Banks must compensate digital fraud victims for losses if due diligence fails: SC

The Supreme Court on Thursday said banks must be held accountable for losses suffered by victims of digital fraud, observing that protecting them is the responsibility of financial institutions. The court asserted that victims of offences such as digital arrest scams should be compensated for at least the amount lost if the fraud is found to have resulted from a failure of due diligence by the bank.A bench comprising Chief Justice of India 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."It is your duty as bankers to protect victims. What is the competent authority doing?" the Chief Justice asked during the hearing."Maybe you cannot flag transactions by big companies, but shouldn't a transaction be flagged when a person who usually withdraws only Rs 10,000 or Rs 20,000 at a time suddenly withdraws Rs 50,000?" he added. The bench, while hearing a Public Interest Litigation taken up on its own initiative, stressed that the proposed regulatory framework must provide for adequate compensation to victims if financial institutions are found to have failed in their due diligence obligations.The court also expressed strong disappointment over the continued instances of digital arrest scams, with the Chief Justice questioning how educated citizens continue to fall prey to such frauds. "What are they afraid of with digital arrest? It's something wrong with fear psychosis. How are people getting trapped like this? Someone tells you on the mobile that you're arrested you agree you're arrested? In a country like this, how are you becoming victims like this? What will you pass on to the next generation of you become a victim at this age?" the CJI asked. The Supreme Cort directed the RBI to submit a list of all authorised financial institutions by the next date of hearing and said the court would issue directions applicable to all institutions without necessarily impleading individual banks in the proceedings.The bench also sought details of financial institutions that would be covered by the proposed guidelines and the measures being considered to compensate victims for their losses, further underlining that banks were responsible for alerting neighbouring police stations about unusual transactions involving customers who may be victims of digital arrest scams.DIGITAL ARREST CASES DECLINE BY 50%: CENTRE TO SCDuring 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.He attributed the reduction to the Supreme Court's intervention, coordinated action by government ministries and departments, and public awareness campaigns.Chief Justice Surya Kant, however, pointed out that the country had still suffered losses of nearly Rs 800 crore from such offences this year.The Chief Justice identified two key areas requiring further intervention, such as the accountability of banks and the problem of mule accounts, which are frequently used to receive and transfer proceeds of cybercrime.The court's observations highlighted the need to strengthen financial institutions' due diligence obligations and introduce measures to identify and respond to unusual transactions.The bench said it would examine the RBI's proposed KYC Amendment Directions, 2026, to assess the provisions for compensating victims when financial institutions are found to have failed in their due diligence obligations.- Ends