Debit-card fraud underscores legal loopholes
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.
Law enforcement authorities and financial firms have launched a broad investigation to track down the sources of the current crop of fraud. A breach at a California office-supply chain last year resulted in the leak of an estimated 200,000 ATM and debit account numbers along with the associated personal identification numbers, or PINs. A rash of fraud that started in February was blamed on the leak, and media reports pointed at OfficeMax as the source. The company did not respond to requests for comments, but in its annual report published last week, OfficeMax warned investors that the situation could hurt its results.
"There is an ongoing federal investigation relating to ATM fraud involving legitimate debit card use at various retailers that was later tied to fraudulent transactions outside the U.S.," the company stated in the filing to the Securities and Exchange Commission. "While we have no knowledge of a security breach at OfficeMax, it is possible that information security compromises involving OfficeMax customer data, including breaches that occur at third party processors, may damage our reputation."
In the past month, law enforcement authorities in New Jersey and New York arrested more than a dozen people in connection with an organized identity theft operation, said Edward DeFazio, the prosecutor for Hudson County, New Jersey. Many of the victims of the ring, which allegedly had connections to other identity thieves in Europe and South East Asia, had shopped at OfficeMax.
"Certainly, a disproportionate number of victims have dealt with OfficeMax," DeFazio said.
Some security experts theorized that OfficeMax's payment processor could be to blame for the breach, but OfficeMax could not be reached for comment on the possibility. In any event, the breach associated with the retailer is the smallest of three data leaks affecting credit and debit cards in the last six months.
Last December, Sam's Club acknowledged that it was cooperating with an investigation into 600 cases of fraudulent transactions using credit cards and debit cards at its gas stations. A representative of Sam's Club, a subsidiary of retail giant Wal-Mart, would not comment on the issue but pointed to a recent public statement released by bulk retailer. "I want to assure our members that these reports of fraud did not involve transactions inside Sam's Club locations, on Samsclub.com or at Wal-Mart stores or on walmart.com, and no personal identification numbers (PINs) were used in any of the fraudulent transactions," Mark Goodman, executive vice president for Sam's Club, said in a statement released on 3 March. "If any compromise occurred, it appears to be limited to the Sam's Club fuel station point-of-sale system."
While the retailer has only acknowledged that some 600 cases of fraud are linked to the data leak, the incident has led to credit-card companies issuing warnings to banks for, what is likely, millions of cards, according to banking executives.
"It was every institution in America," said Steve Swofford, president of the Alabama Credit Union. "And I would say there were millions of people affected."
While the ACU only replaced 500 cards, and had no incidence of fraud, other banks had to deal with far greater numbers. Regions Financial replaced 100,000 credit and debit cards on 23 January, but a representative stated that the majority of the cards were reissued in response to, and seven months after, the CardSystems Solutions incident.
Such replacements are not inexpensive. Each new card costs a bank anywhere from $15 to $30 - a high cost for the failure of companies to abide by data-security standards.
Two weeks ago, Visa and Mastercard warned banks of the most recent incident - a breach of an ATM network, according to financial industry insiders. The incident has led to warnings on a similar number of accounts as the Sam's Club incident, said ACU's Swofford, suggesting that the total number of accounts involved in the breach could number in the millions. Representatives at Visa and Mastercard International refused to comment on the issue. However, Citibank released a statement confirming the ATM network breach, but not naming the company responsible for the network.
In the most recent incident, Visa has said that payment software manufactured by Fujitsu Transaction Solutions has flaws that could put customers information at risk, according to a Friday article in the Wall Street Journal.
Despite the recent epidemic of debit and credit-card fraud and last year's titanic breach at CardSystems Solutions, Congress is considering a bill that will let more companies escape taking responsibility for fraud, consumer advocates charge.
The bill, known as H.R. 3997 or the "Financial Data Protection Act of 2005", would let companies decide when a data breach is significant enough to merit warning their customers. The House Financial Services Committee approved the legislation on Friday.
"It is ironic that after a year in which over 55 million Americans' identities were put at risk through preventable data breaches, the House Financial Services Committee would repeal state laws that have protected consumers from identity theft," Susanna Montezemolo, policy analyst with Consumers Union, the nonprofit publisher of Consumer Reports magazine, said  in a statement following the vote.
The federal legislation would supersede the laws passed by states with significantly weaker protection against identity theft. At least 11 states have stronger notification language than the H.R. 3997 and another eight have stronger rules allowing consumers to freeze their credit accounts to prevent fraudulent use, Montezemolo said.
The key flaws in the bill highlighted by consumer advocates include a requirement of a police report verifying an incident of identity fraud before the victim can place a security freeze on their account and so-called trigger language, which allows the company that suffered a breach to make the decision over whether the incident merits disclosure.
"Having trigger language is ridiculous," said the Privacy Rights Clearinghouse's Givens. "If this bill passes and the trigger language remains intact, there will be few, if any, disclosures about data breaches."
H.R. 3997 will next be considered by the full House of Representatives.
Copyright © 2006, SecurityFocus 
The article failed to mention that at least one state's notification law has protections against data thefts that lack names or that obtain the encryption key as well. The state of New York's Information Security Breach and Notification Act (S03492)  passed in August 2005 does not contain the loopholes. Thanks to the Emergent Chaos blog for pointing out this error.