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Digital arrest scams have become so alarmingly common that our Honourable Prime Minister himself has had to reassure citizens and advise them to stay calm. A common element in all these crimes is the easy availability of bank accounts to scammers. Since the amounts involved are often substantial, running into crores, it is baffling how scammers managed to move around such large sums undetected by the banks. This potentially reveals significant weaknesses in the account opening processes and the monitoring mechanisms employed by banks to detect suspicious transactions. Here, the banks, knowingly or unknowingly, are enablers of the crime by allowing their systems and facilities to be used for fraud.
The way these scammers operate is strikingly consistent. It often starts with a phone call to the victims, purportedly from officials of law enforcement agencies. They are then falsely accused of a serious crime, such as dealing in black money, drugs, or tax evasion, and kept on the line for hours or even days, under threats of arrest and prosecution. Ultimately, a large sum is demanded, to be transferred to a specified bank account to avoid criminal charges. A crucial point is whether such fraud could be carried out so easily if the bank accounts were unavailable to the perpetrators.
Given the scale of these scams, it is surprising that they continue to occur despite several stringent measures implemented by the Reserve Bank of India (RBI), which should ideally prevent fraudsters from accessing banking facilities. The mandatory Know Your Customer (KYC) rules for banks when initiating a customer relationship are one example of the safeguards intended to mitigate such risks. Additionally, banks are required to implement processes for monitoring, detecting, reporting, and taking action on accounts with suspicious transactions. If properly implemented, a sudden spike in transaction volume in a new, dormant, or low-value account, such as those used in digital arrests, should have raised immediate alerts within the system. Failure to detect and prevent such misuse of a bank’s resources points to either a failure in the implementation of safeguards, the inadequacy of the safeguards themselves, or both. Hence, banks cannot be fully absolved of accountability for facilitating such scams, albeit passively, especially where regulatory safeguards have been diluted or violated.
These regulatory safeguards serve broader objectives, extending beyond the protection of domestic banking customers. Implementing such regulations is also a part of India’s commitment to the international Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) initiatives. These measures have significant national and international security implications. These implications include the misuse of banking channels to facilitate human trafficking, drug trafficking, arms trade, and terrorism. The RBI’s audit process is meant to ensure that AML/CFT regulations are enforced both in letter and spirit within the Indian financial sector. When scams of this magnitude occur, it is reasonable to assume that banks are failing to prevent the misuse of their systems, and the regulator is failing to uphold the integrity of the country’s banking system. The concern is that these digital arrest scams may not only represent customer protection issues but could also point to weaknesses in the AML/CFT processes that affect national and international security.
The government is doing a commendable job in quickly adopting measures to prevent such scams from recurring and to apprehend the perpetrators. However, gaps in the implementation of AML/CFT processes within financial institutions and regulatory audits must also be addressed alongside these measures. The accountability of banks must be enforced for failures stemming from negligence in conducting proper background checks on their customers and monitoring transactions through their systems. This accountability could include requiring the scammers’ bank to compensate victims who lost money due to the misuse of its systems. Further, a root-cause analysis of the scammers’ bank’s processes should be conducted. Such measures would provide much-needed relief to financial sector consumers and strengthen trust in our financial institutions.
It all boils down to two critical questions: Do we know the users of our banking resources? And do we know the purpose for which our banks are being used by their users? This issue extends beyond digital arrests. In every scam where financial institutions’ systems are exploited, there is a passive but shared responsibility on the part of those institutions. Through negligence, they become complicit in the crime. Each scam must be thoroughly examined to identify weaknesses in the implementation of RBI safeguards. If these weaknesses point to inadequacies in the safeguards themselves, the regulations surrounding AML/CFT and their enforcement mechanisms must be reviewed and strengthened to prevent further abuses and protect our global reputation.
These pieces are being published as they have been received – they have not been edited/fact-checked by ThePrint