Karnataka High Court Urges Banks To Take Steps Against 'SIM-Swap Fraud', Holds BSNL Liable For Illegal Withdrawals From Bank's Account

Underscoring the accountability of telecom service provider for its negligence in a case of SIM swap fraud, the Karnataka High Court held telecom company BSNL vicariously liable for wrongful issuance of a duplicate SIM card to fraudsters by one of its employees, resulting in a loss of Rs 87.70 lakhs to a co‑operative bank.In doing so the court while recognizing the role of telecom providers as vault keepers who if dishonestly gives access to unauthorised persons bears responsibility for the resulting theft, the court also urged banks to take protective steps against SIM-Swap fraud. The single judge bench of Justice Suraj Govindaraj dismissed BSNL's plea against the Permanent Lokayukta Award and enhanced the compensation payable to the Bank from Rs 5 lakhs to 50.5 Lakhs, along with interest at the rate of 9 per cent interest per annum. BSNL would also be liable to pay consequential damages amounting to Rs 5 lakhs for reputational harm, liquidity crisis, and operational disruption caused to the co-operative Bank.“…Telecom service providers are the custodians of the mobile numbers that serve as the authentication anchors for the entire OTP‑based digital payment system. Their role in the digital financial ecosystem is structurally equivalent to the role of a vault keeper in a traditional banking system. Just as a vault keeper who carelessly or dishonestly gives access to unauthorised persons bears responsibility for the resulting theft, a telecom service provider that carelessly or dishonestly issues a duplicate SIM bears responsibility for the financial fraud that the duplicate SIM enables…”, the court laid down in unequivocal terms about the role played by telecom companies in the hierarchy of digital payments.It further said"The present case is a paradigmatic instance of SIM swap fraud. A banking institution had its registered mobile number compromised through a duplicate SIM issued by a telecom service provider's official. Within hours, substantial funds were drained from its account. The harm was swift, severe and largely irreversible at the moment of fraud. The pattern is precisely that which has been documented in thousands of similar cases across India. The legal response must be clear and consistent: where a telecom service provider's negligence or its official's misconduct directly enables a SIM swap fraud, the telecom service provider bears full civil liability for the consequential loss".Treatment of Recoveries in the Digital Fraud Context"This Court also addresses, for future guidance, the appropriate treatment of insurance proceeds and other recoveries in digital fraud compensation cases. The principle that this Court has applied, that direct recoveries of the stolen funds reduce the net compensable loss, while collateral insurance proceeds do not reduce the tortfeasor's liability, is of general application. It protects the incentive for institutions to obtain insurance coverage against digital fraud risks. It also preserves the insurer's subrogation rights, which are essential to the functioning of the commercial insurance market".It further observed that the verification of subscriber identity before issuing a duplicate or replacement SIM card is not a bureaucratic formality and that every telecom service provider must treat every request for a duplicate SIM card with the gravity it deserves. "The verification must be thorough, the documentation must be examined carefully, and where there is any doubt about the identity or authority of the applicant, the request must be declined and the subscriber must be contacted through alternate channels. The financial consequences of issuing a duplicate SIM to a fraudster can be catastrophic for the victim and, as this judgment demonstrates, equally consequential for the telecom service provider in civil law".The court said that banking institutions must also take proactive steps to protect their customers and themselves from SIM swap fraud:registering multiple OTP delivery channels so that the loss of one channel can be detected and compensated;implementing time-delays between SIM swap notifications and large transactions to provide a window for detection;sending transaction alerts to alternate communication channels;and educating customers about the risks of SIM swap fraud and the precautions they can take.The court said that while these measures are not a substitute for telecom service providers' duty of care but are an additional layer of protection. It further said that while it is not the court's function to issue directions to regulators in these proceedings, however the present matter highlighted the importance of effective regulatory oversight of SIM swap procedures by the Department of Telecommunications and the Telecom Regulatory Authority of India.The regulatory framework must ensure that prescribed verification procedures are actually followed in practice, that penalties for...

Karnataka High Court Urges Banks To Take Steps Against 'SIM-Swap Fraud', Holds BSNL Liable For Illegal Withdrawals From Bank's Account

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Karnataka High Court Urges Banks To Take Steps Against 'SIM-Swap Fraud', Holds BSNL Liable For Illegal Withdrawals From Bank's Account

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