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Crime Security The Almighty Buck The Courts IT Your Rights Online

US Appeals Court Says Bank Liable For Losses From Poor Online Security 94

An anonymous reader writes with this extract: "Threatpost reports that a judge on the United States Court of Appeals this week ruled that People's United Bank's processes and systems for protecting customer accounts from fraud were not "commercially reasonable." The ruling in People's United Bank (formerly Ocean Bank of Maine) versus Patco Construction Company reverses a lower court's ruling in a case that stems from six allegedly fraudulent transactions that occurred over the period of a week in May, 2009 and drained close to $589,000 dollars from Patco's accounts. Patco alleged that People's United Bank did an inadequate job of protecting them against fraud, ignoring repeated 'high risk' warnings from the bank's fraud detection system. Now the Appeals Court appears to agree. The ruling could have broad implications in the U.S., where businesses that are the victim of account takeovers and fraudulent transactions are suing banks to recover lost funds."
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US Appeals Court Says Bank Liable For Losses From Poor Online Security

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  • by DogDude ( 805747 ) on Saturday July 07, 2012 @09:29AM (#40575125)
    It's about fucking time. Banks (and yes, even credit unions) have been warning its customers that whatever happens through their online interfaces isn't their fault. That's really just absurd, when a person or company's entire financial life is available via a single password on the Net. Security, of course, isn't the sole responsibility of the banks, but it is their responsibility. Banks provide giant safes for our physical valuables, they provide insurance for theft or collapse, but online, it's "good luck, customers!"? Bullshit. It's time to hold them at least somewhat responsible for their online interfaces, as well.
    • by drinkypoo ( 153816 ) <drink@hyperlogos.org> on Saturday July 07, 2012 @09:41AM (#40575169) Homepage Journal

      It's well past time. My bank is retarded. Mandatory security questions that people can find out answers to by research, you can lie to them but then you have to remember your lies. Also, your initial online access PIN is the last four of your SSN, and it persists from the time you go to the bank to get it activated to the first login, which could be a very short time (it was for me) or a very long time but either way is terrible.

      • by way2trivial ( 601132 ) on Saturday July 07, 2012 @12:05PM (#40575895) Homepage Journal

        back in the 80's I was asked for my mothers maiden name-

        I asked why they needed it- and they said for a password in case I ever called
        - i immediately thought -- my brother knows the answer to that- and he's the only person I can see attempting it

        My mothers maiden name has been snotrag ever since (not snotrag, but something equally offcolor) and it's always been the same answer

        the one my brother does not know.

      • by Mashiki ( 184564 )

        Considering most banks don't even have FOB service, I find this not surprising. Heck, look at Blizzard, EA, Sony, *insert MMO*, even Google. They all provide two factor authentication for their services. Banks? Ahahaha...yeah good luck.

        • by Ocker3 ( 1232550 )
          My (Australian) bank offers an RSA key, making their online access three-factor if you get one. Their security still sucks (imo), doesn't allow the complexity of passwords that I like.
      • Unless it's a human taking the answer you can always md5sum($maidenname) or sha1($city_of_birth).

    • by Anonymous Coward on Saturday July 07, 2012 @09:56AM (#40575239)

      Basic tort theory states that responsibility for a loss should be placed on the individuals or entities that are most capable of preventing the loss. In this case, banks are responsible for security controls on their own accounts. Banks are most capable of preventing most losses due to fraudulent transactions. It's absurd that they have not already been held responsible for all the fraud out there.

      • I am waiting for banks to go the route blizzard has requiring a third party component with an additional access code. find it funny game companies are pushing some sort of third point authentication systems yet banks use passwords and pins.

        Banks should be doing this. Okay here is your new account and be sure to get your new security dongle.

        • by rtb61 ( 674572 )

          Banks have lots of brick and mortar outlets. Three strikes and online access is dead until you visit a brick and mortar outlet, who can verify anything the bank wants too to secure itself from the losses of having to replace the money it has stolen, it just claims to have given to a fraudulent claimant. Banks can track your image, fingerprints, password and signature. In reality unless the fraudulent claimant who took the money from your account can be found, the bank should be charged with stealing your p

      • by Anonymous Coward on Saturday July 07, 2012 @01:09PM (#40576363)

        Yep. Though actually this isn't governed by tort law, it's governed by Art. 4A Sec. 202 of the Uniform Commercial Code. (http://www.law.cornell.edu/ucc/4A/4A-202.html) (But you're right; the UCC seems just to be codifying the principle you identified.) So, the good news may be that the law has always been pretty sensible about this sort of issue (at least in theory). Though perhaps individual judges and juries have lagged in their understandings of "commercially reasonable."

      • by xelah ( 176252 )

        Logic also suggests that if someone, whether a man in the street or your bank, owes you money and, through some trickery, a third party tricks him in to giving a repayment to that third party, that he still owes you the money. He hasn't repaid you, so he still owes you. This is perhaps not the case if you're careless...if through your recklessness with your password you impose that loss on your borrower then you maybe should have to compensate him by that amount.....but it should always be the starting poin

  • Right ruling (Score:5, Interesting)

    by DoofusOfDeath ( 636671 ) on Saturday July 07, 2012 @09:42AM (#40575175)

    I don't see why it's any more complicated than, "I gave the bank X dollars. I have not withdrawn any money. They owe me X dollars."

    The fact that this hasn't been the case so far strikes me as a case of the banks owning their regulators and the legislature. But I don't want to make too hasty of an assumption. Does anyone know the history of this issue?

    • Re:Right ruling (Score:5, Informative)

      by slew ( 2918 ) on Saturday July 07, 2012 @10:10AM (#40575297)

      RTFA.

      Apparently the issue is that although individuals are protected against fraud by legal statutes, businesses are not. Specifically at issue is the authorization of commerical ACH (automated clearing house) transactions to the account (when you use your debit card it's authorized under the EFTA or electronic funds transfers act).

      In this case the bank so egregiously ignored it's own security measures (authorized transactions even though it's internal fraud alert systems was warning against the transaction) that it was clear the bank was in the wrong...

      • I don't see why it's any more complicated than:

        I gave the bank X dollars. I have not withdrawn any money. They owe me X dollars.

        My business gave the bank X dollars. My business has not withdrawn any money. They owe my business X dollars.

        Fixed.

        • Re:Right ruling (Score:4, Informative)

          by slew ( 2918 ) on Saturday July 07, 2012 @11:12AM (#40575619)

          I don't see why it's any more complicated than:

          I gave the bank X dollars. I have not withdrawn any money. They owe me X dollars.

          My business gave the bank X dollars. My business has not withdrawn any money. They owe my business X dollars.

          Fixed.

          IANAL, but as I understand it the question is the definition of "my business" in the withdrawn case. When it is a person, it is much clearer if you have authorized the money to be withdrawn because of the way the law is written. If it is a business, it isn't a statute thing, it is often a matter of the uniform commercial code or a business to business contract or the charter to your business (e.g., is the "treasurer" allowed, is a "sales-person" allowed, or third party "accountant" is allowed, or my "niece" is allowed to use a checking account), thus these facts sometimes need to be discovered in a court to determine if there is actual fraud, or if the company is instead required to sue the person who took the money (instead of the bank that authorized the transaction).

          For example, if a bookkeeper employeed by a company wanted to embezzle money from the company and gave his password to his aunt in russia to do the deed, the company would probably have to sue the ex-employee and the uncle and the bank would be off the hook since to the bank, the bookeeper was authorized to take the money.

          In this case, it was clearly the bank's fault, but that's not always the case in business (which is one of the reason business accounts are different than individual accounts).

    • Well, it's clear that someone owes them X dollars, the question is whom. In cases where the bank's security measures aren't to blame (the typical case will be when the user picked a weak password, or allowed his password to be stolen somehow, or lost it to keylogging software they installed along with a desktop weather widget) why place the loss on the bank? All they did was implement the security measures that they and their customer agreed upon. It was the customer's fault (by hypothesis) that their accou

      • Re:Right ruling (Score:4, Interesting)

        by evilviper ( 135110 ) on Saturday July 07, 2012 @06:39PM (#40578537) Journal

        In cases where the bank's security measures aren't to blame (the typical case will be when the user picked a weak password, or allowed his password to be stolen somehow, or lost it to keylogging software they installed along with a desktop weather widget) why place the loss on the bank? All they did was implement the security measures that they and their customer agreed upon.

        The reason the bank should ALWAYS be liable is because "the customer" never gets a chance to "agree upon" the bank's security measures. I want two-factor authentication, I want one-time-use credit card numbers, I want cryptographically secure transactions... My bank doesn't care what I want.

        Oh, and an important aside... Banks are REQUIRED BY LAW to provide two-factor authentication for their online banking services. Has your bank ever sent you an RSA key? No? That's because they got their lawyers to work out a loophole where those 'forgotten passwork"-type questions count as one factor, and your password the second. So EVERY BANK OUT THERE is actively circumventing the law, to provide insecure access to your account. Did they ever ask you? They sure didn't ask me.

        • Interesting, but I can't quite tell what you're proposing. I agree with you in wanting banks to use better security measures. This seems to go to the definition of "commercially reasonable." And, as I said, there may be a problem with judges' understanding of the costs and benefits of the technologies involved that could work to ensure that this definition lags.

          But this seems like a different question from the one I was primarily answering: who is liable for a breached account if the banks DID employ commer

          • You can find information about the requirement on the FFIEC site at http://www.ffiec.gov/pdf/authentication_guidance.pdf [ffiec.gov].

            I don't think it explicitly requires RSA keys, but it does speak of multi-factor authentictation. RSA is often a reference to a specific company [emc.com]. The government guidelines would be rightly questionable if they endorsed a specific company as the potential solution. However, RSA the company does do a job of (possibly) providing multi-factor authentication.

            Generally it works like this: The

            • This is interesting, and thanks for the information. Though having read it, it seems pretty clear that this guidance document doesn't set out legal requirements -- it's only informational. (Some guidance docs can indeed be legally binding, but I don't think this one is.) [IAAL -- but, of course, I'm not YOUR lawyer so don't treat this as legal advice. I am also not admitted to the bar in your state. Etc.]

        • I missed the obvious: are you sure there is no bank that provides these things? Most of them? Have you Googled it? I just did, and I found quite a few options. But I take it that, for some reason, you have chosen not to use one of those banks or services. That's the sense in which you are using your bank's security regime voluntarily. You never had to do business on those terms in the first place if you didn't like them. In fact, the law is designed to help you in just the way you have in mind: it provides

          • http://www.prweb.com/releases/2007/07/prweb537332.htm [prweb.com]

            The numbers say that 96% of banks are out of compliance. Giving me the option of using just 4% of all banks is no choice at all.

            • Interesting. But it matters which banks comprise that 4%. (Though the most relevant number for us is 6%, I would thin, since that is the percentage that allows you to opt in to a two-factor system.) Bank of America is one of them -- they offer an optional second factor in the form of an RSA SiteKey fob. Other major banks do the same. Remember that you also have the choice to not use online banking. So, yes, given that backdrop, I;d say it is definitely fair to say that you "chose" to use whatever system it

        • by tlhIngan ( 30335 )

          Most North American banks implement what is known as "Wish-it-Was Two Factor" authentication. [thedailywtf.com].

          Which is nothing more than another password.

  • People's (Score:5, Funny)

    by Anonymous Coward on Saturday July 07, 2012 @09:46AM (#40575195)

    I still get that cuddly, fuzzy Russian Soviet communist feeling every time I see or hear the word People's.

    • by bky1701 ( 979071 )
      I always thought The People's Court sounded a little socialist. Then Sliders proved me right!
  • by Paradise Pete ( 33184 ) on Saturday July 07, 2012 @09:51AM (#40575211) Journal
    This video [youtube.com] properly explains it.
  • by 140Mandak262Jamuna ( 970587 ) on Saturday July 07, 2012 @10:23AM (#40575341) Journal
    This decision is going to create a new problem. Bank lawyers are going to design and approve the security measures of the bank. They do it purely from a lawyer view point. "Will this procedure allow the bank to argue in a court, we have done all we could your honor, to protect the customer.". They would not worry about whether are not the security has been actually enhanced, or whether the procedures would be convenient enough for the customers to adopt.

    Each bank and brokerage account I have wants to send me an RSA dongle. "It is free! It is convenient! Add it to your key bunch! And lug it every where!". If I follow their advice my key fob will have more RSA dongles than actual keys. Then once you accept an RSA dongle, Quicken is not able to download transactions. "You want both security and also download transactions to Quicken? Choose either this or that buddy. I will tell the court we offered RSA dongle and he refused. He is totally at fault.".

    • by mjr167 ( 2477430 )
      And this is different from now how?
    • Re: (Score:3, Informative)

      So you want security, indemnity and you do not want to do anything for it, yes?
    • by The Mighty Buzzard ( 878441 ) on Saturday July 07, 2012 @11:02AM (#40575573)
      I honestly don't see how this is a problem. A bank's fundamental commitment is to be a safe place to stuff your money. They pay a pretty fair chunk of money to physical security experts to make sure nobody can walk in and take the money in their charge. They should take their online security just as seriously and if they don't they should be held liable.
      • by jonwil ( 467024 )

        The problem (like other things in the computer security world such as HIPAA, PCI etc) is that the banks will do the things that will make the lawyers happy and/or reduce the banks risk and not the things that will actually improve security.

        • Re: (Score:2, Insightful)

          by Anonymous Coward
          False dichotomy - the choice isn't usually between 'lawyer security' and 'real security'. The bank is often choosing between 'lawyer security' and 'no security'.
        • The problem (like other things in the computer security world such as HIPAA, PCI etc) is that the banks will do the things that will make the lawyers happy and/or reduce the banks risk and not the things that will actually improve security.

          You mean they'd put the same effort into covering their asses rather than securing the site, which would also cover their asses? I'll grant you there will probably be some portion of the budget devoted to largely useless but legally expedient pursuits but a good portion of it will also have to be actual better security. They may not particularly care about security but their lawyer is going to ask them "will it stand up to security experts scrutinizing the hell out of it?".

        • by Anonymous Coward

          As some comedian put it, "identity theft" is really an euphemism for bank robbery, nothing more. Someone stole money from a bank, but my identity is still here.

          There's really only one way to fix this: make the banks responsible for any transactions with your money that you have not authorized them to do. If they give money to someone pretending to be you, and you can show it was not really you, then it's them who got defrauded, and not you. It becomes an issue of economics, not law: perhaps the banks will i

    • You want security, or you want convenience? You cannot have both.

      I have a dongle for my business account and I sleep well at night. I even have a soft token on my phone for by Blizzard account. It's not so complicated, and I really don't mind.

    • "You want both security and also download transactions to Quicken?"

      If only technology existed where you could digitally sign a chain of trust between multiple business partners.

      Oh, wait, this isn't 1977 - my bad.

      • by jd ( 1658 )

        Oh, wait, this isn't 1975 - my bad.

        FIFY. Even if GCHQ never did anything with the technology, you only stipulated it had to exist. :)

        • GCHQ

          Fair enough. If only the beancounters at the banks knew it existed. OK, seriously, though, maybe the banks will let their security people do their jobs now.

    • by Teun ( 17872 )
      Surely the US court system knows the option to invite an outside expert to make one's point.
      • by kqs ( 1038910 )

        Absolutely. As always, the Free Market provides. There are people who make a very good living being expert witnesses in US court, testifying to prove whatever their client's point is.

  • responsible. If they put up garbage servers, and they allow their employees on garbage OS, then it is an invite to be cracked sooner, rather than later. Similarly, BOA was cracked in the same way several years ago. They are another one that will be cracked again and this time, I hope that large lawsuits follow.
  • by Anonymous Coward

    Now let's move on to make "Identity Theft" become what it really is in every other country on the planet: a bank lending money to a third party that in no way makes YOU liable. Whether that third party convinced the bank they are you by knowing "secrets" such as ten-digit numbers one is required to put on every piece of paper, a date of birth that Facebook considers public information, etc, should not be your problem AT ALL. It is not your identity that is being stolen. It is they who are falling for a frau

  • Where I live this has been the de-facto position since forever. How could it possibly be anyone else's responsibility, or fault?
  • Seems to me that if you modify the law to split the loss by default, both parties will be very well motivated to ensure that security procedures are properly followed. Follow-on litigation can take care of additional liability on either side for unreasonable conduct or procedures.

    Allowing banks to write a contract that says they aren't liable doesn't make sense, but neither does providing blanket protection for business.

    • by lpq ( 583377 )

      Excuse me, but a large company like TJMAX loses a million credit card numbers, why should a million customers be forced to split losses with TJMAX?

  • This should be required by any business to use up to date security methods to protect their customers financial data. I'm pretty sure there was a case against Walfarts or some-other major chain store for knowingly using out dated security measures for wireless internet. And they shouldn't allow customer to use dumb passwords force them to be at least 15 letter number symbol combo. Don't like it don't use the internet to buy stuff or run a business.
  • Historically, banks sold three things:

    • -- Secure storage - a fortress for gold
    • -- Record keeping
    • -- Authentication
    • -- Authorisation

    We don't use gold anymore. As for the other three services, I can get a machine to do that. Very cheaply. So, they don't actually provide secure storage (see TFA) and the other things can be done more reliably without them.

  • I find it amazing that every email, tweet, and Facebook post is saved and retrievable forever but a million dollar bank transaction disappears in milliseconds
  • I worked for major brokerage firms and banks and was shocked and appalled by the cavalier attitude of some security people and programmers who are too lazy to change the default login & passwords in software supplied by some vendors,. Talk about liability, the Court has finally seen the light and sided with the victim of the bank fraud crime. The implementers of info systems are responsible not only for our money but our sensitive tax, family, medical info & Veteran records etc. The lawyers will for

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