Banks Must Compensate Fraud Victims If Due Diligence Fails: Supreme Court

Banks and other financial institutions must compensate digital fraud victims where a failure of due diligence enabled the crime, the Supreme Court said on Thursday, pressing for safeguards that could stop suspicious transfers before the money leaves an account.

A bench of Chief Justice of India Surya Kant and Justices Joymalya Bagchi and V Mohana said it would examine the Reserve Bank of India’s proposed KYC Amendment Directions, 2026, before issuing further orders. The directions are expected to be notified by November 30 and operationalised by December 31, PTI reported.

The bench stressed that the framework must provide suitable compensation when financial institutions fail to fulfil their due diligence obligations. It also questioned the usefulness of reporting suspicious transactions only after funds had been transferred.

“Report will only be post-mortem. What about prevention? Moment a transaction comes, why can't it be withheld?” the CJI asked.

The court called for measures such as temporarily withholding transactions that depart from a customer’s established banking pattern, automated alerts and physical verification to establish whether a transfer is genuine. Banks should also alert nearby police stations when unusual transactions suggest that a customer may be facing a digital arrest scam, it said.

The RBI was asked to provide a list of authorised financial institutions by the next hearing, along with details of those covered by the proposed guidelines and the compensation measures under consideration. The bench indicated that it could issue directions covering these institutions without making each bank a party to the proceedings.

During the hearing, the CJI expressed frustration that people continued to fall for digital arrest scams despite awareness campaigns and extensive reporting.

“What kind of person you are in a democratic country if you think you are getting arrested on mobile? Hit the mobile on the wall, and the arrest goes,” he remarked, according to LiveLaw.

Amicus curiae and senior advocate NS Nappinai told the court that the frauds persisted despite earlier interventions, citing a recent case in which a woman lost ₹2.5 crore. She said fear of arrest often compelled victims to follow fraudsters’ instructions, with some psychologists describing the phenomenon as a form of hypnosis, LiveLaw reported.

Attorney General R Venkataramani, representing the Centre and other authorities, submitted that reported digital arrest cases had fallen by around 50% from the previous year. The CJI pointed out, however, that losses had still reached nearly ₹800 crore this year, PTI reported.

A status report submitted by the Indian Cybercrime Coordination Centre and the Ministry of Home Affairs recorded more than 21,900 digital arrest fraud complaints involving over ₹647 crore between January 1 and August 31, 2026.

Recent cases illustrate the amounts being routed through accounts allegedly used by such networks. In Delhi, police arrested two men accused of operating a mule account linked to a ₹2.10-crore scam targeting a Janakpuri resident. The account received ₹98,592 linked to the case on October 12. Officers recovered phones, debit cards and chequebooks from the accused.

Hyderabad cybercrime police arrested two men for allegedly cheating a 63-year-old retired employee and his daughter of ₹29.17 lakh. Investigators alleged that the proceeds were moved through mule accounts, cash deposit machines and cryptocurrency conversions. A third accused remained absconding.

In Kozhikode, a 57-year-old woman allegedly lost ₹1.35 crore to callers posing as Mumbai Crime Branch officers. They threatened her with criminal proceedings and instructed her to transfer money purportedly to the RBI for verification. Police registered a case over WhatsApp calls received between September 22 and October 15.

In Karnataka’s Dakshina Kannada district, police said a 62-year-old farmer was coerced into transferring ₹1.31 crore after callers claiming to represent Mumbai Police and the Anti-Terrorism Squad accused him of sending money to a Pahalgam terror attack suspect. He was allegedly kept under digital arrest between September 2 and October 6.