Identity theft is the new crime of the information age. A criminal collects enough personal data on someone to impersonate a victim to banks, credit card companies, and other financial institutions. Then he racks up debt in the person's name, collects the cash, and disappears. The victim is left holding the bag. While some of the losses are absorbed by financial institutions - credit card companies in particular - the credit-rating damage is borne by the victim. It can take years for the victim to clear his name.
Unfortunately, the solutions being proposed in Congress will not help. To see why, we need to start with the basics. The very term `identity theft' is an oxymoron. Identity is not a possession that can be acquired or lost; it is not a thing at all. Someone's identity is the one thing about a person that cannot be stolen.
The real crime here is fraud; more specifically, impersonation leading to fraud. Impersonation is an ancient crime, but the rise of information-based credentials gives it a modern spin. A criminal impersonates a victim online and steals money from his account. He impersonates a victim in order to deceive financial institutions into granting credit to the criminal in the victim's name. He impersonates a victim to the Post Office and gets the victim's address changed. He impersonates a victim in order to fool the police into arresting the wrong man. No-one's identity is stolen; identity information is being misused to commit fraud.
The crime involves two very separate issues. The first is the privacy of personal data. Personal privacy is important for many reasons, one of which is impersonation and fraud. As more information about us is collected, correlated, and sold, it becomes easier for criminals to get their hands on the data they need to commit fraud. But data privacy is more than just fraud. Whether it is the books we take out of the library, the websites we visit, or the contents of our text messages, most of us have personal data on third-party computers that we do not want made public. The posting of Paris Hilton's phone book on the Internet is a celebrity example of this.
The second issue is the ease with which a criminal can use personal data to commit fraud. It does not take much personal information to apply for a credit card in someone else's name. It does not take much to submit fraudulent bank transactions in someone else's name. It is surprisingly easy to get an identification card in someone else's name. Our current culture, where identity is verified simply and sloppily, makes it easier for a criminal to impersonate his victim.
Proposed fixes tend to concentrate on the first issue - making personal data harder to steal - whereas the real problem is the second. If we are ever going to manage the risks and effects of electronic impersonation, we must concentrate on preventing and detecting fraudulent transactions.
Fraudulent transactions have nothing to do with the legitimate account holders. Criminals impersonate legitimate users to financial institutions. That means that any solution cannot involve the account holders. That leaves only one reasonable answer: financial institutions need to be liable for fraudulent transactions. They need to be liable for sending erroneous information to credit bureaux based on fraudulent transactions.
They cannot claim that the user must keep his password secure or his machine virus free. They cannot require the user to monitor his accounts for fraudulent activity, or his credit reports for fraudulently obtained credit cards. Those are not reasonable requirements for most users. The bank must be made responsible, regardless of what the user does.
If you think this will not work, look at credit cards. In the US, credit card companies are liable for all but the first $50 of fraudulent transactions. They are not hurting for business; and they are not drowning in fraud, either. They have developed and fielded an array of security technologies designed to detect and prevent fraudulent transactions. They have pushed most of the actual costs onto the merchants. And almost no security focuses on trying to authenticate the cardholder.
That is an important lesson. Identity theft solutions focus much too much on authenticating the person. Whether it is two-factor authentication, ID cards, biometrics, or whatever, there is a widespread myth that authenticating the person is the way to prevent these crimes. But once you understand that the problem is fraudulent transactions, you quickly realise that authenticating the person is not the way to proceed.
Again, think about credit cards. Store clerks barely verify signatures when people use cards. People can use credit cards to buy things by mail, phone, or Internet, where no one verifies the signature or even that you have possession of the card. Even worse, no credit card company mandates secure storage requirements for credit cards. They do not demand that cardholders secure their wallets in any particular way. Credit card companies simply do not worry about verifying the cardholder or putting requirements on what he does. They concentrate on verifying the transaction.
This same sort of thinking needs to be applied to other areas where criminals use impersonation to commit fraud. I do not know what the final solutions will look like, but I do know that once financial institutions are liable for losses due to these types of fraud, they will find solutions. Maybe there will be a daily withdrawal limit, like there is on ATMs. Maybe large transactions will be delayed for a period of time, or will require a call-back from the bank or brokerage company. Maybe people will no longer be able to open a credit card account by simply filling out a bunch of information on a form. Likely the solution will be a combination of solutions that reduces fraudulent transactions to a manageable level, but we will never know until the financial institutions have the financial incentive to put them in place.
Right now, the economic incentives result in financial institutions that are so eager to allow transactions - new credit cards, cash transfers, whatever - that they are not paying enough attention to fraudulent transactions. They have pushed the costs for fraud onto the merchants. But if they are liable for losses and damages to legitimate users, they will pay more attention. And they will mitigate the risks. Security can do all sorts of things, once the economic incentives to apply them are there.
By focusing on the fraudulent use of personal data, I do not mean to minimise the harm caused by third-party data and violations of privacy. I believe that the US would be well-served by a comprehensive Data Protection Act like the European Union. However, I do not believe that a law of this type would significantly reduce the risk of fraudulent impersonation. To mitigate that risk, we need to concentrate on detecting and preventing fraudulent transactions. We need to make the entity that is in the best position to mitigate the risk to be responsible for that risk. And that means making the financial institutions liable for fraudulent transactions.
Doing anything less simply will not work.
Bruce Schneier is the founder and CTO of Counterpane Internet Security. He can be contacted at firstname.lastname@example.org. To subscribe to a free monthly newsletter providing summaries, analyses, insights and commentaries on security: computer and otherwise, visit http://www.schneier.com/crypto-gram.html
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