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Equifax Dumpster Fire

Brian Krebs called it a dumpster fire, and I agree. I can’t add any facts to Krebs’ report on the Equifax breach. It happened, and it is bad. The current number of people said to be affected is 176 million and I doubt that number is final. Equifax’s response has not been good.

Self-dealing response

First, there was a long delay between discovery of the breach and informing the public. The delay gave several Equifax insiders an opportunity to dump shares before the inevitable fall in Equifax stock prices. More on that below.

Second, the response has been weak and possibly self-dealing. Equifax is offering a free year of credit monitoring. Many experts, including Krebs and myself, feel that an individual can do a better job of monitoring their own credit than any service if they are willing to make the effort. Credit monitoring is simply watching your accounts for unexpected activity. The services use algorithms to detect unexpected activity, but you know what is happening on your accounts better than any algorithm and you are more likely to catch something out of order than the service. But you have to review account activity frequently— daily is great, weekly is good, monthly at a bare minimum.

The nasty part of the Equifax response is that it is only for a year. The data that was stolen will be useful to crooks for years, perhaps decades. The offer, at least at this writing, is only for a year and they will start to bill you when the year is up. Yes, Equifax’s credit monitoring service may have a windfall of new paying customers a year from now.

Just a bit self-serving, wouldn’t you say?

Potential for mayhem

The credit reporting services (Equifax, TransUnion, Experian, and Innovis) collect data on credit activity and assign individuals credit ratings that your creditors use to decide risks and rates for extending credit to you. If you have a credit card, buy on credit, or have a mortgage, you have a credit rating with the reporting services and they have your data. You don’t send the information to the service, your creditors do. An individual has little control of the data collected by these services. To protect yourself, you should request a credit report at least once a year and check it for accuracy. You might find, for example, that your credit rating has been dinged because a creditor neglected to report that you paid your bill. Honest mistakes happen, and it is up to you to get them corrected.

The point here is that the data is collected without your approval. Credit ratings are not “opt in.” In fact, you can’t opt out. In my opinion, that places extra responsibility on the credit reporting services to keep the data accurate and private, although credit reporting services are largely unregulated. From the reports I have seen on the breach, Equifax was not following best security practices and I am not surprised that hackers got in. That is bad. I will not expect the picture of extent of the breach to be complete for weeks or even months to come.

This breach could force the entire credit industry to change its practices. Certainly, this is a warning shot across the bow to the other credit reporting services. The data that was stolen, names, addresses, phone numbers, credit card numbers, and driver’s license and social security numbers are everything a criminal needs to steal your identity, rack up phony credit purchases, and file a fake tax return in your name. Who knows what other damages the dark side will hatch from this treasure trove. The potential for mayhem is staggering, and the public outcry could equal that over the Enron debacle or the junk mortgage bubble, both of which inspired new regulations that changed corporate governance.

Insider trading and Sarbanes-Oxley

Now back to accusations of insider trading. I have no idea what the insiders knew or did not know, but I have some familiarity with the Sarbanes-Oxley Act which assigns criminal liability to corporate executives and officers who neglect critical security controls. The act, often called SOX, was in response to the Enron collapse of 2001. One of the security controls that SOX often demands is rapid notification of executive management of critical security lapses. If SOX applies, the corporate insiders who dumped their stock could face jail time for not knowing about the breach as soon as it was detected. If they knew about the breach, they are guilty of insider trading. If they didn’t know, they are in violation of SOX. This is something for the SEC to sort out. I find it hard to believe that they were that benighted, but the possibilities for negligence surrounding this event are goggling.

Advice

Krebs recommends that everyone should put a security freeze on their credit reports from each of the big four. I agree, but I also caution that a security freeze is a hassle; you must temporarily unfreeze and refreeze whenever you want to get a loan or open a new line of credit, but it does stop some of the most devastating attacks. Nevertheless, a freeze is not complete protection. You still must keep a hawk eye on your accounts, get your tax returns in early, and monitor your credit rating reports. That does not guarantee you won’t be hit, but it will make you safer than most.

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Tax Refund Cyber Fraud

I’ve been thinking about tax refund fraud a lot this month. I was resolved that we would get our tax return in early this year so it would be harder for a scammer to rip off our refund, but not all the required documents have wandered in yet and so I sit and fret.

The FBI and the IRS are expecting more fraud than last year, and last year set records. I thought maybe folks would be interested in how the tax refund fraud business works. It is simple: a scammer sends in a fraudulent tax return in your name that nets a big tax refund. The scammer arranges to have the refund wired to his account instead of yours. Then the money vanishes and so does the scammer. When you file your genuine return, the IRS shows its unpleasant side until you can prove that you are the real Clem Kaddidlehopper.

How can the hackers do this? Tax refund fraud is big business. Like all big business, the work is divided up among specialists. Before the tax fraud can occur, the criminals have to steal your identity and steal or manufacture the documents to substantiate a refund that is worth the scammer’s effort and risk. Gathering the documents is the most difficult because it requires the most special knowledge and skill. If scammers have a genuine W-2 form for a victim, they are set. Those W-2s have everything they need.

But how do they get a person’s W-2? The old-school method was to steal them from mail boxes. Modern crooks reject stealing paper mail as risky and inefficient. Stealing W-2s electronically requires more skills, but risk is lower and the take is higher. This year, there have been a number of exploits recorded in which an employee in the financial or human resources department gets an emergency email request from what appears to be the CEO or other higher up in the organization. The request is for the electronic copy of all the W-2s for a department or the entire company. The employee complies and sends the files. Then they discover that the CEO’s email account has been hacked, or on close examination, the email was actually sent by an outside impostor who now has hundreds of juicy W-2s. This outside impostor could be operating from anywhere— onshore, offshore, makes no difference.

What happens then? The impostor might be a tax fraudster, although chances are good that the impostor is an accomplished social engineer who does not dirty his hands with tax fraud. Instead, the impostor goes to a dark net criminal sales site and sells the W-2s for prices that vary based on the amount earned. More money can be extracted from high-earning W-2s, so they sell for more.

The tax fraudster purchases W-2s that suit his fancy on the dark net, then fabricates deductions to extract a large refund from the IRS and files the return electronically. The fraudster’s job is to put together a return that is plausible enough to trick the IRS into believing it is genuine. Although there is word that the IRS has taken steps to clamp down on refund fraud this year, the service is also under pressure to get refunds out speedily, which limits the intensity of the vetting before a check is cut. The growing fraud numbers suggest it is not too hard for a fraudster to fool the IRS.

Good luck! And get those returns in early.