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Debit-card fraud underscores legal loopholes

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Recent widespread debit-card fraud likely has roots in three major data leaks that occurred in the last six months, two of which have yet to be publicly disclosed by the companies involved. Consumers have noted a large increase in the amount of debit-card fraud since the beginning of 2006, as well as a wide recall of cards by banks and financial institutions.

Three major incidents are likely fueling the fraud, according to financial and security experts. A breach associated with bulk-goods retailer Sam's Club last autumn likely resulted in millions of debit cards potentially being put at risk, according to financial-industry insiders. A second, smaller breach affecting hundreds of thousands of debit cards has been connected to office-supply retailer OfficeMax, although that company has denied any breach of its systems. And, the most recent data leak occurred in an ATM network and likely affected millions of debit cards as well, banking executives told SecurityFocus.

Despite security-breach notification laws on the books in 23 states, credit-card companies and financial institutions have not named the sources of the breaches.

"There are few details of these leaks because credit-card companies do not want people to lose confidence in debit cards," said Beth Givens, executive director of the consumer advocacy group Privacy Rights Clearinghouse.

The mystery surrounding the data breaches underscores loopholes within the majority of state laws which aim to mandate the disclosure of security breaches. Moreover, the silence over responsibility for the breaches contrasts consumer advocates' warnings that a federal law currently being considered by Congress will ironically roll back protections even further. There are three cases in which a company suffering a breach can bypass most current notification laws, all of which have some basis in the legislation first drafted in California, security and legal experts told SecurityFocus.

A company suffering a data breach can delay notification during a criminal investigation by law enforcement. If the stolen data includes identifiable information - such as debit card account numbers and PINs - but not the names of consumers, then a loophole in the law allows the company who failed to protect the data to also forego notification. Finally, if the database holding the personal information was encrypted but the encryption key was also stolen, then the company responsible for the data can again withhold its warning.

In those cases, "they have no obligation to notify", said Avivah Litan, vice president of security and privacy research for business analysis firm Gartner. "The bottom line is that they escaped the disclosure law - at least for now."

At least one state's notification law has language that forces companies to disclose a breach even if the database records did not contain names or were encrypted and were stolen with the key. The state of New York's Information Security Breach and Notification Act (S03492) passed in August 2005 does not contain the loopholes. A breach that includes any consumers from New York state would fall under the law's jurisdiction.

Companies still have commercial disincentives to disclosing a partner's breach, however. It's unlikely that credit-card companies will risk harming their clients by disclosing the identity of companies that fail to take responsibility for breaches, Litan said. While major credit-card companies and banks have warned partners and consumers of recent breaches in general terms, business pressures leave the companies unlikely to out partners, even if the companies are violating the spirit of disclosure laws.

Last June, Mastercard International published a statement warning that online attackers had breached the network of CardSystems Solutions and collected as many as 40 million credit-card accounts of various brands. Following the breach, CardSystems foundered and was eventually bought by biometric payment processor Pay By Touch.

"It is a lot easier to expose a company like CardSystems Solutions, than to expose a retailer," she said. "The credit card companies are not out there to put any retail company out of business."

The lesson that credit-card companies have apparently taken away from the experience of CardSystems Solutions is to withhold details of breaches, putting the onus for taking responsibility on the shoulders of the company that suffered the breach, she added. Many firms point out that while large numbers of accounts might be put at risk by data leaks, only a small fraction of cardholders typically experience fraud.

However, without disclosure companies are still not taking security as seriously as they should. Already, the majority of merchants do not protect customer information in accordance with industry standards. Both Visa and Mastercard International have security regulations in place that require merchants to abide by strict rules about handling customer data. Only about 17 per cent of the 231 large merchants abide by the requirements, despite the fact that consumers' Number one fear is loss or theft of personal and financial information, beating out terrorism, job loss and epidemics, according to survey data from Visa.

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