Supreme Court’s Directive on Bank Accountability

The Supreme Court has stated that banks should be held responsible for losses incurred by victims of digital fraud, emphasising that safeguarding customers is a fundamental duty of financial institutions. This assertion was made during a hearing on Thursday, where the court addressed the necessity for banks to compensate victims of scams, such as digital arrest fraud, if it is determined that the fraud stemmed from a lack of due diligence on the bank’s part.

A bench led by Chief Justice of India Surya Kant highlighted the importance of implementing mandatory preventive measures. These include suspending transactions that deviate significantly from an account holder’s usual pattern, automating reports of suspicious activities, and conducting physical verifications to confirm the authenticity of transactions. The Chief Justice questioned the adequacy of current practices, particularly when unusual transactions occur, such as a sudden withdrawal of Rs 50,000 by an individual who typically withdraws smaller amounts.

The bench, which also included Justices Joymalya Bagchi and V Mohana, was reviewing a Public Interest Litigation initiated by the court itself. The justices stressed that a regulatory framework must be established to ensure that victims receive appropriate compensation when financial institutions fail to meet their due diligence responsibilities.

Concerns Over Digital Arrest Scams

The court expressed significant concern regarding the ongoing prevalence of digital arrest scams, questioning why educated individuals continue to fall victim to such fraudulent schemes. Chief Justice Surya Kant raised alarming questions about the mindset of individuals who are easily manipulated into believing they are under arrest based on phone calls. He urged the public to consider the implications of becoming victims at a time when they should be safeguarding their knowledge and experiences for future generations.

During the proceedings, the Supreme Court directed the Reserve Bank of India (RBI) to provide a list of all authorised financial institutions by the next hearing date. The court plans to issue directives that will apply to all institutions, rather than targeting individual banks. The bench also requested information on the financial institutions that would be encompassed by the proposed guidelines and the measures being contemplated to compensate victims for their losses.

Moreover, the court underscored the responsibility of banks to notify local police stations about unusual transactions that may indicate victims of digital arrest scams. This highlights a proactive approach to preventing further incidents and protecting customers from fraudulent activities.

Government’s Report on Digital Arrest Cases

During the hearing, Attorney General R Venkataramani, representing the Centre and various authorities, informed the court that reported cases of digital arrest had decreased by approximately 50 per cent compared to the previous year. He attributed this decline to the Supreme Court’s intervention, coordinated efforts by government ministries and departments, and public awareness campaigns aimed at educating citizens about digital fraud.

Despite the reported decrease, Chief Justice Surya Kant noted that the nation had still experienced losses nearing Rs 800 crore from such frauds this year. He identified two critical areas requiring further attention: the accountability of banks and the issue of mule accounts, which are often exploited for receiving and transferring proceeds from cybercrime.

The court’s comments emphasised the urgent need to enhance the due diligence obligations of financial institutions and to implement strategies for identifying and addressing unusual transactions. The bench indicated it would review the RBI’s proposed KYC Amendment Directions, 2026, to evaluate provisions for compensating victims when financial institutions fail in their due diligence duties.

Long or Short, get news the way you like. No ads. No redirections. Download Newspin and Stay Alert, The CSR Journal Mobile app, for fast, crisp, clean updates!

App Store – https://apps.apple.com/in/app/newspin/id6746449540

Google Play Store – https://play.google.com/store/apps/details?id=com.inventifweb.newspin&pcampaignid=web_share