The study investigates the correlation between legal and regulatory clarity and the efficient implementation of AI-based fraud prevention systems in Indian banks, and how data privacy and constitutional rights, including the right to privacy under Article 21, influence their design and deployment. Using the qualitative approach, the study provides an analysis of secondary resources such as scholarly literature, legal documents, and policy reports to assess the operational, legal, and moral problems of the use of AI. The results prove that AI has great potential but can be effective in reducing fraud only due to fragmented legal frameworks, poor transparency of the algorithms used and data privacy and due process issues under the constitution. The lack of regulations specific to AI results in inconsistency in operation, but doctrines provided under the existing laws, such as the DPDP Act and judicial precedents, provide partial guidance. This study recommends that a unified rights-aware regulatory regime would be critical in sound and responsible integration of AI in the domain of fraud prevention, which would eliminate the issue of technological progress overcoming the law and the limits imposed by ethics.