In a significant ruling, the Supreme Court of India has affirmed that banks and other financial institutions are obligated to compensate victims of cyber fraud when investigations establish that the fraud occurred due to the institutions' failure to exercise due diligence. This directive aims to bolster consumer protection against increasingly sophisticated cybercrimes, including prevalent “digital arrest” scams.
The bench, comprising Chief Justice of India Surya Kant and Justices Joymalya Bagchi and V Mohana, issued its order on October 29 (uploaded in November), emphasizing the need for stronger safeguards. The court reiterated that the Reserve Bank of India (RBI) must incorporate mandatory compensation provisions into its proposed regulatory framework. Under these provisions, the compensation should not be less than the amount lost by the customer if the institution's failure to prevent or report the fraud is established.
New Safeguards and RBI Directives
The proposed safeguards will require banks to temporarily suspend unusual transactions that deviate from an account holder's normal history. Furthermore, institutions may be mandated to alert the police about suspicious activity and conduct physical verification to confirm the legitimacy of a transaction. This proactive approach aims to prevent fraud before it escalates.
The Supreme Court has also directed the RBI to provide a comprehensive list of all authorized financial institutions. The court will review the central bank's proposed Know Your Customer (KYC) Amendment Directions, 2026, before allowing the regulatory process to proceed. These directions are anticipated to be notified by November 30 and become operational by December 31.
Tackling Digital Arrest Scams
Parallel to its directives for financial institutions, the court has engaged digital intermediaries like WhatsApp, instructing them to outline measures to combat digital arrest scams and related cybercrimes. These platforms are required to submit their proposals to the Indian Cybercrime Coordination Centre (I4C). WhatsApp's counsel informed the court that the platform has already taken action against 9,400 accounts and is actively developing software to identify suspicious accounts and issue warnings to users.
The Scale of Cybercrime
Despite a reported 50% decline in cyber offenses this year, the problem remains substantial. Court observations, as reported by The New Indian Express, indicate that victims have collectively lost approximately Rs 800 crore to cybercrime this year. Digital arrest scams typically involve fraudsters impersonating law enforcement or other agency officials, threatening victims with arrest, often through prolonged video calls, and coercing them into transferring money.