Why in News?

• India is witnessing a sharp rise in digital frauds, particularly the phenomenon of “digital arrest” scams, leading to massive financial losses and erosion of trust in digital payments.
• In response, a high-level inter-departmental committee (IDC) constituted by the Ministry of Home Affairs (MHA) is examining systemic solutions, including a transaction “kill switch” and a fraud insurance mechanism.

What’s in Today’s Article?

• ‘Digital Arrest’ Scams
• Key Proposals Under Consideration
• Institutional Framework Involved
• Role of RBI and Insurance Sector
• Key Challenges and Way Ahead
• Conclusion

‘Digital Arrest’ Scams:

• Meaning:
  • Cyber-enabled fraud: Fraudsters impersonate law enforcement officials via video calls. Victims are shown fake IDs, arrest warrants, and threatened with arrest. Leaked personal data is used to build credibility.
  • Social engineering: Victims are kept under psychological pressure for hours and coerced into transferring money to mule accounts.
• Estimated losses: Victims across India are believed to have collectively lost nearly Rs 3,000 crore to digital arrest scams, prompting the Supreme Court to take suo motu cognizance of the issue.

Key Proposals Under Consideration:

• Transaction ‘Kill Switch’:
  • An emergency button embedded in UPI apps, and banking/payment applications.
  • Once activated all banking and financial transactions are instantly frozen, preventing further outflow of funds during suspected fraud.
  • It aims to create last-mile consumer protection, and real-time intervention in fraud scenarios.
• Tracking and blocking fraudulent transactions: Exploring systems to identify suspicious transactions, prevent instant splitting of funds into multiple mule accounts, and address rapid laundering techniques used by fraud networks.
• Fraud insurance mechanism:
  • Proposal to introduce insurance coverage for fraud-related losses in banking.
  • Driven by increasing scale and sophistication of digital frauds, and recognition that traditional audits and compliance are insufficient.
  • RBI’s evolving stance - Shift from viewing fraud as merely a compliance issue to a systemic and balance-sheet risk.

Institutional Framework Involved:

• The IDC is chaired by Special Secretary (Internal Security), MHA, with representatives from:
  • Ministry of Electronics and Information Technology (MeitY),
  • Department of Telecommunications (DoT),
  • Ministry of External Affairs (MEA),
  • Department of Financial Services (DFS),
  • Ministry of Law & Justice (MoLJ),
  • Ministry of Consumer Affairs (MoCA),
  • Reserve Bank of India (RBI),
  • CBI, NIA, Delhi Police, and
  • The Indian Cyber Crime Coordination Centre (I4C) (with the CEO, I4C acting as Member-Secretary).
• Additionally: MeitY met major IT intermediaries (Google, WhatsApp, Telegram, Microsoft) earlier.

Role of RBI and Insurance Sector:

• RBI observations:
  • There were 23,879 fraud cases involving an amount of Rs 34,771 crore as of 2024-25.
  • The RBI’s Payment Vision 2025 report has proposed studying the feasibility of setting up a Digital Payment Protection Fund (DPPF) to provide security cover to defrauded customers and payment instrument issuers.
• Expert view: Existing cyber insurance does not cover first-party fraud losses, especially those caused by customer manipulation.
• Preferred option - Insurance pool model:
  • Backed by contributions from banks, insurers and potentially supported by regulatory frameworks – that could spread fraud risk across the system.
  • This will be similar to terrorism insurance pools in several countries.
  • Such a structure would help manage tail risks while keeping premiums affordable.

Key Challenges and Way Ahead:

• Operational complexity: Avoiding misuse or accidental triggering of the kill switch.
  • Technology-based safeguards - AI-driven fraud detection and transaction velocity checks.
• Interoperability: Uniform adoption across banks, UPI platforms, and fintech apps.
  • Strengthened coordination - Banks–Insurers–Regulators–Tech platforms partnership.
• Moral hazard: Risk of reduced consumer vigilance if insurance is guaranteed.
  • Consumer awareness - Nationwide campaigns on digital arrest scams.
• Regulatory coordination: RBI, IRDAI, MeitY, and banks must act in sync.
  • Regulatory clarity - Clear SOPs for kill switch activation and reversal.
  • Legal backing - Amendments to IT and banking regulations for rapid response.
• Coverage gaps: Current cyber insurance inadequate for social engineering frauds.
  • Insurance innovation - Creation of a fraud insurance pool under IRDAI leadership.

Conclusion:

• India’s rapid digitalisation has outpaced traditional risk-control mechanisms, making digital fraud a systemic threat rather than a mere compliance issue.
• The proposed initiatives represent a paradigm shift towards proactive, consumer-centric and system-wide protection.
• If implemented with robust safeguards, regulatory coordination and public awareness, these measures can significantly enhance the resilience and credibility of India’s digital financial ecosystem.