court stressed that the regulatory measures should transcend general advisories, establishing clear obligations for financial institutions and outlining consequences for any non-compliance.
In its order, the bench stated, “We emphasise that the regulatory measures proposed by the RBI must mandate financial institutions to indemnify victims of digital arrest or cyber fraud through suitable compensation, not less than the amount lost by the customer, where the fraud or crime is found to have resulted from a failure of due diligence by the financial institution.” The Chief Justice noted that without penal directives, banks might not alter their practices. The court also reiterated the necessity for banks to temporarily suspend transactions inconsistent with an account holder’s established transaction history, automatically report suspicious activities, and conduct physical verification when necessary to ascertain the genuineness of transactions.
Proactive Measures and AI Integration Suggested
Highlighting the scale of digital fraud, the Chief Justice questioned why banks could not intervene when an account holder unexpectedly attempts to transfer a substantial sum that deviates significantly from their usual banking patterns. The court referred to fraud amounting to thousands of crores through digital arrest scams and expressed concern over the perceived inadequacy of strong countermeasures. It suggested that banks could classify accounts into different groups and leverage Artificial Intelligence (AI) to analyze transaction trails, particularly for individual account holders who have accumulated savings over time.
Financial institutions were described as a “protective umbrella” for vulnerable customers, possessing account holder information, including transaction histories, which should be utilized to prevent fraud before funds are transferred. The court drew a distinction between commercial accounts, where large transactions are routine, and individual accounts of retirees or ordinary savers, who typically engage in smaller withdrawals. The bench proposed that financial institutions could categorize accounts based on their nature and transaction patterns, employing technology like AI to detect deviations indicative of coercion or fraud.
Call for Enhanced Reporting and State Compliance
Additionally, the court called for a mechanism that would automatically alert the nearest police station about suspicious high-value transactions involving customers potentially targeted by digital arrest fraudsters. This alert would enable local police to verify whether the account holder was knowingly initiating the transaction. The Chief Justice cautioned that retrospective investigations would be insufficient if institutions failed to prevent fund transfers in the first instance, emphasizing the focus on prevention over post-mortem analysis.
Attorney General R. Venkataramani informed the bench that significant efforts were underway to improve the detection of suspicious transactions and reinforce preventive mechanisms within the banking system. However, the Chief Justice inquired about the strength of accountability provisions in the proposed measures and their potential impact on non-compliant institutions. The attorney general submitted that the RBI was examining banking liability, including personal liability and criminal prosecution for bank officials found to have colluded in fraud.
The court insisted that the regulatory framework must include a liability clause, threatening to enforce it through a judicial order if necessary. The government stated it was not defending banking negligence or collusion and was actively examining aspects of prevention and accountability. The bench directed the RBI to provide a list of all authorised financial institutions, ensuring that any court-issued directions would apply sector-wide. The court also highlighted the accountability of banks and the continued use of mule accounts for transferring cybercrime proceeds as key areas requiring attention. Law enforcement agencies across all states and Union Territories were directed to submit reports on FIRs registered in digital arrest scam cases, investigations, and suggestions for prevention, detection, and prosecution. Compliance was mandated for the Directors-General of Police of all states and Union Territories.
Senior advocate Kapil Sibal, representing WhatsApp, informed the bench about preventive measures taken by the platform, including the action against 9,400 accounts, and indicated the filing of an affidavit detailing these steps. He mentioned that WhatsApp was developing software to identify suspicious accounts and alert users.
The Chenab Times News Desk