How ATM fraud nearly brought down British banking
Phantoms and rogue banks
This is the story of how the UK banking system could have collapsed in the early 1990s, but for the forbearance of a junior barrister who also happened to be an expert in computer law - and who discovered that at that time the computing department of one of the banks issuing ATM cards had "gone rogue", cracking PINs and taking money from customers' accounts with abandon.
The reason you're hearing it now is that, with Chip and PIN cards finally in widespread use in the UK, the risk of the ATM network being abused as it was has fallen away. And now that junior barrister, Alistair Kelman, wanted to get paid for thousands of pounds of work that he did under legal aid, when he was running a class action on behalf of more than 2,000 people who had suffered "phantom withdrawals" from their bank accounts. What you're about to read comes from the documents he submitted last week to the High Court, pursuing his claim to payment.
"Phantom withdrawals" were a big mystery when the banks and building societies began to join their ATM networks together in the 1980s. Kelman at that time was a barrister (who argues cases in front of a judge, rather than only slogging away in legal chambers) specialising in intellectual property law. He got interested in computing in the 1980s when the National Computing Centre asked him to advise the Midland Bank on its computer system.
What quickly became clear was that the law needed a system to provide proof that events had happened so that legal cases could be made. You might say that "the computer debited the account", but to a barrister (and more importantly, a judge) that's not enough. Did the computer do it at random? In that case it's like a tree branch falling - an accident. Or did a person program it to do so? In which case the person must be able to testify about the precise circumstances when a debit could happen. Sounds daft, but the law rests on proving each step of an argument irrefutably.
In February 1992 Kelman got a call from Sheila MacKenzie, head of the Consumers' Association (which publishes Which? magazine), who said that members were complaining by the dozen about phantom withdrawals, and was he interested? Kelman was, and met MacKenzie, with two of the association's members, Mr and Mrs McConville from Liverpool, who had had a number of phantom withdrawals from their Barclays account. They already had a solicitor, but needed someone with computer expertise in the law to make their case. Kelman at this time was able to charge £1,750 per hour - each hour being broken into six-minute chunks. Oh, and don't forget VAT too. That's £206.62 per six minutes.
He showed his value pretty quickly, pointing out that banks must have a legal mandate to debit someone's account. If they take it away from a customer without a mandate, they must refund it. So the legal point of phantom withdrawals hinged on the question: if a PIN is typed into an ATM with a card that matches an account number, is that a mandate by the customer for the bank to debit their account?
As long as you didn't breach the terms of the contract by leaving your card lying around (which would give implicit authority for use), then you, as the customer, could simply say that the withdrawal was not mandated, and demand your cash back.
How could the banks respond? They'd have to give all the phantom withdrawal money back where they could not show that the customer had typed in the PIN - unless, that is, they claimed that their systems were infallible. Yes, only by going where no computer system had ever gone before could the banks deny that phantom withdrawals were (1) taking place and (2) their responsibility to refund.
You'd think it would be open and shut. You haven't dealt much with banks, have you? Kelman took the case on legal aid and decided to bundle up more than 2,000 peoples' cases into a single class action against all the high street banks taking part in the ATM network. He trawled newsgroups for information on how crackers might decode ATM cards.
He also met two key people in the course of his research. The first, early on, was Andrew Stone, an ex-con who had been done for fraud, who claimed to had taken £750,000 from ATMs by combining techniques such as shoulder-surfing and grabbing receipts from ATMs (which in those days often had the full account number on them). Stone - who was soon back in prison - was proof in himself that criminals could make "phantom" withdrawals.
Professor Ross Anderson , a cryptography and security expert who was an expert consultant to Kelman on the case, explains: "Stone had been working with building access systems using cards with magnetic stripes, and one day he thought he'd see what it could read of his ATM card. Then he tried it with his wife's." Stone figured that the stream of digits was probably an encrypted PIN.
"Then, because you can change the content of the magnetic strip, he wondered what would happen if he changed the number on his card to match his wife's. He found he could get money out using his old PIN." The high street bank Stone used (The Register knows which one) had not used the account number to encrypt the PIN on the card - meaning that any card for that bank could be changed and used to make withdrawals on any other account in it, providing you knew the right details (such as branch sort code and account number. The name of the card holder of course was unimportant, because it was not on the stripe.)
"After that," says Professor Anderson, "it was just a question for Stone of collecting as many account numbers as he could." Until the police caught up with him, at least.
In September 1992 Kelman met a woman he called the "Lotus Lady", because she worked for Lotus at a time when he was considering buying some groupware to organise the rapidly-growing class action; he had already put the names and other details of all the litigants into a relational database to search for patterns in victims and withdrawals. The Lotus Lady was interesting because her ATM card didn't debit her account. It gave her money, but heaven knew where from.
Kelman thought for a moment and realised that there must be thousands of such cards - and after a little more thought, how it had happened.
How could there be thousands of such cards? Because the chances of any two random people meeting in the UK population at that time were 25 million to 1. For one of them to have the only card in existence that debited other peoples' accounts was absurd. He'd been on the case for six months, met - say - 3,000 people through it - and one of them had such a card. The odds only work if thousands of people are walking around with cards like that, or potentially could be. They had the wrong magnetic stripe on the card: the front was embossed with the holder's details, but the account and PIN encrypted on the stripe pointed somewhere else. How wouldn't that be spotted?
Simple: dummy accounts. To do their testing in an environment where the bank systems had to work all the time, the computing teams set up a parallel universe of dummy banks, dummy branches and dummy accounts. But they generated real ATM cards for them, and could take out real money - authorised by the banks. Some people were getting dummy cards.
But equally, Kelman saw, it would be possible for a "rogue" computing department to start tweaking the cards to take money from innocent customers.
By this time the legal process was underway. Kelman had issued (but not served) a writ on the banks in July 1992. Four days later four men appeared in court following the seizure by police of more than 200 forged ATM cards in Sydenham, south London. Even so, the banks refused to deal.
In August 1992 the writ was served. The banks suggested that the class action shouldn't be a class action, but should be 2,000 small claims actions. Divide and conquer, of course.
Things ground on, until in April 1993 the banks - through the Association of Payment Clearing Services, Apacs - changed their rules. Customers would only be liable for the first £50 of any disputed or "phantom" withdrawals; the sum could be waived completely if the customer had a good enough case that they had not given away their PIN. This effectively killed the ATM class action, because the banks had accepted liability - in a roundabout way.
The Writ that Kelman had served on the banks was then wrapped up in a two-day hearing in May 1993, in which the solicitors for the banks were obliged to stand up and admit one by one that their systems were not, after all, infallible.
On 22 June 1993, Judge Hicks gave judgement, mostly in favour of the motion by Kelman, who expected the banks to simply settle.
But a few days later Kelman heard something that worried him deeply. The computing staff at one bank - the Rogue bank - had discovered through the dummy accounts how to fix the PIN generator so that it would only generate three different PINs in all the PINs issued. By creating a number of dummy accounts and getting new PINs issued for them, they could capture the sequence. Then all that was needed was to recode the cards so they would point to different account numbers, try the three PINs (ATMs gave you three chances) and they were away.
This "gave me major concern," says Kelman. "The security of the entire ATM network upon which the UK banking system was based was predicated on nobody knowing your PIN." He could see that if this reached the media, people would begin comparing PINs, and on finding identical ones would tell others, and the security system used by the banks would collapse overnight. Then there would be a dramatic run on the banks  as everyone tried to take their money to a safer place, such as under the mattress.
And there wasn't time for the banks to fix the problem if anyone went public with it. Their MTBU was too short. MTBU? That’s “Maximum Time to Belly Up”, as coined by the majestic Donn Parker of Stanford Research Institute. He found that businesses that relied on computers for the control of their cash flow fell into catastrophic collapse if those computers were unavailable or unusable for a period of time. How long? By the late 1980s it had fallen from a month to a few days. That’s not a good thing; it meant that a collapse of the computers that any UK clearing bank relied on would destroy it in less than a week.
After dwelling on the problem for 48 hours, Kelman finally decided there was only one way out: use the Bank of England’s "show and tell" session, held secretly every month, where banks had to own up to their vulnerabilities, so that risks to the British economy could be identified. Kelman suggested the creation of an "Office of ATM Security", which would deal with any complaint of phantom withdrawal, and analyse it on a time-and-geography database, and get the customer to give their PIN, which would be encoded on a one-time cipher and compared with previous records. Details of customers with identical PINs would point the police to further lines of inquiry. Anthony Scrivener – lately appointed defence counsel to Saddam Hussein – was strongly behind this.
But before he could do this, Kelman was dismissed from the case by the solicitor representing the McConvilles, who had originally hired him. They wanted to pursue the case to the bitter end, rather than get the settlement Kelman felt was in the offing.
Kelman was stuck. He couldn’t say what he had learned; it would leak. He couldn’t complain to the Law Society or Bar Council; it would leak. He couldn’t tell the banks, because he had no authority now, having been de-instructed. So he drew up his fee note. It was a lot less than he could have earned in the City, he says.
"Fortunately for the UK banking system and the British people, nobody else did discover what I found about the activities of the Rogue Bank," Kelvin notes. Two years later, though, he had corroboration of what he had learnt: "the computing staff at the [Rogue] bank were completely out of control and engaged in multiple frauds."
He reckons that his fees – just shy of £200,000 over 15 months – probably “saved the UK banking system”, and that by using his database suggestion, the UK banks could have saved £200 million over the past 12 years.
And why is he telling this explosive story now? Because chip and PIN has been deployed across the UK ATM network. "The vulnerability in the UK ATM network was still there to be exploited – if someone had chanced upon it."
Only now, with chip and PIN widely deployed, does Kelman feel that the risk of subversion of the PIN system, "as performed by the computing staff of the Rogue Bank" (his capitals) "been eliminated". (Professor Anderson agrees, but says many other loopholes remain.) Kelman thinks that during the 1990s, “the UK banking system was gravely at risk of collapse at all times because of this substantial security flaw."
Apacs said it was unaware of Kelman's case and so had no comment on Kelman's allegations. Link, which operates the UK's largest ATM network, had no comment ahead of this story.
And the price of silence? He could not take silk – that is, become a QC (Queen’s Counsel, the highest level of barrister) – because he felt he could not talk about the risks to the UK banks.
But the real losers, he suggests, are the McConvilles, "an ordinary working-class couple whose money was stolen from them by criminals at [a high street] Bank." They're now dead. But any time that you, or someone you know, has money siphoned from their account by a cloned card you have the McConvilles to thank when it's repaid.
Other links: Phantom withdrawals page  (Prof Ross Anderson)