Supreme Court proposes that banks compensate victims of ‘digital arrest’ fraud

The Supreme Court has said that financial institutions should repay victims of “digital arrest” fraud at least the amount they lost where the institution failed in its due diligence, and that the Reserve Bank of India’s (RBI) planned rules must say so². The proposal came on Thursday in a suo motu case before a bench of Chief Justice of India Surya Kant and Justices Joymalya Bagchi and V Mohana¹².

LiveLaw describes the court’s position as strict liability for banks, where the institution or its officials are found negligent in exercising due diligence². It notes that the observations were a proposal and not an order already issued². The case is titled “In Re: Victims of Digital Arrest Related to Forged Documents”².

What the bench proposed

According to The Week, the court is considering directing that banks and other financial institutions compensate victims wherever such fraud occurs, and face prosecution if a failure of due diligence is proved¹. The Chief Justice said: “We are proposing to direct that wherever such fraud takes place, bank will compensate victim and suffer prosecution”¹.

LiveLaw reports that the bench said that in a digital arrest case the debit from the victim’s account should be zero, with the bank bearing the full liability². Justice Bagchi said the court was proposing strict liability for financial institutions and questioned whether RBI’s rules would have enough enforcement strength². The bench also suggested that banks sort accounts into three or four risk groups, halt unusual transactions and notify local police, who would verify with the customer, and it asked whether the proposed rules cover intermediaries such as WhatsApp².

On prevention, the Chief Justice said unusual transactions should be stopped until verified, and that a report would only be a post-mortem, asking what was being done about prevention¹. He also said that bank officials were themselves involved in some cases².

The scale of the problem

About ₹800 crore (₹8 billion) was reportedly lost to digital arrest scams this year¹. The amicus curiae, senior advocate N S Nappinai, cited a recent case in which a woman lost ₹2.5 crore (₹25 million), and told the court that such incidents continue to occur¹². The Chief Justice remarked that banks already negotiate one-time settlements worth crores in loan recovery¹.

The government’s position

Attorney General R Venkataramani opposed court-imposed punishment for banks, arguing that RBI should handle such regulatory measures¹. He told the bench that RBI’s proposed rules against digital arrests would soon be operational as part of wider cyber-threat reforms, and that banks now flag suspicious transactions better than they did six months ago¹. LiveLaw reports that he said RBI, the Ministry of Electronics and Information Technology and the Department of Telecommunications are working on measures that may be operational by December, and that he asked for more time for banks to align².

LiveLaw adds that the liability of bank officials who collude with the accused is under consideration². The Week reports that the Indian Cyber Crime Coordination Centre is also working on the issue¹. The report on the hearing does not say when the court will next take up the matter.