Supreme Court seeks bank liability for digital arrest fraud losses

A digital arrest fraud is a scam built around a false threat of arrest. Criminals pretend to be police officers or officials from central agencies. They contact victims by phone or video call and claim the person is linked to a crime. The fear and pressure are designed to make victims obey quickly.

The callers may keep victims on video calls while demanding money to avoid supposed arrest or investigation. The money transfer is the theft mechanism. The fraud is not a real arrest, but victims are manipulated into believing that an official process is underway.

The scale remains serious despite awareness campaigns. The National Cybercrime Reporting Portal recorded 21,928 complaints involving more than ₹647 crore during the first eight months of the year. The Supreme Court is seeking stronger safeguards, including bank responsibility when institutional failures help such fraud happen.

Digital arrest frauds were reported on a large scale through the National Cybercrime Reporting Portal. In the first eight months of the year, the portal recorded 21,928 complaints involving more than ₹647 crore. These figures describe reported complaints and the money involved, showing the size of the problem.

The government’s status report also listed 123,672 cases in 2024, 58,239 in 2025, and 21,928 cases up to September 1 this year. The reporting periods differ, so the figures should not be treated as a direct year-to-year comparison. Still, they show that many people continue to face this fraud.

The Supreme Court is examining whether existing safeguards are strong enough. It has sought preventive transaction systems, bank accountability, and compensation when a bank’s failure contributes to a customer’s loss. The RBI is also preparing revised KYC guidelines.

The Supreme Court said proposed RBI measures must make financial institutions compensate victims when a fraud results from the institution’s failure. The compensation should be at least the amount the customer lost. The court also said banks must be held accountable and that the RBI should impose strict liability rather than simply publish voluntary guidance.

The proposed mechanism would connect compensation to the bank’s conduct. If a bank failed in the relevant act or incident and that failure enabled the digital arrest or cyber fraud, the institution would have to indemnify the victim. This would give customers a remedy that the court said they currently lack.

The RBI is finalising revised KYC guidelines and expects to notify them by November 30. The bench wants to examine the draft first. It said it would pass further orders after reviewing the document, so the final obligations remain to be settled.

The Supreme Court said any anti-fraud mechanism must allow prosecution of bank officials found to have colluded with fraudsters. It also said financial institutions should compensate customers when their own failure contributes to the fraud. These proposals would make both individual misconduct and institutional failure consequences of concern.

For example, an official involved with fraudsters could be prosecuted. Separately, a bank whose systems or actions failed in a way that enabled the fraud could be required to indemnify the customer. The court said compensation should not be less than the amount lost when the bank’s failure is established.

The bench also asked for strict liability and clear accountability clauses. The RBI is preparing revised KYC guidelines, while the MHA is preparing a standard operating procedure on bank liability. The court wants to review the RBI’s draft before it is finalised, so the exact rules are still pending.

Banks could use a customer’s past transaction pattern to identify unusual activity. A very large withdrawal from an account that normally has modest transactions would trigger an alert. The aim is to pause suspicious transfers before money leaves the customer’s account.

The court gave the example of a senior citizen whose account suddenly shows a large withdrawal. The bank could withhold the transaction and ask the nearest police station to contact the account holder. That direct verification could reveal whether the customer is being pressured by fraudsters.

The proposal focuses on prevention rather than compensation after the loss. The court said banks should build systems that detect unusually large transactions, especially in individual accounts. Such safeguards would complement the RBI’s planned KYC changes and the MHA’s proposed procedure on bank liability.

Know Your Customer, or KYC, rules guide the checks banks perform on customers and their accounts. In this case, the RBI’s draft guidelines are considering the due diligence banks must carry out. That matters because banks need reliable customer and transaction information to identify unusual activity and respond to fraud risks.

The court wants the rules to support practical safeguards. These include systems that compare a transaction with an account’s past history and flag unusually large withdrawals. For a senior citizen’s sudden large withdrawal, the bank could withhold the transaction and arrange verification through the nearest police station.

The RBI expects to notify the revised guidelines by November 30, but the Supreme Court wants to examine the draft first. The court also wants enforceable liability, including compensation when a bank’s failure contributes to a customer’s loss. Thus, KYC may shape both prevention and accountability.

In this setting, strict liability means a bank could be held responsible when its failure contributes to a fraud, without the victim having to rely only on proving that a particular official intended to help criminals. The court wants this responsibility written into enforceable rules. It also wants compensation of at least the amount lost.

The mechanism would work alongside prosecution. An official found to have colluded with fraudsters could face prosecution. Separately, the financial institution could have to indemnify the customer if its failure enabled the incident. This would give victims a remedy beyond the limited compensation described in the article.

The court said banks can recover their own losses through the SARFAESI Act and the IBC, while fraud victims lack a similar remedy. The RBI is drafting revised KYC rules, and the court will examine them before finalisation. The final allocation of risk remains pending.