Financial Cryptography

1st round in Internet Account Fraud World Cup: Customer 0, Bank 1, Attacker 300,000

More grist for the mill -- where are we on the security debate? Here's a data point.

In May 2009, PATCO, a construction company based in Maine, had its account taken over by cyberthieves, after malware hijacked online banking log-in and password credentials for the commercial account PATCO held with Ocean Bank. ....

There are two ways to look at this: the contractual view, and the responsible party view. The first view holds that contracts describe the arrangement, and parties govern themselves. The second holds that the more responsible party is required to be <ahem> more responsible. PATCO decided to ask for the second:

A magistrate has recommended that a U.S. District Court in Maine deny a motion for a jury trial in an ACH fraud case filed by a commercial customer against its former bank. According to the order, which must still be reviewed by the presiding judge, the bank fulfilled its contractual obligations for security and authentication through its requirement for log-in and password credentials. ....

At issue for PATCO is whether banks should be held responsible when commercial accounts, like PATCO's, are drained because of fraudulent ACH and wire transfers approved by the bank. How much security should banks and credit unions reasonably be required to apply to the commercial accounts they manage?

"Obviously, the major issue is the banks are saying this is the depositors' problem," Patterson says, "but the folks that are losing money through ACH fraud don't have enough sophistication to stop this."

And lost.

David Navetta, an attorney who specializes in IT security and privacy, says the magistrate's recommendation, if accepted by the judge, could set an interesting legal precedent about the security banks are expected to provide. And unless PATCO disputes the order, Navetta says it's unlikely the judge will overrule the magistrate's findings. PATCO has between 14 and 21 days to respond.

"Many security law commentators, myself included, have long held that *reasonable security does not mean bullet-proof security*, and that companies need not be at the cutting edge of security to avoid liability," Navetta says. "The court explicitly recognizes this concept, and I think that is a good thing: For once, the law and the security world agree on a key concept."

My emphasis added, and it is an important point that security doesn't mean absolute security, it means reasonable security. Which from the principle of the word, means stopping when the costs outweigh the benefits.

But that is not the point that is really addressed. The question is whether (a) how we determine what is acceptable (not reasonable), and (b) if the Customer loses out when acceptable wasn't reasonable, is there any come-back?

In the disposition, the court notes that Ocean Bank's security could have been better. "It is apparent, in the light of hindsight, that the Bank's security procedures in May 2009 were not optimal," the order states. "The Bank would have more effectively harnessed the power of its risk- profiling system if it had conducted manual reviews in response to red flag information instead of merely causing the system to trigger challenge questions."

But since *PATCO agreed to the bank's security methods when it signed the contract*, the court suggests then that PATCO considered the bank's methods to be reasonable, Navetta says. The law also does not require banks to implement the "best" security measures when it comes to protecting commercial accounts, he adds.

So, we can conclude that "reasonable" to the bank meant putting in place risk-profiling systems. Which it then bungled (allegedly). However, the standard of security was as agreed in the contract, *reasonable or not*.

That is, *reasonable security* doesn't enter into it. More on that, as the observers try and mold this into a "best practices" view:

"Patco in effect demands that Ocean Bank have adopted the best security procedures then available," the order states. "As the Bank observes, that is not the law."

(Where it says "best" read "best practices" which is lowest common denominator, a rather different thing to best. In particular, the case is talking about SecureId tokens and the like.)

Patterson argues that Ocean Bank was not complying with the Federal Financial Institutions Examination Council's requirement for multifactor authentication when it relied solely on log-in and password credentials to verify transactions. Navetta agrees, but the court in this order does not.

"The court took a fairly literal approach to its analysis and bought the bank's argument that the scheme being used was multifactor, as described in the [FFIEC] guidance," Navetta says. "The analysis on what constitutes multifactor and whether some multifactor schemes [out of band; physical token] are better than others was discussed, and, to some degree, the court acknowledged that the bank's security could have been better. Even so, it was technically multifactor, as described in the FFEIC guidance, in the court's opinion, and "the best" was not necessary."

Navetta says the court's view of multifactor does not jibe with common industry understanding. Most industry experts, he says, would not consider Ocean Bank's authentication practices in 2009 to be true multifactor. "Obviously, the 'something you have' factor did not fully work if hackers were able to remotely log into the bank using their own computer," he says. "I think that PATCO's argument was the additional factors were meaningless since the challenge question was always asked anyway, and apparently answering it correctly worked even if one of the factors failed. In other words, it appears that PATCO was arguing that the net result of the other two factors failing was going back to a single factor."

This problem has been known for a long time. When the "best practices" approach is used, as in this FFIEC example, there is a list of things you do. You do them, and you're done. You are encouraged to (a) not do any better, and (b) cheat. The trick employed above, to interpret the term "multi-factor" in a literal fashion, rather than using the security industry's customary (and more expensive) definition, has been known for a long long time.

It's all part of the "best practices" approach, and the court may have been wise to avoid further endorsing it. There is now more competition in security practices, says this court, and you'll find it in your contract.

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Caveat: as with all such cases, this is a preliminary ruling, and it can be overturned including several times... before we see a precedent.

Posted by iang at June 9, 2011 06:10 AM | TrackBack