Banks may have to compensate digital arrest scam victims for lapses, Supreme Court tells RBI

New Delhi: The Supreme Court on Thursday suggested that banks could face liability for compensating cyber fraud victims if their failure to conduct proper checks allows fraudulent transactions. It also called for stronger safeguards to stop suspicious transfers before victims lose their money.

Chief Justice of India Surya Kant questioned how people could fall for threats of arrest through a phone. “How can someone be arrested over a mobile phone?” he asked.

Concern over scams

A bench comprising CJI Surya Kant and Justices Joymalya Bagchi and V Mohana expressed concern that digital arrest scams persist despite awareness campaigns and widespread media coverage. The court heard that a woman had recently lost Rs 2.5 crore to such a scam. The CJI questioned why people continued to believe these threats despite repeated warnings about cyber fraud.

Flag unusual transfers

The bench questioned why banks could not promptly identify transactions that differ sharply from a customer’s usual banking activity. It said reporting a suspicious transaction after the fraud had occurred was insufficient. Banks should take steps to prevent the transfer before the money leaves the account.

The court suggested that banks alert the relevant police station about suspicious transactions. It also sought verification of their legitimacy before funds are transferred.

Compensation for victims

The court indicated that banks could have to reimburse victims if negligence or inadequate checks on their part enabled the fraud. Such failures could also invite legal action, it said. Attorney General R Venkataramani, representing the Centre, told the bench that the RBI has authority over bank liability and the regulations required to address it. The court asked the central bank to examine a mechanism that would compensate victims when a financial institution’s negligence causes their loss.

RBI response sought

The bench also directed the RBI to submit a list of all authorised financial institutions before the next hearing. During the proceedings, the court was told that proposed RBI directions on changes to Know Your Customer norms were expected by November 30. Their implementation could begin in December. The CJI said such fraudulent activities had caused losses of approximately Rs 800 crore to the Indian economy this year.