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FTC reports on efforts to combat cross-border fraud and ransomware attacks
On October 20, the FTC published two reports outlining its efforts to protect consumers against cross-border fraud and ransomware attacks.
In the first report, the FTC described the US SAFE Web Act (SAFE WEB), passed in 2006, as an “indispensable” tool to combat cross-border fraud and protect consumers in an increasingly global and digital economy. For example, the report noted that since SAFE WEB was passed, the FTC has used the law in myriad ways: issuing more than 140 civil investigative demands on behalf of 21 foreign agencies from eight countries; engaging in 148 staff exchanges to build cooperation with foreign counterparts; and sharing confidential information from FTC files with 43 law enforcement agencies in twenty different countries. The report also indicated that SAFE WEB has allowed the FTC to pursue and stop harmful conduct in the US and defend against challenges to its jurisdictional authority over foreign companies targeting American consumers. Notably, SAFE WEB helped the FTC (i) shut down a real estate investment scam that took in more than $100 million (the largest such scheme the FTC has ever targeted); (ii) cooperate with privacy authorities in Canada and the United Kingdom to pursue actions against an online dating site that deceived consumers and failed to protect the account and profile information of more than 36 million individuals; (iii) and work with foreign law enforcement agencies to stop fraudulent money transfers to certain money transfer companies located in Spain in connection with a Nigerian email scam. The FTC recommends that Congress permanently reauthorize SAFE WEB to preserve the agency’s ability to fight cross-border fraud.
In the second report, the FTC discussed its work to target ransomware and other cyber-attacks. The FTC highlighted its longstanding data security enforcement program, which seeks to ensure that businesses engage in reasonable practices to protect the data of their customers. Moreover, the RANSOMWARE Act refers specifically to China, Russia, North Korea, and Iran. The report stated that although the FTC has taken data security-related enforcement actions involving connections to China and Russia, the FTC has had limited interactions with government agencies in China, Russia, North Korea, and Iran. The report included several recommendations for Congress, including making SAFE WEB permanent, amending a provision in the FTC act which would restore the FTC’s ability to provide refunds to harmed consumers, and enacting privacy and data security legislation which would be enforceable by the FTC. The FTC also urged businesses to take steps to safeguard customer data, including retaining information only so long as there is a legitimate business need, restricting access to sensitive data, and storing personal information securely and protecting it during transmission.
11th Circuit revises data breach negligence claim
The U.S. Court of Appeals for the Eleventh Circuit recently reversed the dismissal of a negligence claim brought against a Georgia-based airport retailer, determining that a company of its size and sophistication “could have foreseen being the target of a cyberattack.” Plaintiff, who used to work for the defendant, filed suit alleging the defendant failed to protect thousands of current and former employees’ sensitive personally identifiable information (PII), including Social Security numbers, from an October 2020 ransomware attack. Bringing claims for negligence and breach of implied contract on behalf of class members, plaintiff contended that not only should the defendant have protected the PII, but it also took several months for the defendant to notify affected individuals. A notice provided by the company claimed the attack only affected an internal, administrative system, but according to the plaintiff, the attacker uploaded the PII to third-party servers. Plaintiff was later informed that an unknown party used his Social Security number to file pandemic-related unemployment assistance claims under his name in Rhode Island and Kentucky. Plaintiff challenged that the defendant should have taken steps before the hack to better protect the information and that the alleged “harms he suffered were a foreseeable result of [defendant’s] inadequate security practices and its failure to comply with industry standards appropriate to the nature of the sensitive, unencrypted information it was maintaining.” The district court disagreed and granted defendant’s motion to dismiss for failure to state a claim. Plaintiff appealed, arguing that “the district court demanded too much at the pleadings stage.”
On appeal, the 11th Circuit concluded, among other things, that the plaintiff could not have been expected to plead details about the defendant’s private data security policies. “We cannot expect a plaintiff in [this] position to plead with exacting detail every aspect of [defendant’s] security history and procedures that might make a data breach foreseeable, particularly where ‘the question of reasonable foreseeability of a criminal attack is generally for a jury’s determination rather than summary adjudication by the courts,’” the appellate court wrote, noting that plaintiff had sufficiently pled the existence of a special relationship as well as a foreseeable risk of harm. However, the 11th Circuit affirmed dismissal of plaintiff’s claim for breach of implied contract, stating that he failed to allege any facts showing that the defendant agreed to be bound by a data retention or protection policy.
A few days later, the 11th Circuit issued an opinion saying class members in a different action should be allowed to amend their data breach negligence claim in light of the appellate court’s decision discussed above. The 11th Circuit wrote that the decision in the aforementioned case “undermined” the dismissal of plaintiff’s negligence claim alleging a defendant warehousing company allowed a data breach to occur because it failed to take appropriate measures to secure its network. Class members in this case also alleged their PII was improperly accessed during a ransomware attack. The appellate court agreed with class members’ contention that the defendant had failed to address a newly created legal standard for data breach negligence claims in its motion to dismiss: “Indeed, the plaintiffs would have been hard-pressed to predict that they might need to amend their complaint to add more specific foreseeability allegations in response to [defendant’s] renewed motion to dismiss,” the appellate court wrote, reversing the denial of the motion for leave to amend.
11th Circuit revises data breach negligence claim
The U.S. Court of Appeals for the Eleventh Circuit recently reversed the dismissal of a negligence claim brought against a Georgia-based airport retailer, determining that a company of its size and sophistication “could have foreseen being the target of a cyberattack.” Plaintiff, who used to work for the defendant, filed suit alleging the defendant failed to protect thousands of current and former employees’ sensitive personally identifiable information (PII), including Social Security numbers, from an October 2020 ransomware attack. Bringing claims for negligence and breach of implied contract on behalf of class members, plaintiff contended that not only should the defendant have protected the PII, but it also took several months for the defendant to notify affected individuals. A notice provided by the company claimed the attack only affected an internal, administrative system, but according to the plaintiff, the attacker uploaded the PII to third-party servers. Plaintiff was later informed that an unknown party used his Social Security number to file pandemic-related unemployment assistance claims under his name in Rhode Island and Kentucky. Plaintiff challenged that the defendant should have taken steps before the hack to better protect the information and that the alleged “harms he suffered were a foreseeable result of [defendant’s] inadequate security practices and its failure to comply with industry standards appropriate to the nature of the sensitive, unencrypted information it was maintaining.” The district court disagreed and granted defendant’s motion to dismiss for failure to state a claim. Plaintiff appealed, arguing that “the district court demanded too much at the pleadings stage.”
On appeal, the 11th Circuit concluded, among other things, that the plaintiff could not have been expected to plead details about the defendant’s private data security policies. “We cannot expect a plaintiff in [this] position to plead with exacting detail every aspect of [defendant’s] security history and procedures that might make a data breach foreseeable, particularly where ‘the question of reasonable foreseeability of a criminal attack is generally for a jury’s determination rather than summary adjudication by the courts,’” the appellate court wrote, noting that plaintiff had sufficiently pled the existence of a special relationship as well as a foreseeable risk of harm. However, the 11th Circuit affirmed dismissal of plaintiff’s claim for breach of implied contract, stating that he failed to allege any facts showing that the defendant agreed to be bound by a data retention or protection policy.
A few days later, the 11th Circuit issued an opinion saying class members in a different action should be allowed to amend their data breach negligence claim in light of the appellate court’s decision discussed above. The 11th Circuit wrote that the decision in the aforementioned case “undermined” the dismissal of plaintiff’s negligence claim alleging a defendant warehousing company allowed a data breach to occur because it failed to take appropriate measures to secure its network. Class members in this case also alleged their PII was improperly accessed during a ransomware attack. The appellate court agreed with class members’ contention that the defendant had failed to address a newly created legal standard for data breach negligence claims in its motion to dismiss: “Indeed, the plaintiffs would have been hard-pressed to predict that they might need to amend their complaint to add more specific foreseeability allegations in response to [defendant’s] renewed motion to dismiss,” the appellate court wrote, reversing the denial of the motion for leave to amend.
Software company to pay $3 million to SEC for misleading disclosures about ransomware attack
On March 9, the SEC charged a South Carolina-based donor data management software company with allegedly making materially misleading disclosures about a 2020 ransomware attack. According to the SEC’s cease-and-desist order, the company issued statements that the ransomware attack did not affect donor bank account information or social security numbers. It was later revealed that the attacker had accessed and exfiltrated the unencrypted sensitive information. However, the SEC maintained that due to the company’s alleged failure to maintain disclosure controls and procedures, employees did not inform senior management responsible for public disclosures. As a result, the company’s quarterly report filed with the SEC allegedly omitted material information about the scope of the attack and “misleadingly characterized the risk of exfiltration of such sensitive donor information as hypothetical,” the SEC said. The company did not admit or deny the SEC’s findings, but agreed to pay a $3 million civil penalty and said it would cease and desist from committing violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.
FINRA alerts firms about rising ransomware risks
On December 14, FINRA issued Regulatory Notice 22-29, alerting member firms about the increasing number and sophistication of ransomware incidents. FINRA explained that the proliferation in ransomware attacks can be attributed in part to the increased use of technology and continued adoption of cryptocurrencies that bad actors use to conceal their identities when collecting ransom payments. Moreover, bad actors who purchase attack services on the dark web “have helped execute attacks on a much larger scale and make attacks available to less technologically savvy bad actors,” FINRA said. Under Rule 30 of the SEC’s Regulation S-P, firms are required to maintain written policies and procedures designed to reasonably safeguard customer records and information, FINRA stated, adding that FINRA Rule 4370 (related to business continuity plans and emergency contact information) also applies to ransomware attacks that include service denials and other interruptions to firms’ operations. The notice provides questions for firms to consider when evaluating their cybersecurity programs and outlines common attack types and considerations for firms’ ransomware threat defenses, as well as additional ransomware controls and relevant resources.
G7 Cyber Expert Group releases reports on ransomware and third-party risk
On December 8, the G7 Cyber Expert Group (CEG) – co-chaired by the Bank of England and the U.S. Treasury Department’s Office of Cybersecurity and Critical Infrastructure – released two reports addressing ransomware and third-party risk in the financial sector. According to the announcement, the reports “are intended to help financial sector entities better understand cybersecurity topics as agreed upon by a multilateral consensus.”
The Fundamental Elements of Ransomware Resilience for the Financial Sector provides financial entities with high-level building blocks for addressing ransomware threats. The “non-prescriptive and non-binding” report is meant to guide public and private financial institutions for their own internal ransomware mitigation activities and “provide[s] an overview of the current policy approaches, industry guidance, and best practices in place throughout the G7.”
The Fundamental Elements of Third-Party Risk Management for the Financial Sector updates a previous version published in 2018. According to the announcement, the updated report was necessary due to the increase in use of service providers by financial institutions in their central operational functions and subsequent vulnerabilities as a result of such reliance. The update includes explicit recommendations for monitoring risks along the supply chain and identifying systemically important third-party providers and concentration risks.
FinCEN reports significant increase in ransomware-related BSA filings in 2021
On November 1, FinCEN reported that ransomware continues to pose a significant threat to U.S. infrastructure, businesses, and the public, with ransomware-related Bank Secrecy Act (BSA) filings in 2021 accounting for nearly $1.2 billion. Issued pursuant to the Anti-Money Laundering Act of 2020, FinCEN’s Financial Trend Analysis examines ransomware activities for calendar year 2021, with a particular focus on ransomware trends in BSA data from July-December 2021. According to FinCEN, reported ransomware-related incidents have substantially increased from 2020, with roughly 75 percent of these incidents reported during the second half of 2021 emanating from or connected to actors in Russia. Highlights from the report include: (i) the number and total U.S. dollar value for ransomware-related incidents during 2021 far exceeds data for any previous year, with FinCEN reporting a 188 percent increase from 2020 to 2021 (possibly reflecting either an increase of ransomware-related incidents or improved reporting and detection); (ii) an average of 132 and a median of 136 ransomware-related incidents per month were reported during the review period (Treasury’s October 2021 measures to combat ransomware — covered by InfoBytes here — and potentially associated reporting obligations may have contributed to the overall rise in 2021 filings, FinCEN noted); and (iii) of the 793 ransomware-related incidents reported during the second half of 2021, 594 (roughly 75 percent) pertained to Russia-related variants.
The same day, Deputy Secretary of the Treasury Wally Adeyemo hosted participants from 36 countries during the second International Counter Ransomware Initiative Summit where attendees examined the challenges presented by ransomware and discussed the U.S.’s whole-of-government approach for responding to serious threats posed by bad actors.
Biden outlines aggressive approach for strengthening U.S. cybersecurity
On October 11, President Biden outlined actions for strengthening and safeguarding the nation’s cybersecurity. In addition to stressing the importance of improving cybersecurity and resilience measures for critical infrastructure owners and operators, the Biden administration outlined additional priorities that focus on (i) strengthening the federal government’s cybersecurity requirements; (ii) countering ransomware attacks, including by making it more difficult for criminals to move illicit money; (iii) collaborating with allies and partners to build collective cybersecurity, develop coordinated responses, and develop cyber deterrence; (iv) imposing costs on and sanctioning malicious cyber actors; (v) implementing internationally-accepted cyber “rules of the road”; (vi) strengthening cyber-education efforts; (vii) developing quantum-resistant encryption algorithms to protect privacy in digital systems such as online banking; and (viii) establishing research centers and workforce development programs under the National Quantum Initiative to protect investments, companies, and intellectual property and prevent harm as technology in this space continues to develop.
CISA urges companies to take action to combat malicious cyber activity
On September 14, the Cybersecurity and Infrastructure Security Agency, along with several other federal agencies and international partners, released a joint cybersecurity advisory (CSA) highlighting continued malicious cyber activity taken by advanced persistent threat actors affiliated with the Iranian Government’s Islamic Revolutionary Guard Corps (IRGC). The CSA recommended that companies continually test their security programs to protect against longstanding online threats that may arise from IRGC-affiliated actors known for exploiting vulnerabilities for ransom operations. “Our unified purpose is to drive timely and prioritized adoption of mitigations and controls that are most effective to reducing risk to all cyber threats,” CISA said in its announcement. Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson added that the U.S. Treasury Department “is dedicated to collaborating with other U.S. government agencies, allies, and partners to combat and deter malicious cyber-enabled actors and their activities, especially ransomware and cybercrime that targets economic infrastructure.” He noted that the CSA provides information on specific tactics, techniques, and procedures used by IRGC-affiliated actors, and advised both the public and private sector to use the information to strengthen cybersecurity resilience and reduce the risk of ransomware incidents. Organizations are encouraged to review a 2021 Treasury advisory, which highlights the sanctions risks associated with ransomware payments and provides steps for companies to take to mitigate the risk of being a victim of ransomware (covered by InfoBytes here).
CISA issues RFI on new cyber incident reporting requirements
On September 9, the Cybersecurity and Infrastructure Security Agency (CISA) issued a request for information (RFI) from critical infrastructure owners and operators on how to develop new data breach reporting regulations related to ransomware and other malicious attacks. The RFI will inform CISA’s promulgation of proposed regulations as required by the Cyber Incident Reporting for Critical Infrastructure Act of 2022. Specifically, the agency is requesting feedback on definitions and terminology for the proposed rules, the form and content of reports, incident reporting requirements, enforcement procedures, and information protection policies. Once the final regulation is published, CISA will use information obtained from cyber-incident reports submitted by covered entities to “deploy resources and render assistance to victims suffering attacks, analyze incoming reporting across sectors to spot trends and understand how malicious cyber actors are perpetrating their attacks, and quickly share that information with network defenders to warn other potential victims,” the RFI explained. CISA will also host a series of public listening sessions across the country to receive additional input as it develops the proposed regulations. Comments on the RFI are due November 14.