SC calls for mandatory compensation to digital fraud victims in case of banks' due diligence

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Observing that banks must be made accountable to indemnify losses of victims of digital fraud, the Supreme Court on Thursday (October 29, 2026) said victims of offences like digital arrests should receive compensation of at least the amount lost if the fraud is found to have resulted from a failure of due diligence by the financial institution.

A Bench comprising Chief Justice Surya Kant and Justices Joymalya Bagchi and V. Mohana said it would examine the Reserve Bank of India's proposed Know Your Customer (KYC) Amendment Directions, 2026, which are expected to be notified by November 30 and operationalised by December 31.

The Bench stressed that the proposed regulatory framework must provide for suitable compensation to victims where financial institutions are found to have failed in their due diligence obligations.

It also 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.

Directing the RBI to submit a list of all authorised financial institutions by the next date of hearing, the Bench said the Court would issue directions applicable to all institutions without necessarily impleading individual banks in the proceedings.

The Court further said that it is the responsibility of 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 provide details of the financial institutions that would be covered by the proposed guidelines and the measures being considered to compensate victims for their losses.

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% compared with the previous year, attributing the reduction to the Court's intervention, coordinated action by government ministries and departments, and public awareness campaigns.

The CJI, however, pointed out that the country had still suffered losses of nearly ₹800 crore from such offences this year.

The CJI identified two key areas requiring further intervention, the accountability of banks and the problem of mule accounts, which are frequently used to receive and transfer proceeds of cybercrime.

The matter, titled In Re: Victims of Digital Arrest Related to Forged Documents, is being monitored by the Supreme Court as part of efforts to strengthen the country's institutional response to cyber-enabled financial fraud.

Published - October 29, 2026 06:25 pm IST