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Fraud protection

Court Ruling: Authentication Is Not Effective Fraud Protection


Those who understand the nature of today’s threat landscape know that legacy authentication solutions are not effective fraud protection and are no longer effective against cyber criminals. This fact has been discussed in our articles many times, but a recent court ruling on Choice Escrow and Land Title LLC’s failed claim against BancorpSouth Bank has very clearly articulated this point.

Choice Escrow v. BancorpSouth

Here is a short summary of the case background: Choice Escrow fell victim to a $440,000 fraudulent transfer that was wired to a bank in Cyprus by BancorpSouth. Following this event, Choice Escrow sued the bank for the lost funds. In the court ruling several key facts were highlighted:

  • BancorpSouth used PassMark for device ID;
  • BancorpSouth used user IDs and passwords for user authentication;
  • BancorpSouth used daily transfer limits;
  • BancorpSouth offered dual authorization for transactions to Choice Escrow; Choice Escrow declined the offer, claiming it would be too complicated and costly to implement with their limited staff.

Sometime after Choice Escrow’s refusal to use dual authorization, one of its employees fell victim to a phishing attack. Using the stolen credentials as well as tools and techniques that defeated PassMark’s device ID solution, the cyber criminal successfully wired the money out of Choice Escrow’s account at BancorpSouth. These are the facts of the case that neither side is disputing.

In the court’s decision regarding whether BancorpSouth is liable for the lost funds, the court looked into the underlying security systems. The court references the 2005 FFIEC guidance and its multifactor authentication guidance. The court clearly states that “Of course, cyber crime evolves rapidly, and guidance issued in 2005 may become obsolete in subsequent years.” The court mentions that BancorpSouth’s security expert acknowledges that by 2009-2010, criminals could “take on the identity and Internet configuration of the victim organization’s personnel that were involved in the wire transfer, emulating the computer IP address.” It summarizes that paragraph by stating, “This testimony suggests that multifactor authentication alone may have been an inadequate safeguard against Internet fraud perpetrated in 2010.”

In fact, the FFIEC realized this as well. In its 2011 “Supplement to Authentication in an Internet Banking Environment,” there is a reference to financial malware in the “Background” paragraph that states, “Such malware can compromise some of the most robust online authentication techniques, including some forms of multifactor authentication.” The FFIEC also highlights that “MIM/MIB attacks may be used to circumvent some strong authentication methods and other controls, including one-time password (OTP) tokens” and warns companies using device ID that “institutions should no longer consider simple device identification, as a primary control, to be an effective risk mitigation technique.”

Winning the War on Cybercrime: Keys to Holistic Fraud Prevention

The Future of Fraud Protection

The court’s ruling in the Choice Escrow v. BancorpSouth case highlights that BancorpSouth offered the controls necessary to perform secure transactions in light of today’s threats. Choice Escrow’s decision not to implement a solution shifted the liability back on itself. The interesting points made by the court highlights once again — and adds a court’s seal of approval to — what industry experts have been saying for quite some time: Authentication and legacy device ID systems are no longer effective at combating advanced financial malware. To effectively counter these threats, institutions must deploy a holistic solution, one that captures and correlates events across all attack vectors, identifies new threats in real time and does not rely on customer authentication for fraud protection. It must also do this without compromising the customer experience and not placing a heavy burden on the institution’s security team.

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