‘Why Can’t Suspicious Transactions Be Stopped?’ SC Seeks Bank Accountability In Digital Arrest Frauds

The Supreme Court has questioned banks' role in preventing digital arrest fraud and said victims may need compensation when bank negligence contributes to their losses.

The Supreme Court on Thursday questioned whether banks are doing enough to protect customers from cyber fraud, particularly in cases where victims are forced into transferring large sums of money by fraudsters posing as officials.

The court said the responsibility should not end after a fraudulent transaction has taken place. Banks and financial institutions must have systems in place to identify and stop unusual transactions, the bench said.

The matter was heard by Chief Justice of India Surya Kant and Justices Joymalya Bagchi and V Mohana. The bench is considering the Reserve Bank of India’s proposed KYC Amendment Directions, 2026, which are expected to be notified by November 30 and implemented by December 31.

The court said the proposed rules should also address compensation for victims when a bank’s failure to follow due diligence is found to have contributed to the loss.

SC Questions Banks’ Role In Stopping Fraud

The judges discussed what should happen when a customer’s account suddenly records a transaction that is completely different from their usual financial activity.

The CJI questioned why such a transfer could not be put on hold until the bank establishes that it is genuine.

“Report will only be post-mortem. What about prevention?" he asked.

The court also considered several possible safeguards, including notifying the police when suspicious transactions are detected, carrying out physical verification and temporarily blocking transfers that do not fit a customer’s usual transaction pattern.

The RBI has also been asked to provide the court with details of all authorised financial institutions. The bench indicated that any directions issued in the case could potentially cover financial institutions generally, rather than requiring every bank to be separately brought before the court.

‘You Think You Are Getting Arrested On Mobile?’

The hearing also turned to the continuing spread of digital arrest scams.

Despite repeated warnings, victims continue to hand over their savings after fraudsters convince them that they are facing arrest or investigation. The CJI questioned how people could believe that an arrest could be carried out through a mobile phone.

“What kind of person you are in a democratic country if you think you are getting arrested on mobile?" he said, according to LiveLaw.

Senior advocate NS Nappinai, who is assisting the court as amicus curiae, told the bench that such frauds were continuing despite earlier efforts to tackle them. She referred to a recent case in which a woman allegedly lost ₹2.5 crore.

Nappinai also said fear was a major factor in such cases. Victims, she explained, often become so frightened by threats of arrest that they follow the instructions of the callers. She referred to descriptions by some psychologists comparing this state to hypnosis.

Attorney General R Venkataramani told the court that the number of reported digital arrest cases had dropped by about half compared with the previous year. However, the CJI pointed out that the amount lost remained high and had reached nearly ₹800 crore this year, PTI reported.

Court Looks At Liability Of Banks

The bench also raised concerns about the role of bank employees in cases where fraudulent transactions are allowed to go through.

The Attorney General said steps were being taken against bank officials found to have acted improperly and that financial institutions were working on better ways to identify suspicious activity.

The court, however, wanted stronger safeguards rather than measures that come into play only after money has disappeared.

Justice Joymalya Bagchi indicated that the court could consider whether RBI regulations should contain a strict-liability provision for financial institutions.

The broader question before the court is whether victims should bear the entire loss when a financial institution fails to carry out the checks expected of it.

Recent Cases Show Scale Of Problem

The court’s concern comes as digital arrest scams continue to result in major financial losses across the country.

In Delhi, two men were recently arrested in connection with a mule bank account allegedly used to receive money linked to a ₹2.10-crore scam involving a Janakpuri resident. Police said ₹98,592 from the alleged fraud was routed through the account.

A retired employee, 63, and his daughter in Hyderabad were allegedly cheated of ₹29.17 lakh. Investigators said the money was moved through mule accounts, cash deposit machines and cryptocurrency.

In Kozhikode, a 57-year-old woman allegedly transferred ₹1.35 crore after people claiming to be Mumbai Crime Branch officers threatened her with legal action and told her that the money had to be transferred for verification.

Another case was reported from Dakshina Kannada, where a 62-year-old farmer allegedly lost ₹1.31 crore. Police said fraudsters posing as Mumbai police and Anti-Terrorism Squad officials accused him of being linked to the Pahalgam terror attack and kept him under digital arrest from September 2 to October 6.

A report submitted to the Supreme Court by the Indian Cybercrime Coordination Centre and the Ministry of Home Affairs recorded more than 21,900 complaints of digital arrest fraud between January 1 and August 31, 2026. The complaints involved losses of more than ₹647 crore.

The Supreme Court will consider the RBI’s proposed KYC changes before deciding on further measures, including safeguards for suspicious transactions and provisions concerning compensation to victims.