Banks must indemnify digital arrest victims with compensation not less than the amount lost where the fraud succeeded because the institution failed in its due diligence, the Supreme Court has recorded in its suo motu case on digital arrest scams, while questioning why the RBI is still consulting banks whose own officials, the Chief Justice said, are involved.
New Delhi: The Supreme Court on Wednesday, October 29, said that financial institutions must face strict liability when a customer falls victim to a digital arrest or cyber fraud that took place because the institution or its officials were negligent in exercising due diligence, and directed that the regulatory measures being framed by the Reserve Bank of India must mandate compensation to such victims [In Re: Victims of Digital Arrest Related to Forged Documents].
A Bench of Chief Justice Surya Kant, Justice Joymalya Bagchi and Justice V. Mohana was hearing the suo motu case registered over the rising number of digital arrest scams. A day earlier, the Chief Justice had said that if the law permitted, the “ruthless criminals” targeting senior citizens through such scams should be punished even before trial.
RBI measures expected by December
Attorney General R. Venkataramani told the Court that many steps had been taken since the Court’s intervention and that the RBI was contemplating regulatory measures likely to be operationalised by December. He said the RBI, the Ministry of Electronics and Information Technology and the Department of Telecommunications were working on the required framework, that banks were now flagging suspicious transactions, and that the liability of bank officials found in collusion with digital arrest accused was also under consideration. He sought more time for all banks to come into alignment.
Senior Advocate N.S. Nappinai, the amicus curiae, submitted that despite the Court taking cognizance and passing several directions, digital arrest incidents were still taking place rampantly, the latest reported a week earlier.
“Bank officials are involved”
The Bench asked why the RBI was still consulting banks on the measures.
“Problem is – bank officials are involved. Even when we are asking to [take steps], RBI is consulting the banks!”
The Chief Justice asked the Attorney General why banks, which hold complete records of the money in their customers’ accounts, do not intervene to stop suspicious or fraudulent messages demanding payment.
“They know very well who is the account holder. The moment you know there’s amount lying in account, banks must create protective umbrella. Why don’t [banks] stop messages asking for money? The moment a transaction comes, why can’t it be withheld?”
“Unless there’s a penal direction, banks will not mend their ways”
The Chief Justice said that thousands of crores had been lost through digital arrests, which he described as the biggest financial fraud on the country’s economy, and asked why banks could not be required to classify accounts into three or four groups, stall unusual transactions, and alert the local police station so that an officer could verify with the customer whether the transaction was genuine.
“Unless there’s a penal direction to banks, they will not mend their ways!”
The Bench also asked whether the proposed regulations dealt with intermediaries such as WhatsApp, through which the frauds are increasingly carried out, and remarked that banks appeared reluctant to address the problem because they feared an effect on their business.
Zero debit for the victim, strict liability for the bank
The Bench said that in a digital arrest case the debit from the victim’s account should be zero and the bank or financial institution should bear the entire liability. The Chief Justice said the Court wished to direct that wherever such a fraud took place, the bank would compensate the victim with an amount not less than the amount lost and face prosecution. Justice Bagchi added that the Court was proposing strict liability on financial institutions, and that whether the RBI’s proposed guidelines had sufficient “teeth” would have to be examined. The Chief Justice said there had to be a mandatory sting, with transactions suspended unless their genuineness was verified in writing.
The order recorded the Court’s position in these terms:
“We may reiterate that regulatory measures proposed by RBI must mandate financial institutions to indemnify the digital arrest or cyber fraud victims through compensation not less than amount lost, if it is found that the fraud has taken place due to the failure of due diligence on behalf of the financial institution.”
Why the order matters
The order shifts the focus of the digital arrest case from the scamsters to the financial system that lets the money move. Until now, victims of such frauds have usually had to pursue the accused or rely on the banking ombudsman, with recovery rare once the money has been layered through mule accounts. A mandatory indemnity, triggered by the bank’s own failure of due diligence, would give victims a direct claim against the institution and give banks a financial reason to stop suspicious transfers before they clear.
The Court has not yet framed the regulations itself. It has told the RBI what the forthcoming measures must contain and has signalled that it will test them for enforceability, including the question of liability for bank officials found to be in collusion with the accused. The matter remains pending, and the Court has made clear that it expects the December timeline to be met.
Case Title: In Re: Victims of Digital Arrest Related to Forged Documents [SMW (Crl.) No. 3 of 2025]
Bench: Chief Justice Surya Kant, Justice Joymalya Bagchi and Justice V. Mohana, Supreme Court of India
Date of Hearing: October 29, 2026
Appearances: Attorney General R. Venkataramani for the Union; Senior Advocate N.S. Nappinai, amicus curiae