Banks Must Compensate Digital Fraud Victims if Negligence Is Proven: Supreme Court

NEW DELHI: The Supreme Court on Thursday said banks should compensate victims of digital arrest scams and other cyber frauds by at least the amount lost if investigations establish that institutional negligence or inadequate due diligence contributed to the crime.

A bench led by Chief Justice of India Surya Kant, along with Justices Joymalya Bagchi and V Mohana, said the RBI's proposed regulatory framework must establish clear rules on compensation, fraud prevention and institutional accountability.

The court noted that cybercrime had declined by 50 per cent, but losses had reached Rs 800 crore so far this year. It said general advisories would not suffice and called for enforceable penalties for banks that failed to meet their responsibilities.

The proposed RBI Know Your Customer (KYC) Amendment Directions, 2026, are expected to be notified by November 30 and implemented by December 31. The bench said it would examine the framework before allowing the regulatory process to proceed.

The court suggested temporarily suspending transactions that deviate significantly from a customer's usual banking pattern, automatically reporting suspicious activity and conducting physical verification where necessary. It also called for banks to use artificial intelligence to identify unusual transactions based on account type and established banking behaviour.

The CJI proposed automatically alerting the nearest police station when a potentially fraudulent high-value transaction is initiated, allowing officers to verify whether the customer is acting voluntarily or under coercion.

"A report would only be a post-mortem. We are concerned with prevention," he said.

The observations came during the hearing of the suo motu case, In Re: Victims of Digital Arrest Related to Forged Documents, initiated to strengthen the response to digital arrest scams and other cyber-enabled financial offences.

Attorney General R Venkataramani told the court that the RBI was examining banks' liability and the accountability of individual officials. He said personal liability and criminal prosecution could be considered if employees were found to have colluded in fraud.

The bench warned that it could issue its own directions if the proposed framework failed to establish adequate accountability. It also identified the continued use of mule accounts to channel cybercrime proceeds as a key concern.

The court directed the RBI to submit a list of all authorised financial institutions before the next hearing. It also instructed police and law enforcement agencies across states and Union territories to submit details of FIRs registered in digital arrest cases, investigation updates and recommendations to improve prevention, detection and prosecution. DGPs were directed to ensure compliance. (Agencies)

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