Supreme Court Directs Banks to Compensate Digital Fraud Victims for Due Diligence Failures

The Supreme Court has called for stricter bank accountability, mandatory compensation for eligible victims of digital fraud, and stronger preventive measures against suspicious transactions. During a hearing on Thursday, a bench comprising Chief Justice Surya Kant and justices Joymalya Bagchi and V Mohana stated that banks must indemnify losses suffered by digital fraud victims if due diligence failures by financial institutions contributed to the offense.

The bench observed that despite cyber crimes reportedly falling by 50 percent, victims have still lost Rs 800 crore so far this year. The court noted that the proposed Reserve Bank of India (RBI) regulatory framework must incorporate enforceable provisions for compensation, preventive intervention, and institutional accountability.

Chief Justice Surya Kant stated that the bench would first examine the proposed RBI Know Your Customer (KYC) Amendment Directions, 2026, before permitting the regulatory process to proceed. These directions are proposed to be notified by November 30 and operationalized by December 31. The court emphasized that the framework must establish clear obligations for financial institutions alongside direct consequences for non-compliance.

“Unless there is a penal direction to these banks, they will never mend their ways,” the CJI remarked during the proceedings, which were initiated through suo motu proceedings titled In Re: Victims of Digital Arrest Related to Forged Documents to address digital arrest scams and related financial crimes.

The court highlighted that financial institutions possess complete audit trails and transaction histories for individual account holders. The bench suggested that banks should classify accounts into different groups and deploy technology, including artificial intelligence, to temporarily suspend transactions inconsistent with an account holder's established transaction history. Furthermore, the court suggested that automated alerts be sent to the nearest police station regarding suspicious high-value transactions.

Attorney General R Venkataramani, appearing for the Centre and other authorities, submitted that substantial work has been undertaken to improve detection and preventive mechanisms within the banking system. He noted that the government is examining banking liability, including the personal liability and criminal prosecution of individual bank officials found colluding in frauds.

The bench directed the RBI to submit a list of all authorized financial institutions by the next hearing so that any judicial directions issued can apply uniformly across the sector. Additionally, law enforcement agencies of all states and Union territories have been instructed to submit reports detailing FIRs registered in digital arrest scam cases, alongside investigations and preventive suggestions.

During the proceedings, senior advocate Kapil Sibal, representing WhatsApp, informed the bench that the platform has taken preventive measures—including action against 9,400 accounts—and intends to file an affidavit detailing steps undertaken to identify suspicious accounts and warn users.

"This ruling marks a critical turning point for digital financial security in India. By placing financial accountability squarely on institutions for lapses in due diligence, the Supreme Court is forcing banks to upgrade their technological and monitoring infrastructure. For businesses and fintech startups operating in the digital ecosystem, this emphasizes the absolute necessity of robust fraud prevention and compliance frameworks. Financial institutions can no longer treat customer protection as a secondary priority." — Dr. Shishir Gupta, Founder & CEO, StartupLanes