ATM fraud siphoning billions a year

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BOSTON -- By failing to scan security codes in the magnetic strips on ATM and debit cards, many banks are letting thieves get away with an increasingly common fraud at a cost of several billion dollars a year.

A report yesterday from Gartner Inc., a technology analyst firm, estimates that 3 million American consumers were victims of ATM and debit card fraud in the past year.

The fraud most commonly begins when a criminal engages in "phishing" -- sending a legitimate-seeming e-mail with a link to a phony Web site that appears to belong to a consumer's bank, Gartner analyst Avivah Litan believes. The e-mail recipients are asked to give their account information, including personal identification number (PIN).

With that information "harvested," defrauders can make their own cards for automated teller machines and withdraw huge sums.

This should be easily preventable, because the magnetic strips on cards contain multiple tracks. One track has data such as the user's name and account number. A second track contains special security codes that card users don't know. That means the information can't be squeezed out of them in a phishing scam.

Duplicating the codes would require inside knowledge of a bank's security procedures, Ms. Litan said. (The inclusion of security codes in records held by a credit and debit card processor, CardSystems Solutions Inc., made that company's massive data breach disclosed this spring especially dangerous.)

Surprisingly, Ms. Litan said, perhaps half of U.S. financial institutions have not programmed their ATM systems to check the security codes. Con artists specifically seek out customers of banks that do not validate the second track on the strip, she said.

Ms. Litan believes many banks simply didn't know about the vulnerability. Others may have once scanned the codes but stopped because using the codes requires that customers go to a bank and have an ATM card rewritten whenever they want to change their PINs.

That was a costly step that many banks figured they could avoid in pre-phishing days when ATM fraud was rare.

"It's not negligence," Ms. Litan said. "It's just kind of being asleep at the wheel when business is running smoothly, and then you get hit."

Gartner estimates that annual losses from ATM fraud total $2.75 billion, or $900 per incident. Most of that is covered by the financial institutions that issued the hacked cards, but consumers sometimes have to struggle with bounced checks and other inconveniences when a criminal raids a bank account.

Although fixing the security hole is straightforward, it might not solve everything.

One of the codes is only three digits, meaning hackers can use brute-force attacks -- trying every possible combination -- over some online systems. Ms. Litan advises banks to lengthen the codes on newly issued cards.

A separate report yesterday by the corporate services unit at International Business Machines Corp. noted a surge in Internet attacks that facilitate bank fraud, including phishing and the surreptitious installation of keystroke-logging programs that copy what a computer user types.

Network monitoring by IBM and other organizations led IBM to determine that, in the first half of this year, criminals sent 35 million e-mail messages designed to steal financial data.

Criminals are increasingly engaging in "spear phishing," a targeted attack at a specific person or organization known to be vulnerable, IBM security analyst Jeremy Kelley said. That makes the phishers harder to detect and shut down.