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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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August 20, 2012

Finding a Reasonable Definition of Commercially Reasonable

Corporate account takeovers have cost businesses millions of dollars over the last several years. According to 2011 congressional testimony of Gordon Snow, assistant director of the FBI's cyber division, the FBI was at that time investigating more than 400 reported cases of corporate account takeovers. These 400 cases involved the attempted theft of over $255 million, resulting in actual losses of approximately $85 million.

Corporate accounts are not offered the same protections as consumer accounts, which are protected from financial loss from online fraud through the Electronic Funds Transfer Act and Regulation E. Article 4A of the Uniform Commercial Code (UCC) states that as long as a bank adopts commercially reasonable security measures, its business customers are accountable for fraud losses arising from funds transfers. Unfortunately, Article 4A does not provide a definition for "commercially reasonable," which leaves the term open to interpretation.

A recent ruling by a court of appeals reveals one court's opinion on what is commercially reasonable versus unreasonable. Despite the bank's compliance with Federal Financial Institutions Examination Council (FFIEC) guidance, the court found in favor of the bank's customer. In accordance with the FFIEC guidance, the bank employed multifactor authentication and had the capacity to detect and stop possible fraud. However, the court still found the bank's security measures unreasonable due to two factors.

First, the bank failed to consider the circumstances of its customer's frequency and volume of ACH transactions when implementing security measures and developing security procedures. And second, it failed to monitor and provide notice of possible fraudulent transactions to the customer. A key takeaway from this court's opinion is that financial institutions must take a holistic approach to preventing and detecting fraud. Having the proper prevention and detection tools in place is just one aspect of a fraud mitigation strategy. Financial institutions should also have policies and procedures in place to effectively use their deployed resources and technology for the unique circumstances of each of their customers. Unfortunately, a "one-size-fits-all" approach does not work in the fraud prevention arena.

Though the court did not offer an opinion on the customer's obligations in this particular case, it did recognize that commercial customers also have "obligations and responsibilities" under Article 4A of the UCC. So, at least according to this court's opinion, the holistic approach to fraud prevention does not stop with the financial institution. Corporate customers must also incorporate systems and policies to prevent unauthorized access to its financial accounts and other sensitive documents. With corporate account takeover fraud showing no signs of slowing down, it is imperative that financial institutions and their corporate customers discuss each others' roles and obligations to effectively minimize their risks.

Douglas A. KingBy Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

January 31, 2011

Payments Spotlight podcast: The evolving threat of corporate account takeovers as seen through a bank's lens

Play Play podcast (MP3 7:23) TranscriptTranscript

Last July, we spoke with Jane Larimer, executive vice president of ACH network administration and general counsel for NACHA, about fraud in the ACH network via corporate account takeovers. In the latest interview in our Payments Spotlight podcast series, we revisit the issue of corporate account takeovers—this time, from a bank's point of view. Tina Giorgio, senior vice president of operations for Sandy Spring Bank in Columbia, Md., and a member of the Atlanta Fed's Retail Payments Risk Forum's Advisory Group, offered some helpful tips for financial institutions on how to best deter corporate account takeover attacks. The podcast is one that financial institutions would benefit from hearing and one worth sharing with their corporate customers.

Addressing corporate account takeover threats
NACHA's Risk Management Advisory Group (RMAG) published a newsletter in April 2010 detailing how criminals target institutions and what institutions can do to prevent an attack. Tina told us that the RMAG has been actively engaged in addressing corporate account takeovers since they emerged in 2007.

Additionally, Tina said that NACHA's board of directors released a policy statement in October 2010 stressing the importance of implementing sound business practices to mitigate the risk of corporate account takeovers in the ACH network. The RMAG, Tina tells us, is currently working on developing resources to assist businesses and banks alike in assessing, establishing, and strengthening sound business practices.

Taking the first step in the fight against corporate account takeovers
The banking system has been combating large-scale phishing attacks for some time now. In recent years, we've seen more frequent reports of global cybercriminals' successfully stealing the credentials of bank customers through numerous low-value transactions or one-time, large-scale attacks against corporate bank accounts.

Tina said that from a bank's perspective, the first step in detecting and protecting against corporate account takeovers requires diligent risk management from the institution and its corporate customer. Educating business customers about sound and safe business practices is critical; essential educational components include the importance of daily account reconciliation and deployment of up-to-date security patches.

Using the bank's existing tool kit
Cybercriminals use sophisticated commercial online banking malware to attack computers that store sensitive banking credentials. Some of these malicious software programs are reportedly undetectable and capable of defeating multi-factor authentication systems. Tina said she believes that some of the best tools at a bank's disposal for combating these malwares include employing out-of-band authentication and alerts, as well as maintaining the payment file initiation under dual control. She also said that banks may also already have in place some low-tech tools to help prevent these takeovers—exposure limits, origination calendars, and prenotifications all provide added security layers.

Ultimately, Tina said, banks and their corporate customers must remain vigilant in protecting against corporate account takeovers. Otherwise, their risk for these takeovers increases exponentially, and it is each of their responsibilities to act safely and defend against these types of cyberattacks. Fraudsters' attacks will continue to become more sophisticated, but adopting these tips and measures can best prepare banks and its corporate consumers to defend against cyber attacks.

Photo of Ana Cavazos-WrightBy Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed

October 18, 2010

Fighting back: Good news on the law enforcement front

I've noticed that blogs by their nature tend to focus on pointing out problems, this blog included. But I think it's also important to identify progress and celebrate victory in a society that appears to approach every topic from a negative angle. So here goes!

In the past, we've reported on all kinds of complications and issues in the cooperative efforts necessary to catch bad actors intent on defrauding folks in the payments space. This includes the sometimes difficult efforts of government and law enforcement to work together across borders. In the past few months, though, we've seen some significant accomplishments with respect to industry collaboration to address payments-related crimes.

First, we reported some time ago that a rift between the European Union and the FBI had resulted in the European Parliament's rescinding the FBI's access to the wire transaction data of SWIFT—short for the Society for Worldwide Interbank Financial Telecommunication. In late June 2010, the European Union, via the European Council, signed with little fanfare a new five-year contract with the United States, allowing U.S. authorities to continue sharing European bank data for the purpose of counterterrorism. The key to the renewal was the promise of stronger controls over data privacy and the presence of a third-party overseer to make sure that data provided to U.S. authorities were accurately maintained and procedures existed to manage redress if a person's private data was abused. This five-year deal ensures that the global fight to address the financial aspects of terror activities can proceed aggressively.

Second, we've spent some time in this space talking about the growing problem of corporate account takeovers over the Internet, in addition to traditional identity theft forays, particularly from foreign sources. We've also described the complexity of U.S. and foreign law enforcement authorities working together to apprehend instigators of such schemes. In the last few weeks, however, we've been delighted to see a spate of successes by European and U.S. authorities—often working together—that will send a message to perpetrators who may believe that they are free to conduct crime in cyberspace.

In partnership with Slovenian Criminal Police and the Spanish Guardia Civil, the FBI announced in July that a two-year investigation into European-based fraud activity had resulted in the arrest of the operators of the Mariposa Botnet, quickly followed by the arrest in Slovenia of the Botnet's creator, who was code-named "Iserdo." All parties lauded the value of the strong law enforcement partnerships present in this effort.

In August, U.S. and French authorities worked together to arrest a notorious cybercriminal owning the moniker of "BadB." Otherwise known as Vladislav Horohorin, BadB had been targeted by the U.S. Secret Service for some time. He was arrested by French authorities while traveling in France. If extradited to the United States, Horohorin faces up to 12 years in prison.

In September, U.S. and British authorities made what seems to be well-coordinated announcements concerning the wide-ranging arrests of Eastern European cybercriminals engaged in hacking and account takeover activities of British and U.S. small businesses. U.K. officials announced that the Metropolitan Police's e-crime Unit arrested in a predawn raid 11 individuals on charges of fraud and money-laundering activities that netted close to $40 million dollars. This announcement was followed by an announcement from the New York U.S. Attorney's office that they had issued 60 arrest warrants and made 20 arrests for U.S.-based perpetrators involved in similar account takeover schemes. At least 37 of the individuals involved were so-called "money mules," hired by overseas criminals to open bank accounts and deposit funds stolen from businesses, then wire the funds overseas after keeping a nice fee. This effort featured extraordinary cooperation among the U.S. Attorney's Office for the Southern District of New York, the FBI, the New York Police Department, the Department of State Diplomatic Security Service, the New York Office of Homeland Security Investigation, and the U.S. Secret Service. The gang appears to have stolen at least $4.2 million from small businesses and security brokers in the United States.

At any rate, our hats are off to the various law enforcement authorities who successfully participated in these actions. We look forward to more such efforts as a growing deterrent to those who use cyberspace as a playground for financial crime. Mr. Horohorin may have plenty of company during his stay in the United States.

By Rich Oliver, Executive Vice President of the Atlanta Fed and Director of the Retail Payments Risk Forum

August 30, 2010

Latest Payments Spotlight podcast focuses on fraud and risk in the ACH network: They're on the rise, but under control

Play Play podcast (MP3 15:07) TranscriptTranscript

NACHA—The Electronic Payments Association (formerly the National Automated Clearinghouse Association) describes ACH fraud risk as "the risk that ACH data will be compromised through the introduction of false transactions, the alteration of valid transactions or the alteration of static data that controls the routing or settlement of valid ACH transactions." Fraud in the ACH network can occur in a number of ways, including through corporate account takeovers, direct-access relationships, and possibly person-to-person payments.

In our latest podcast interview, Jane Larimer, executive vice president of ACH network administration, general counsel for NACHA, and a member of the Atlanta Fed's Retail Payments Risk Forum's Advisory Group, explores these risks and some of the steps financial institutions can take to mitigate them.

Corporate account takeovers
The incidence of corporate account takeovers—when cybercriminals use malicious software to steal user credentials to originate wire transfers and ACH batches—has been a significant fraud issue in the past year. Criminals have stolen the banking credentials of several small businesses, municipalities, and even school districts, which they have then used to make unauthorized ACH transactions and wire transfers.

Larimer says that the best way to safeguard against this type of ACH fraud is to be aware of your surroundings and follow safe best practices like using multifactor and multichannel authentication as well as multilayer controls. Financial institutions can also employ red-flag controls and out-of-band verification for transactions. Most importantly, businesses should monitor their activities by conducting daily account reconcilements. This is important advice, she says, even if it may seem old school. Also critical is ensuring that anti-spyware, anti-malware, and security software for computer workstations and laptops used for online banking and payments are up to date. Larimer also recommends using a dedicated computer for online banking functions and not using it for other activities such as browsing at a Wi-Fi hotspot or coffee shop.

ACH risk measures show a downward trend
A common measure of risk in the ACH network is the number of unauthorized debits returned to institutions originating transactions. NACHA reported that this measure has declined for the past several years, including last year, which saw a 9.6 percent decline. The reason? Larimer attributes the success story to effective risk management, targeted rulemaking, and rule enforcement. Thanks to new network enforcement and company name rules, NACHA has seen a continued decline in return rates and unauthorized debits, especially in the first quarter of 2010, when the volume of unauthorized debits declined 16 percent over the first quarter of 2009.

Direct-access relationships
In March 2010, NACHA released an ACH Operations Bulletin that requires financial institutions to register or report their direct-access relationships with originators or third parties. Larimer explains that the new registration requirement helps NACHA track and promote due diligence in accordance with originating depository financial institutions' (ODFI) risk-management policies. An ODFI that permits its originator or third parties direct access to the ACH network potentially exposes itself to a host of risks. Larimer says that it is essential for an ODFI participating in these relationships to effectively mitigate the risks by appropriately underwriting, managing, and monitoring its customer relationships.

Partnerships in the fight against ACH network fraud and risk
ACH fraud and risk impact financial institutions and businesses, and while their goals may vary according to their unique roles, they all share a common responsibility to safeguard the network against fraud through sound controls and processes. Larimer believes that risk mitigation and prevention are the responsibility of every party in the ACH network, and that establishing partnerships between financial institutions and business is a move towards reducing fraud and risk in the ACH network.

By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed