Banks must compensate digital arrest victims if due diligence fails: SC

The Supreme Court on Thursday said banks and other financial institutions must compensate victims if the fraud is found to have resulted from a failure of due diligence, and called for preventive safeguards to stop suspicious transactions before money is transferred.A bench headed by Chief Justice of India Surya underlined the need for mandatory preventive measures, including suspending unusual transactions that deviate from an account holder's 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 stressed the need for 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.The court also emphasised the need for banks to alert neighbouring police stations about unusual transactions involving customers who may be victims of digital arrest scams.
The bench asked the RBI to submit a list of all authorised financial institutions by the next date of hearing, indicating that it could issue directions applicable to all such institutions without requiring individual banks to be impleaded in the proceedings. The court said it would examine the RBI's proposed KYC Amendment Directions, 2026, before issuing further directions.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.
During 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.
A status report filed by the Indian Cybercrime Coordination Centre (I4C) and the Ministry of Home Affairs (MHA) before the Supreme Court said more than 21,900 complaints of digital arrest fraud, involving over Rs647 crore, were registered between January 1 and August 31, 2026.