Protecting the Scammed Without Freezing the Innocent

Liability Without Overreach: The Line Between Protecting Victims and Punishing the Innocent

Two goods are pulling against each other here. A retired person coerced by a fake "CBI officer" into transferring her savings deserves protection and banks are best placed to stop the money moving. But an ordinary trader whose account is frozen because a payment passed through a scammer's hands also deserves protection - from the bank and from the State.

The case for making banks pay The strongest argument for bank liability is about who can actually prevent the loss.

Digital-arrest scams depend on mule accounts

• accounts opened, often in other people's names, to receive and move stolen money. CBI investigations have found mule accounts central to laundering scam proceeds and in some cases bank staff helped open them. Banks hold the full transaction history and the tools to spot unusual patterns. Victims hold neither. The current rules leave a gap. The RBI's 2017 zero-liability circular protects customers from unauthorised transactions. But a victim coerced into making the transfer has technically authorised it, so she falls outside it. The UK closed this gap in October 2024, requiring banks to reimburse such victims up to £85,000, with the cost split equally between the sending and receiving banks. When banks pay for failures, they invest in stopping them.

The case for caution The strongest argument on the other side is about what full liability will make banks do.

If a bank must fully compensate every time its diligence is found wanting, the rational response is to flag far more accounts than are actually mules. The draft rules already cast a wide net. As reported, any transaction of ₹1,000 or more that looks unusual for a customer's profile or is linked to a reported account, can be held for up to 60 days and longer if police direct.

A small trader or a Jan Dhan account holder who unknowingly receives money that passed through a mule account could lose access to their funds for two months. For someone living day to day, that is not an inconvenience; it is a crisis.

The court's suggestion that unusual transactions be automatically reported to police and physically verified adds a privacy cost on top.

Where this leaves us TAN's position is that banks should share liability for coerced frauds, but holds must be proportionate. Specifically:

• Reimburse coerced victims where mule-account detection failed, with the cost shared between the banks that sent and received the money, as in the UK.
• Hold only the suspect amount, not the whole account, for a short default period, with review by a person before any extension.
• Report to police only above clear thresholds and with safeguards, not automatically.
• Use diplomacy to press Myanmar, Cambodia and Laos, where many scam compounds operate using trafficked Indians. We weigh it this way because the harm of a wrongful freeze falls hardest on the poorest account holders, while banks can absorb a shared reimbursement. What would change our view is evidence that partial, time-limited holds fail to stop mule laundering.