Supreme Court Says Banks Must Compensate Digital Fraud Victims if Due Diligence Fails, Seeks Strict RBI Rules

The Supreme Court on Thursday, October 29, said banks and financial institutions must compensate victims of digital fraud, including digital arrest scams, if an investigation establishes that the fraud occurred because the institution failed to exercise due diligence. The court called for mandatory safeguards to prevent suspicious transactions and stressed that compensation should be at least equivalent to the amount lost by the victim.

A three-judge bench comprising Chief Justice of India Surya Kant and Justices Joymalya Bagchi and V Mohana made the observations while hearing suo motu proceedings concerning digital arrest scams. The bench said the Reserve Bank of India's (RBI) proposed regulatory framework must include enforceable provisions for compensation and accountability. Digital Arrest Scam: Retired Army Colonel Duped of INR 15.50 Lakh as Delhi Police Busts Cyber-Fraud Network.

Supreme Court Seeks Strict RBI Rules on Digital Fraud

The Supreme Court said the proposed RBI regulations must go beyond general advisories and establish clear obligations for banks and other financial institutions. The bench indicated that financial institutions should face consequences if their failure to conduct proper checks enables cybercriminals to defraud customers. It also stressed that accountability should extend beyond action taken after the money has already been transferred.

The court questioned whether the proposed regulatory measures had sufficient provisions to compel banks to act against suspicious transactions and prevent customers from losing their savings.

Banks May Have to Block Suspicious Transactions

The bench emphasised the need for preventive measures, including temporarily suspending transactions that significantly deviate from a customer's established banking pattern. It also called for automated reporting of suspicious activity and physical verification to establish whether unusual transactions are genuine.

The court stressed that banks should act promptly when a transaction raises red flags, rather than relying solely on investigations and reports after a fraud has occurred. It also highlighted the need to alert nearby police stations about suspicious transactions involving customers who may be victims of digital arrest scams. Fake Legal Threats, Video Surveillance, Secret Accounts: How a ‘Digital Arrest’ Scam Drained INR 2.60 Crore.

Digital Arrest Scams Cause Losses Worth ₹800 Crore

The Supreme Court expressed concern over the continuing financial losses caused by digital arrest scams, despite public awareness campaigns and efforts by authorities to tackle cybercrime. During the hearing, the court was informed that reported digital arrest cases had declined by around 50 per cent compared with the previous year. However, the bench noted that losses from such offences had reached approximately ₹800 crore this year.

Digital arrest scams typically involve fraudsters impersonating police officers, government officials or judicial authorities through phone calls and video calls. Victims are threatened with arrest or legal action and pressured into transferring money under the pretext of verification, investigation or avoiding custody. The court questioned why financial institutions were not doing more to identify and stop transactions that could indicate such fraud.

RBI's Proposed KYC Amendment Directions 2026 Under Scrutiny

The Supreme Court said it would examine the RBI's proposed Know Your Customer (KYC) Amendment Directions, 2026, before allowing the regulatory process to proceed. The proposed directions are expected to be notified by November 30 and operationalised by December 31. The bench stressed that the framework must include a clear compensation mechanism for victims where a bank's failure of due diligence is established.

The court also asked the RBI to provide a list of authorised financial institutions covered by the proposed measures. It indicated that directions could be framed for implementation across institutions without requiring every bank to be individually made a party to the proceedings.

Supreme Court Seeks Police Reports on Digital Arrest Cases

The bench also directed the Directors General of Police of all states and Union Territories to ensure that law enforcement agencies submit reports on digital arrest cases. The reports are expected to cover relevant cases, investigations and suggestions for preventing such offences. The court sought stronger coordination among authorities to improve prevention, investigation and prosecution.

The proceedings reflect the court's broader concern about the growing threat posed by cybercriminals who exploit fear of arrest and misuse the identities of public officials to target unsuspecting people. The Supreme Court's observations place the focus on stronger banking safeguards and regulatory accountability. The proposed RBI framework is expected to be examined before further directions are issued.

(The above story first appeared on LatestLY on Oct 29, 2026 09:55 PM IST. For more news and updates on politics, world, sports, entertainment and lifestyle, log on to our website latestly.com).