RBI Orders Compensation for Digital Arrest Scam Victim

The Reserve Bank of India (RBI) has mandated five banks—Axis Bank, City Union Bank, ICICI Bank, IndusInd Bank, and Yes Bank—to pay ₹1.31 crore to Naresh Malhotra, a 78-year-old victim of a digital arrest scam. Malhotra, a retired banker, was defrauded of over ₹20 crore through an elaborate extortion scheme that lasted for a month. The RBI's order follows findings that these banks failed to comply with Know Your Customer (KYC) norms and adequately monitor "mule" accounts involved in the fraudulent transactions.

The scam involved fraudsters impersonating law enforcement officials via video calls, keeping Malhotra under a simulated "digital arrest" to pressure him into transferring funds. The RBI's intervention came after it was revealed that banks neglected to identify suspicious transactions, leading to significant financial losses for the victim. Ultimately, Malhotra has received ₹1.31 crore from the banks where the stolen funds were initially deposited.

In addition to the compensation ordered by the RBI, Malhotra has filed a criminal writ petition with the Supreme Court, seeking further restitution. He has also appealed to the RBI for the complete return of his lost funds, including interest and damages. A review of the RBI’s ombudsman order indicated that while Malhotra initiated all transactions himself, deficiencies were noted in the beneficiary banks’ compliance with KYC and anti-money laundering (AML) guidelines.

The RBI’s ombudsman found that the five banks had failed to monitor mule accounts properly, leading to the swift and complex layering of transactions—over 4,236 in total—that made it challenging to prevent the fraud. The ombudsman ordered Axis Bank, City Union Bank, ICICI Bank, and IndusInd Bank to compensate Malhotra 5% of the amounts transferred, while Yes Bank was directed to pay 7.5% due to additional lapses.

Malhotra's case represents one of the largest individual cyber frauds in India, raising alarms about the effectiveness of banking security protocols in the face of sophisticated scams. The RBI's findings underscore the need for stronger compliance measures to prevent similar incidents in the future.

Despite receiving a portion of his lost funds, Malhotra highlights that he has only recovered a small fraction of the total amount defrauded. He continues to advocate for full restitution, citing systemic failures within the banking sector. Malhotra's determination to pursue justice reflects the ongoing challenges faced by victims of digital scams in navigating the complexities of financial restitution.

As the investigation progresses, including inquiries by the Central Bureau of Investigation (CBI), the case serves as a critical reminder of the vulnerabilities within the digital banking system and the urgent need for enhanced safeguards against fraud.