Finance Panel Rebuffs Government's Cyber Fraud Plan, Flags Mule Account Gaps

A Parliamentary Standing Committee on Finance has formally rejected the government's response to its earlier recommendations on tackling cyber-enabled financial fraud. In its 44th Report on action taken by the government regarding the Department of Financial Services, the panel concluded that the proposed measures remain largely procedural and do not address critical operational gaps, particularly the flow of fraudulent funds through mule accounts.

The committee's concerns come amid a rise in sophisticated digital crimes, including digital arrest scams, phishing, and investment fraud. The government's response had highlighted existing tools such as banks' use of Artificial Intelligence and Machine Learning, the RBI's 'MuleHunter' system for identifying suspected mule accounts, and the National Cyber Crime Reporting Portal and 1930 helpline.

Despite these measures, the panel observed that the reply fails to offer effective solutions. A key point of contention is the proposed compensation framework, which assigns 65 percent of payouts to the RBI while beneficiary banks would bear only a 10 percent burden. The committee argues this creates a severe moral hazard and does not adequately hold receiving institutions accountable for hosting mule accounts.

The panel also flagged the failure to address the 'Golden Hour' — the critical three-to-four-hour window after a fraud is reported when funds can potentially be frozen. This window is frequently lost due to delayed victim reporting and a lack of technological capability and specialised training at the district-level law enforcement agencies.

Furthermore, the committee noted that retrospective Suspicious Transaction Reports and broad advisories do not create sufficient deterrence against negligent KYC verification at the branch level. It has recommended a recalibration of the liability framework to impose a substantial loss-sharing burden on banks harbouring mule accounts. The panel also urged the Department of Financial Services and the RBI to establish a 'Penal Framework for Negligent Branches' to penalise banks hosting multiple mule accounts and hold them accountable for KYC lapses.