SC calls for compensation to digital fraud victims if banks fail due diligence

The Supreme Court on Thursday called for greater accountability from banks in cases of digital fraud, saying victims should be compensated for their losses if an investigation establishes that a financial institution failed to meet its due diligence obligations.

A bench comprising Chief Justice Surya Kant and Justices Joymalya Bagchi and V Mohana said compensation should cover at least the amount lost by victims in cases such as digital arrest scams, where lapses by banks are found to have contributed to the fraud.

The court 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 implemented by December 31. It asked the central bank to spell out the compensation mechanism being considered for victims of cyber-enabled financial fraud.


The bench emphasised that the proposed framework must include appropriate safeguards and provide for compensation when financial institutions fail to discharge their due diligence responsibilities.

It also called for preventive measures to detect and disrupt suspicious transactions, including temporarily suspending transactions that deviate from an account holder's usual pattern, automatically reporting suspicious activity and conducting physical verification to establish the genuineness of transactions.

The court also highlighted the need for banks to alert nearby police stations about unusual transactions involving customers who may have fallen victim to digital arrest scams.

Directing the RBI to submit a list of all authorised financial institutions before the next hearing, the bench said it could issue directions covering all such institutions without having to implead individual banks in the proceedings.

The court asked the central bank to provide details of the institutions that would fall within the scope of the proposed guidelines, along with the measures being considered to ensure that victims receive compensation for their losses.

During the hearing, Attorney General R Venkataramani, appearing for the Centre and other authorities, told the court that reported digital arrest cases had declined by around 50 per cent from the previous year. He attributed the fall to the Supreme Court's intervention, coordinated efforts by government ministries and departments, and public awareness campaigns.

Chief Justice Surya Kant, however, pointed out that losses from such offences had still reached nearly Rs 800 crore this year, underlining the scale of the problem despite the decline in reported cases.

The CJI identified two areas requiring further attention: the accountability of banks and the continued use of mule accounts to receive and transfer proceeds of cybercrime. Such accounts are frequently used to move money obtained through fraudulent transactions, making it harder to trace the funds and identify those responsible.

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