SC pulls up RBI over cyberfrauds, seeks strict liability for losses

The Supreme Court questioned whether banks should bear customers’ losses when bank employees are found involved in cyberfraud. It said banks hold customers’ account details and transaction histories, so they should act as a “protective umbrella.” The issue matters because digital arrest scams continue despite warnings and awareness campaigns.

The bench compared possible compensation with banks’ ability to waive thousands of crores through one-time loan settlements. It asked why victims should not receive similar accountability when fraud involves bank staff. The attorney general opposed an automatic liability rule and said RBI must address bank responsibility.

In August, the court directed RBI to create a framework and standard operating procedure for mule accounts and cyber-enabled fraud. RBI received time until 30 November to file proposed KYC Amendment Directions, 2026. The court wants them operational by year-end, while the compensation question remains under consideration.

A digital arrest scam is a fraud in which criminals pretend to be police officers, government officials or judicial authorities. They falsely claim that the target faces arrest or legal trouble. The threat creates fear and urgency, making victims more likely to obey instructions and transfer money.

The pressure works through impersonation and intimidation rather than a genuine arrest process. Fraudsters may present the demand as necessary to avoid arrest or resolve an alleged case. The article gives a recent example involving a woman who allegedly lost ₹2.5 crore in this way.

The scams remain widespread despite public awareness campaigns, media coverage and earlier judicial directions. The Supreme Court is examining the issue through a suo motu case. It has also questioned whether banks respond quickly when suspicious messages or transactions indicate that an account may be misused.

Digital arrest fraud remained a major problem in India during the first eight months of 2026. More than 21,900 complaints were registered, and the reported amount involved exceeded ₹647 crore. These figures show the large financial impact of scams built around fake arrest threats.

The figures came from a status report filed before the Supreme Court by the Indian Cybercrime Coordination Centre and the ministry of home affairs. The report was cited in a 23 October Hindustan Times report. The complaints form part of the court’s continuing examination of digital arrest fraud.

The attorney general said cyberfrauds had fallen by about 50% compared with last year. He attributed the reduction to the court’s intervention, government ministry and department action, and awareness programmes. Even with that decline, the complaint total and money involved prompted further pressure for stronger bank and RBI safeguards.

Strict liability linked to employee involvement could make banks compensate customers for losses caused by fraud in which their staff participated. That would shift more of the financial burden from victims to financial institutions. It could also make banks treat internal controls and suspicious activity monitoring as more urgent responsibilities.

The Supreme Court raised this possibility after questioning why banks should not be accountable. It noted that banks can waive thousands of crores through one-time settlements. The bench also questioned why RBI was consulting banks on safeguards when some bank employees were allegedly involved in misuse of accounts.

The article does not state that strict liability has been adopted or spell out its exact consequences. It records the attorney general’s opposition to such a rule and his view that RBI should address bank liability. The court separately gave RBI until 30 November to propose new directions and wants them operational by year-end.

Mule accounts are bank accounts used to receive or transfer money obtained through illegal activities, including cybercrime. They matter because cyberfraud money can pass through such accounts after victims are deceived. Identifying and controlling these accounts can help banks respond to suspicious transfers and limit further movement of funds.

In August, the Supreme Court directed the RBI to establish a framework and standard operating procedure for banks dealing with mule accounts and cyber-enabled financial fraud. The direction focuses on how banks should handle accounts connected with potentially illegal money flows. It also responds to concerns about delayed action and alleged employee involvement.

During the latest hearing, the attorney general requested more time to prepare the proposed procedure. The court granted time until 30 November to file the proposed RBI Know Your Customer Amendment Directions, 2026. It instructed RBI to make the framework operational by the end of the year.

The Supreme Court said banks have responsibilities because customers give them access to account details and transaction histories. That access should help banks notice unusual activity and protect customers when accounts may be misused. The bench described banks as a “protective umbrella” for their customers.

The court specifically asked why banks do not act as soon as suspicions arise or a money-related message appears. In practical terms, the article points to faster intervention when warning signs emerge. It also raised concerns about bank employees allegedly participating in fraud or misuse of accounts.

The article does not list specific mandatory steps, such as freezing an account or reimbursing a customer. Instead, it records the court’s questions and its broader push for RBI safeguards. The proposed framework and SOP are intended to guide banks dealing with mule accounts and cyber-enabled financial fraud.

Know Your Customer, or KYC, is the banking process for collecting and checking information about an account holder. That identity link can help banks understand who is using an account and identify activity that does not fit the customer’s profile. It can therefore make anonymous or misleading account use harder.

KYC is especially relevant to mule accounts because criminals may use accounts to receive or transfer money from cybercrime. Accurate customer information and ongoing review can help banks connect suspicious account activity with the responsible user. The article, however, does not describe particular KYC checks or verification technologies.

The Supreme Court gave RBI until 30 November to file proposed Know Your Customer Amendment Directions, 2026. The court wants the directions operational by the end of the year. They are part of a wider framework and SOP for mule accounts and cyber-enabled financial fraud, amid continuing digital arrest complaints.