SC Seeks Strict Bank Liability, Mandatory Compensation for Victims of Digital Arrest, Cyber Fraud

New Delhi, Oct 30 (KNN) The Supreme Court has said financial institutions must compensate victims of digital arrest and cyber fraud for losses caused by their failure to exercise due diligence, signalling the possibility of strict liability for banks.

A three-judge bench headed by Chief Justice of India (CJI) Surya Kant, and comprising Justices Joymalya Bagchi and V Mohana, said the Reserve Bank of India's (RBI) proposed regulatory framework must mandate compensation of at least the amount lost where fraud is found to have resulted from a financial institution's failure to exercise due diligence.

Hearing a suo motu case on rising digital arrest scams, the bench questioned the RBI's approach of consulting banks instead of ensuring accountability, particularly given concerns over the involvement of bank officials in such frauds.

SC Seeks Enforceable Liability for Banks

The court said the proposed regulations must provide for enforceable liability, warning that it could impose the obligation through a judicial order if the RBI framework lacked adequate provisions.

Justice Bagchi said the bench was considering strict liability for financial institutions where inadequate safeguards or failure to exercise due diligence facilitated cyber fraud. The CJI also stressed that bank officials found involved in fraud, including through collusion, should face personal liability and criminal prosecution.

Attorney General R Venkataramani informed the bench that the RBI was working on the regulatory framework and that the liability of banks and their officials was under consideration.

The court's order reiterated that RBI's proposed measures must require financial institutions to indemnify victims by an amount not less than the loss suffered where fraud is attributable to their failure to exercise due diligence.

Banks Asked to Strengthen Preventive Safeguards

The bench questioned why banks could not identify and stop suspicious transactions using customers' established banking patterns, stressing that preventive action was necessary rather than relying solely on post-fraud reporting.

It called for safeguards including temporary suspension of unusual transactions, automatic alerts to the neighbouring police station and verification of the transaction's genuineness before it is allowed to proceed.

The court also sought clarity on whether the proposed regulations would address the role of intermediaries such as WhatsApp, which are increasingly being used by fraudsters to contact victims.

(KNN Bureau)