A bench comprising Chief Justice of India Surya Kant, Justice Joymalya Bagchi, and Justice V Mohana on Tuesday reiterated that regulatory measures proposed by the Reserve Bank of India (RBI) must mandate financial institutions to indemnify victims of digital arrest and cyber fraud. The compensation, the court stipulated, shall not be less than the amount lost, provided it is established that the fraud occurred due to the failure of due diligence on the part of the financial institution.
The observation was made during the hearing of a suo motu proceeding initiated over the rising incidence of digital arrest scams. The bench expressed strong disapproval over the RBI's ongoing consultation process with banks regarding preventive regulatory measures, which the Attorney General, R Venkataramani, indicated are likely to be operationalised by December. Senior Advocate N S Nappinai, assisting the court as amicus curiae, submitted that despite previous judicial directions, such frauds continue unabated, with a fresh incident reported as recently as a week ago.
Why did the Supreme Court criticise the RBI's consultation with banks?
The Chief Justice questioned the rationale behind the RBI consulting banks when officials of these very institutions are allegedly involved in facilitating the frauds. He remarked that the regulator should issue binding directions rather than seek consensus from entities that have a conflict of interest.
The Chief Justice further observed that banks possess complete records of account holders and balances, yet fail to intervene when suspicious messages solicit fund transfers. He questioned why transactions flagged as unusual cannot be withheld pending verification, suggesting that banks must create a protective umbrella for customers the moment they detect funds lying in accounts.
What regulatory framework did the bench propose?
The bench proposed a framework of strict liability on financial institutions. The Chief Justice indicated the court's intention to pass an order directing that wherever digital arrest fraud takes place, the debit from the victim's account should be zero, with the bank bearing the entire liability. He suggested that banks be mandated to classify accounts into three or four risk categories and that regulations must require banks to stall unusual transactions and intimate the local police station. A police officer would then verify with the customer whether they genuinely authorised the transaction.
Justice Bagchi added that the proposed RBI guidelines must be examined for sufficient 'teeth,' specifically the degree of protection offered. The Chief Justice emphasised that there must be a 'mandatory sting' ensuring transactions are suspended unless genuineness is verified in writing. He warned that unless penal directions are issued, banks will not mend their ways, noting that their reluctance stems from a mindset that proactive measures might affect business.
The Attorney General informed the court that the aspect of liability for banking officials found in collusion with accused persons is under consideration. He stated that the RBI, the Ministry of Electronics and Information Technology, and the Department of Telecommunications are working extensively on requisite measures and sought more time for all banks to align with the new protocols.
The bench also enquired whether the proposed regulations address the role of intermediaries such as WhatsApp, through which these frauds are increasingly perpetrated. The Chief Justice noted that the biggest financial fraud on the country's economy has taken place through digital arrests, involving thousands of crores of rupees.
Aspect | Court's Direction / Observation |
|---|---|
Liability Standard | Strict liability on financial institutions for digital arrest fraud. |
Compensation Quantum | Not less than the amount lost by the victim. |
Condition for Liability | Fraud must have occurred due to failure of due diligence by the institution. |
Transaction Protocol | Mandatory suspension of unusual transactions pending written verification of genuineness. |
Account Classification | Banks to classify accounts into 3-4 risk groups for monitoring. |
Police Intimation | Banks to alert local police station on suspicious transactions for physical verification. |
Intermediary Role | Regulations to address platforms like WhatsApp used for fraud. |
The order recorded by the bench mandates that the RBI's regulatory framework must incorporate these indemnification provisions. The matter remains under consideration with the court monitoring the operationalisation of these measures.