Banks must compensate victims of digital arrest for losses if due diligence fails: Supreme Court

The Supreme Court on Thursday said banks and other financial institutions must compensate victims if fraud is found to have occurred due to a failure in due diligence. It also stressed the need for preventive safeguards to flag suspicious transactions before funds are transferred.

A bench comprising Chief Justice of India 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. According to reports, the directions are expected to be notified by November 30 and implemented by December 31.

The court emphasised that the framework must ensure appropriate compensation for victims when financial institutions fail to fulfil their due diligence obligations.

During the hearing, the Chief Justice of India also expressed concern that people continue to fall victim to digital arrest scams despite public awareness campaigns and extensive media coverage.

"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, as reported by LiveLaw.

Amicus curiae and senior advocate NS Nappinai told the bench that digital arrest scams continued despite previous interventions. She cited a recent case in which a woman lost Rs 2.5 crore, according to the report.

She submitted that the fear of arrest often compels victims to comply with fraudsters’ demands, with some psychologists describing the experience as a form of hypnosis.

Attorney General R Venkataramani, representing the Centre and other authorities, told the court that reported digital arrest cases had declined by around 50% compared with the previous year.

The CJI, however, noted that financial losses from such offences had still amounted to nearly Rs 800 crore this year, according to reports.

The bench highlighted the need for preventive measures, including temporarily suspending unusual transactions that deviate from an account holder’s established spending pattern, automatically reporting suspicious activity and conducting physical verification to confirm the legitimacy of transactions.

The court also stressed that banks should alert nearby police stations about unusual transactions involving customers who may be victims of digital arrest scams.

The bench directed the RBI to submit a list of all authorised financial institutions by the next hearing. It indicated that it could issue directions applicable to all such institutions without requiring individual banks to be made parties to the proceedings.

Recent cases reported across India in October highlight how digital arrest scams have defrauded victims of crores of rupees, with fraudsters impersonating law enforcement officials to intimidate them into transferring money.