New Delhi: The Supreme Court on Thursday said that financial institutions must face strict liability in case customers suffer losses due to digital fraud. The court added that customers should receive compensation if any money is lost and the investigation establishes a failure of due diligence by the financial institutions.
A bench of CJI Surya Kant, Justice Joymalya Bagchi and Justice V Mohana was dealing with the suo motu case taken up over rising incidents of digital arrest scams. Yesterday, the CJI took a strong view on persons accused in such crimes, saying that if law permits, such "ruthless criminals" targeting senior citizens must be punished even before trial, as reported by Live Law.
Observing that even though cyber crimes fell by 50 per cent, victims lost Rs 800 crore so far this year, the bench said the proposed Reserve Bank of India (RBI) regulatory framework must incorporate enforceable provisions for compensation, preventive intervention and institutional accountability.
The CJI said the bench would first examine the proposed RBI Know Your Customer (KYC) Amendment Directions, 2026, before permitting the regulatory process to proceed.
The directions are proposed to be notified by November 30 and operationalised by December 31.
It also reiterated that banks must temporarily suspend transactions that are inconsistent with an account holder's established transaction history, automatically report suspicious activity and undertake physical verification wherever necessary to establish the genuineness of a transaction.
The CJI identified two areas requiring particular attention: the accountability of banks and the continued use of mule accounts to receive and transfer proceeds of cybercrime.
Mule accounts, often operated or obtained through deceptive means, are used by fraudsters to move money between accounts and make the tracing and recovery of stolen funds more difficult.
The CJI also questioned the AG as to why banks, which have a complete record of amounts in people's accounts, don't intervene to stop suspicious or fraudulent messages asking for money. "They know very well who the account holder is. The moment you know there's an amount lying in an account, banks must create a protective umbrella. Why don't [banks] stop messages asking for money? The moment a transaction comes, why can't it be withheld?" as reported by Live Law.
He distinguished commercial accounts, where transactions worth crores of rupees may be routine, and individual accounts belonging to retired persons or ordinary savers who typically withdraw relatively small amounts.
"If that person suddenly seeks to transfer a large amount through RTGS, why can there not be intervention?" the CJI asked.
The bench suggested that financial institutions could classify accounts according to their nature and transaction patterns and deploy technology, including artificial intelligence, to identify deviations that may indicate coercion or fraud.
Local police could then verify whether the account holder was knowingly initiating the transaction, it said.
"A report would only be a post-mortem. We are concerned with prevention," said CJI.
Attorney General R Venkataramani, appearing for the Centre and other authorities, told the bench that substantial work had been undertaken to improve the detection of suspicious transactions and strengthen preventive mechanisms within the banking system.
The CJI, however, questioned whether the proposed measures contained sufficiently strong accountability provisions and whether they would result in meaningful action against institutions that failed to comply.
"The regulation must include a liability clause. Otherwise, we will enforce it through a judicial order," the CJI said.
The Attorney General said that the government was not defending banking negligence or collusion and was examining the various aspects of prevention and accountability.
The reports must be submitted to the inter-departmental committee coordinating the government's response, with reports furnished to the court also being forwarded to the committee, the bench directed.
Senior advocate Kapil Sibal, appearing for WhatsApp, told the bench the platform had taken preventive measures, including action against 9,400 accounts, and would file an affidavit detailing the steps undertaken.
He said the platform was working on software to identify suspicious accounts and warn users.
(With agency inputs from PTI)
