Hearing: The Growing Problem of Identity Theft and Its Relationship to the Fair Credit Reporting Act
Thursday, June 19, 2003
[view file]I. INTRODUCTION
Mr. Chairman, and members of the Committee, I am Howard Beales, Director of the Bureau of Consumer Protection, Federal Trade Commission ("FTC" or "Commission").1 I appreciate the opportunity to present the Commission?s views on the impact of identity theft on consumers and the importance of information security in preventing identity theft.
The Federal Trade Commission has a broad mandate to protect consumers, and controlling identity theft is an important issue of concern to all consumers. The FTC?s primary role in combating identity theft derives from the 1998 Identity Theft Assumption and Deterrence Act (?the Identity Theft Act? or ?the Act?).2 The Act directed the Federal Trade Commission to establish the federal government?s central repository for identity theft complaints and to provide victim assistance and consumer education. The Commission also works extensively with industry on ways to improve victim assistance, including providing direct advice and assistance in cases when information has been compromised. The Commission can take enforcement action when companies fail to take adequate security precautions to protect consumers? personal information.
II. THE FEDERAL TRADE COMMISSION?S ROLE IN COMBATING IDENTITY THEFT
The Identity Theft Act strengthened the criminal laws governing identity theft3 and focused on consumers as victims.4 Congress also recognized that coordinated efforts are essential to best serve the needs of identity theft victims because these fraud victims often need assistance both from government agencies at the national and state or local level and from businesses. As a result, the FTC?s role under the Act is primarily one of facilitating information sharing among public and private entities.5 Specifically, Congress directed the Commission to establish procedures to: (1) log the receipt of complaints by victims of identity theft; (2) provide identity theft victims with informational materials; and (3) refer complaints to appropriate entities, including the major national consumer reporting agencies and law enforcement agencies.6 To fulfill the Act?s mandate, the Commission has implemented a plan that focuses on three principal components: (1) A toll-free telephone hotline, (2) the Identity Theft Data Clearinghouse (the ?Clearinghouse?), a centralized database used to aid law enforcement, and (3) outreach and education to consumers, law enforcement, and private industry.
A. Assisting Identity Theft Victims
The most immediate way in which the FTC assists victims is by collecting complaints and providing advice on recovery through a telephone hotline and a dedicated website. On November 1, 1999, the Commission began collecting complaints from consumers via a toll-free telephone number, 1-877-ID THEFT (438-4338). Every year since has seen an increase in complaints. In 2002, hotline counselors added almost 219,000 consumer complaints to the Clearinghouse, up from more than 117,000 in 2001. Of the 219,000 reports, almost 162,000 (74%) were complaints from identity theft victims, and almost 57,000 (26%) were general inquiries about identity theft. Despite this dramatic growth in reports of identity theft, the FTC is cautious in attributing it entirely to a commensurate growth in the prevalence of identity theft. The FTC believes that the increase is, at least in part, an indication of successful outreach in informing the public of its program and the availability of assistance.
Callers to the hotline receive telephone counseling from specially trained personnel who provide general information about identity theft and help guide victims through the steps needed to resolve the problems resulting from the misuse of their identities. Victims are advised to: (1) contact each of the three national consumer reporting agencies to obtain copies of their credit reports and request that a fraud alert be placed on their credit reports;7 (2) contact each of the creditors or service providers where the identity thief has established or accessed an account, to request that the account be closed and to dispute any associated charges; and (3) report the identity theft to the police and get a police report, which is very helpful in demonstrating to would-be creditors and debt collectors that the consumers are genuine victims of identity theft.
Counselors also advise victims having particular problems about their rights under relevant consumer credit laws including the Fair Credit Reporting Act,8 the Fair Credit Billing Act,9 the Truth in Lending Act,10 and the Fair Debt Collection Practices Act.11 If the investigation and resolution of the identity theft falls under the jurisdiction of another regulatory agency that has a program in place to assist consumers, callers also are referred to those agencies.
The FTC?s identity theft website, located at www.consumer.gov/idtheft, provides equivalent service for those who prefer the immediacy of an online interaction. The site contains a secure complaint form, which allows victims to enter their identity theft information for input into the Clearinghouse. Victims also can read and download all of the resources necessary for reclaiming their credit record and good name. One resource in particular is the FTC?s tremendously successful consumer education booklet, Identity Theft: When Bad Things Happen to Your Good Name. The 26-page booklet, now in its fourth edition, comprehensively covers a range of topics, including the first steps to take for victims, how to correct credit-related and other problems that may result from identity theft, tips for those having trouble getting a police report taken, and advice on ways to protect personal information. It also describes federal and state resources that are available to victims who may be having particular problems as a result of the identity theft. The FTC alone has distributed more than 1.2 million copies of the booklet since its release in February 2000.12 Last year, the FTC released a Spanish language version of the Identity Theft booklet, Robo de Identidad: Algo malo puede pasarle a su buen nombre.
B. Outreach and Education
The Identity Theft Act also directed the FTC to provide information to consumers about identity theft. Recognizing that law enforcement and private industry play an important part in the ability of consumers both to minimize their risk and to recover from identity theft, the FTC expanded its mission of outreach and education to include these sectors.
(1) Consumers: The FTC has taken the lead in coordinating with other government agencies and organizations in the development and dissemination of comprehensive consumer education materials for victims of identity theft and those concerned with preventing this crime. The FTC?s extensive consumer and business education campaign includes print materials, media mailings, and radio and television interviews. The FTC also maintains the identity theft website, which includes the publications and links to testimony, reports, press releases, identity theft-related state laws, and other resources.
To increase identity theft awareness for the average consumer, the FTC recently developed a new primer on identity theft, ID Theft: What?s It All About? This publication discusses the common methods of identity thieves, how consumers can best minimize their risk of being victimized, how to identify the signs of victimization, and the basic first steps for victims. Taken together with the detailed victim recovery guide, Identity Theft: When Bad Things Happen to Your Good Name, the two publications help to fully educate consumers.
(2) Law Enforcement: Because law enforcement at the state and local level can provide significant practical assistance to victims, the FTC places a premium on outreach to such agencies. In addition to the training described below (see infra Section II.C.), the staff joined with North Carolina?s Attorney General Roy Cooper to send letters to every other Attorney General letting him or her know about the FTC?s identity theft program and how each Attorney General could use the resources of the program to better assist residents of his or her state. The letter encourages the Attorney General to link to the consumer information and complaint form on the FTC?s website and to let residents know about the hotline, stresses the importance of the Clearinghouse as a central database, and describes all of the educational materials that the Attorney General can distribute to residents. North Carolina took the lead in availing itself of the Commission?s resources in putting together for its resident victims a package of assistance that includes the ID Theft Affidavit (see Section II.B.(3)(a)), links to the FTC website and www.consumer.gov/idtheft. Through this initiative, the FTC hopes to make the most efficient use of federal resources by allowing states to take advantage of the work the FTC has already accomplished and at the same time continuing to expand the centralized database of victim complaints and increase its use by law enforcement nationwide. Other outreach initiatives include: (1) Participation in a ?Roll Call? video produced by the Secret Service, which will be sent to thousands of law enforcement departments across the country to instruct officers on identity theft, investigative resources, and assisting victims; and (2) redesigning of the FTC?s website to include a section for law enforcement with tips on how to help victims as well as resources for investigations. The FTC will launch the new website this summer.
(a) Victim Assistance: Identity theft victims spend significant time and effort restoring their good name and financial records. As a result, the FTC devotes significant resources to conducting outreach with the private sector on ways to improve victim assistance procedures. One such initiative arose from the burdensome requirement that victims complete a different fraud affidavit for each different creditor with whom the identity thief had opened an account.13 To reduce that burden, the FTC worked with industry and consumer advocates to create a standard form for victims to use in resolving identity theft debts. From its release in August 2001 through April 2003, the FTC has distributed more than 293,000 print copies of the ID Theft Affidavit. There have also been more than 356,000 hits to the Web version. The affidavit is available in both English and Spanish.
The three major credit reporting agencies (?CRAs?) recently launched a new initiative, the ?joint fraud alert.? After receiving a request from an identity theft victim for the placement of a fraud alert on his or her consumer report and for a copy of that report, each CRA now shares that request with the other two CRAs, thereby eliminating the requirement that the victim contact each of the three major CRAs separately.
(b) Information Security Breaches: Additionally, the FTC is working with institutions that maintain personal information to identify ways to help keep that information safe from identity theft. Last year, the FTC invited representatives from financial institutions, credit issuers, universities, and retailers to an informal roundtable discussion of how to prevent unauthorized access to personal information in employee and customer records. The FTC will soon publish a self-assessment guide to make businesses and organizations of all sizes more aware of how they manage personal information and to aid them in assessing their security protocols.
As awareness of the FTC?s role in identity theft has grown, businesses and organizations that have suffered compromises of personal information have begun to contact the FTC for assistance. For example, in the cases of TriWest14 and Ford/Experian,15 in which tens of thousands of consumers? files were compromised, the Commission advised how to notify those individuals and how to protect the data in the future. To provide better assistance in these types of cases, the FTC developed a kit, Responding to a Theft of Customer or Employee Information, that will be posted on the identity theft website in the coming weeks. The kit provides advice on which law enforcement agency to contact, depending on the type of compromise, business contact information for the three major credit reporting agencies, suggestions for establishing an internal communication protocol, information about contacting the FTC for assistance, and a detailed explanation of what information individuals need to know. The kit also includes a form letter for notifying the individuals whose information was taken. Organizations are encouraged to print and include copies of Identity Theft: When Bad Things Happen to Your Good Name with the letter to individuals.
The FTC particularly stresses the importance of notifying individuals as soon as possible when information has been taken that may put them at risk for identity theft. They can then begin to take steps to limit the potential damage to themselves. Individuals who place a fraud alert promptly have a good chance of preventing, or at least reducing, the likelihood that the release of their information will turn into actual misuse. Prompt notification also alerts these individuals to review their credit reports and to watch for the signs of identity theft. In the event that they should become victims, they can quickly take action to clear their records before any long-term damage is done. Besides providing Responding to a Theft of Customer or Employee Information, FTC staff can provide individual assistance and advice, including review of consumer information materials for the organization and coordination of searches of the Clearinghouse for complaints with the law enforcement officer working the case.
C. Identity Theft Data Clearinghouse
The final mandate for the FTC under the Identity Theft Act was to log the complaints from victims of identity theft and refer those complaints to appropriate entities such as law enforcement agencies. Before launching this complaint system, the Commission took a number of steps to ensure that it would meet the needs of criminal law enforcement, including meeting with a host of law enforcement and regulatory agencies to obtain feedback on what the database should contain. Access to the Clearinghouse via the FTC?s secure Web site became available in July of 2000. To ensure that the database operates as a national clearinghouse for complaints, the FTC has solicited complaints from other sources. For example, in February 2001, the Social Security Administration Office of Inspector General (SSA-OIG) began providing the FTC with complaints from its fraud hotline, significantly enriching the FTC?s database.
The Clearinghouse provides a much fuller picture of the nature, prevalence, and trends of identity theft than was previously available.16 FTC data analysts aggregate the data to develop statistics about the nature and frequency of identity theft. For instance, the Commission publishes charts showing the prevalence of identity theft by states and by cities. Law enforcement and policy makers at all levels of government use these reports to better understand the challenges identity theft presents.
Since the inception of the Clearinghouse, 62 federal agencies and 574 state and local agencies have signed up for access to the database. Within those agencies, over 4,200 individual investigators have the ability to access the system from their desktop computers twenty-four hours a day, seven days a week. The Commission actively encourages even greater participation.
One of the goals of the Clearinghouse and the FTC?s identity theft program is to provide support for identity theft prosecutions nationwide.17 Last year, in an effort to further expand the use of the Clearinghouse among law enforcement, the FTC, in cooperation with the Department of Justice and the United States Secret Service, initiated a full day identity theft training seminar for state and local law enforcement officers. Sessions were held in Washington, D.C., Des Moines, Chicago, San Francisco, Las Vegas, Dallas, and Phoenix. The Phoenix program was held May 22. More than 730 officers have attended these seminars, representing more than 170 different agencies. Additional training seminars will occur later this year in Seattle, New York, and Houston -- cities the FTC has identified as having high rates of identity theft. Also, the FTC is a member of an identity theft task force in Kansas City and is helping coordinate a training seminar there later this summer.
The FTC staff also helps develop case leads. Now in its second year, the Commission runs an identity theft case referral program in coordination with the United States Secret Service. The Secret Service has assigned a special agent on a full-time basis to the Commission to assist with identity theft issues and has provided the services of its Criminal Research Specialists.18 Together, the FTC and Secret Service staff develop preliminary investigative reports by examining significant patterns of identity theft activity in the database and refining the data through the use of additional investigative resources. Thereupon, the staff refer the investigative reports to appropriate Financial Crimes Task Forces and other law enforcers located throughout the country for further investigation and potential prosecution.
III. THE FEDERAL TRADE COMMISSION?S ROLE IN INFORMATION SECURITY
In addition to providing assistance to victims of identity theft, the Commission also examines security precautions involving consumers? personal information to determine whether law enforcement may be appropriate. If so, the Commission has two valuable legal tools to work with: Section 5 of the FTC Act,19 which prohibits unfair and deceptive acts or practices, and the Commission?s Gramm-Leach-Bliley Safeguards Rule (the ?Safeguards Rule? or the ?Rule?).20
A. Law Enforcement Under Section 5
One of the mainstays of the Commission?s privacy program is the enforcement of promises that companies make to consumers about privacy, including, the precautions they take to ensure the security of consumers? personal information. The Commission enforces such promises both online and offline. One area of particular concern involves breaches of sensitive information because they put consumers at the greatest risk of identity theft and other harms.
Last August, the Commission announced a settlement with Microsoft regarding misleading claims made by the company about the information collected from consumers through its Passport services ? Passport, Passport Wallet, and KidsPassport.21 Passport is a service that collects
information from consumers and then allows them to sign in at any participating site using a single name and password. Passport Wallet collects and stores consumers? credit card numbers, and billing and shipping addresses, so that consumers do not have to input this information every time they make a purchase from a site. Kids Passport was promoted as a way for parents to create accounts for their children that limited the information that could be collected from them.
The Commission?s complaint alleged that Microsoft misrepresented the privacy afforded by these services, including the extent to which Microsoft kept the information secure. For example, in various online statements, Microsoft said that the Passport service ?achieves a high level of Web Security by using technologies and systems designed to prevent unauthorized access to your personal information.? The Commission alleged that Microsoft in fact failed to employ reasonable and appropriate measures to protect the personal information collected in connection with these services because it failed to: (1) implement procedures needed to prevent or detect unauthorized access; (2) monitor the system for potential vulnerabilities; and (3) perform appropriate security audits or investigations.
The Commission?s order against Microsoft contains strong relief that will provide significant protections for consumer information. First, it prohibits any misrepresentations about the use of and protection for personal information. Second, it requires Microsoft to implement a comprehensive information security program similar to the program required under the FTC?s Gramm-Leach-Bliley Safeguards Rule, which is discussed below. Finally, to provide additional assurances that the information security program complies with the consent order, every two years Microsoft must have its program certified by an independent professional that it meets or exceeds the standards in the order. The provisions of the order will continue for 20 years and the Commission is systematically monitoring compliance.
Microsoft is an important case because the settlement required that the company adhere to its security promises even in the absence of a known breach of the system. The Commission found even the potential for injury actionable when sensitive information and security promises were involved, and when the potential for injury was significant. This determination is an extremely important principle. It is not enough to make promises about protecting personal information, and then just hope that nothing bad happens or, if it does, that nobody finds out. Fulfilling privacy promises requires affirmative steps to ensure that personal information is appropriately protected from identity theft and other risks to consumers? personal information.
The Microsoft case followed a similar case the Commission settled earlier last year against Eli Lilly.22 The Lilly case also involved alleged misrepresentations regarding the security provided for sensitive consumer information ? in this instance, consumers? health information. Like Microsoft, Lilly made claims that it had security measures in place to protect the information collected from consumers on its website. As in Microsoft, the Commission charged Lilly with failing to have reasonable measures in place to protect the information.
Specifically, in sending an e-mail to Prozac users who subscribed to a service on the site, Lilly put all of the consumers? email addresses in the ?To? line of the e-mail, essentially disclosing to all users the identities of all of the other Prozac users. The Commission?s complaint alleged that this happened because Lilly failed, among other things, to provide appropriate training and oversight for the employee who sent the email and to implement appropriate checks on the process of using sensitive customer data. The order in the Lilly case prohibits the misrepresentations and, as in Microsoft, requires Lilly to implement a comprehensive information security program.
Just this week, the Commission settled alleged violations of Section 5 in connection with statements made by Guess, Inc. concerning the security provided for sensitive consumer information collected through its website www.guess.com. According to the Commission's complaint, by conducting a ?web-based application? attack on the Guess website, an attacker gained access to a database containing 191,000 credit card numbers. The complaint alleged that, despite specific claims that it provided security for the information collected from consumers through its website, Guess did not: (1) employ commonly known, relatively low-cost methods to block web-application attacks, which are well known in the technology industry; (2) adopt policies and procedures to identify these and other vulnerabilities; or (3) test its website and databases for known application vulnerabilities, which would have alerted it that the website and associated databases were at risk of attack. Essentially, the company allegedly had no system in place to test for known application vulnerabilities, or to detect or to block attacks once they occurred.
In addition, the complaint alleged, Guess misrepresented that the personal information it obtained from consumers through www.guess.com was stored in an unreadable, encrypted format at all times; but in fact, after launching the attack, the attacker could read the personal information, including credit card numbers, http://www.guess.comstored on www.guess.com in clear, unencrypted text. The order prohibits misrepresentations about the security and confidentiality of any information collected from or about consumers online and, as in Microsoft and Lilly, requires Guess to implement a comprehensive information security program.
This case highlights a crucial but often neglected aspect of information security: the security of web-based applications and the databases associated with them. Databases frequently house sensitive data such as credit card numbers, and web-based applications are often, as with Guess, the ?front door? to these databases. It is critical that online companies take reasonable steps to secure these aspects of their systems, especially when they have made promises about the security they provide for consumer information.
It is important to note that the Commission is not simply saying ?gotcha? for security breaches. While a breach may indicate a problem with a company?s security, breaches can happen even when a company has taken every reasonable precaution. In such instances, the breach will not violate the laws that the FTC enforces. Instead, the Commission recognizes that security is an ongoing process of using reasonable and appropriate measures in light of the circumstances. That is the approach the Commission took in these cases and in its Gramm-Leach-Bliley Safeguards Rule, and the approach it will continue to take.
B. GLB Safeguards Rule
In May 2002, the Commission finalized its Gramm-Leach-Bliley Safeguards Rule, which requires financial institutions under the FTC?s jurisdiction to develop and implement appropriate physical, technical, and procedural safeguards to protect customer information. The Rule became effective on May 23 of this year, and the Commission expects that it will quickly become an important tool to ensure greater security for consumers? sensitive financial information. Whereas Section 5 authority derives from misstatements particular companies make about security, the Rule requires a wide variety of financial institutions to implement comprehensive protections for customer information ? many of them for the first time. The Rule could go a long way to reduce risks to this information, including identity theft.
The Safeguards Rule requires financial institutions to develop a written information security plan that describes their program to protect customer information. Due to the wide variety of different entities covered, the Rule requires a plan that takes into account each entity?s particular circumstances ? its size and complexity, the nature and scope of its activities, and the sensitivity of the customer information it handles.
As part of its plan, each financial institution must: (1) designate one or more employees to coordinate the safeguards; (2) identify and assess the risks to customer information in each relevant area of the company's operation, and evaluate the effectiveness of the current safeguards for controlling these risks; (3) design and implement a safeguards program, and regularly monitor and test it; (4) hire appropriate service providers and contract with them to implement safeguards; and (5) evaluate and adjust the program in light of relevant circumstances, including changes in the firm's business arrangements or operations, or the results of testing and monitoring of safeguards. The Safeguards Rule requires businesses to consider all areas of their operation, but identifies three areas that are particularly important to information security: employee management and training; information systems; and management of system failures.
The Commission has already issued guidance to businesses covered by the Safeguards Rule to help them understand the Rule?s requirements.23 Commission staff have met with a variety of trade associations and companies to learn about industry?s experience in coming into compliance with the Rule, to discuss areas in which additional FTC guidance might be appropriate, and to gain a better understanding of how the Rule is affecting particular industry segments. Now that the Rule is effective, the Commission plans to conduct sweeps to assess compliance within various covered industry segments.
C. Education and Workshops
Finally, the Commission recently hosted two workshops focusing on the role technology plays in protecting personal information.24 At the first workshop, which focused on the technologies available to consumers, we heard that many of these technologies have failed because they were too difficult to use; also, consumers did not want to pay separately for a ?fix? many assumed was already integrated into the computers and applications they purchased. Panelists generally agreed that, to succeed in the marketplace, these technologies must be easy to use and built into the basic hardware and software consumers purchase.
At the second workshop, which focused on the technologies available to businesses, we learned that businesses, like consumers, need technology that is easy to use and compatible with their other systems. We also heard that technology should be viewed as just one part of an overall information management system that also relies heavily on people and the use of appropriate processes and procedures. Unfortunately, we also heard that too many technologies are sold before undergoing adequate testing and quality control, frustrating progress in this area.
On June 18, the Commission hosted a public workshop to examine the costs and benefits to consumers and businesses of the collection and use of consumer information. Five CEOs made presentations about how their companies use and value data. Two case studies related to credit transactions and targeting marketing provided specific examples.25 In addition, we considered the possible methodologies for further measuring and analyzing the costs and benefits to consumers of these information practices.
Identity theft and large scale security breaches place substantial costs on individuals and businesses. The Commission, through its education and enforcement capabilities, is committed to reducing these breaches as much as possible. The Commission will continue its efforts to assist criminal law enforcement with their investigations. Prosecuting perpetrators sends the message that identity theft is not cost-free. Finally, the Commission knows that as with any crime, identity theft can never be completely eradicated. Thus, the Commission?s program to assist victims and work with the private sector on ways to facilitate the process for regaining victims? good names will always remain a priority.
1The views expressed in this statement represent the views of the Commission. My oral presentation and responses to questions are my own and do not necessarily represent the views of the Commission or any Commissioner.