24 March 2009

Unthinkable: Adapting in New World Disorder...

35 million electronic records of Personal Identifiable Information (PII) was exposed in 2008. Up 47% according to reports by the Identity Theft Resource Center (ITRC) compared to the previous year.

Will 2009 bring more data breaches, lost laptops and insider theft than 2008? You can bet on it and this is why CSO's, CPO's and General Counsels are getting their teams ready. When the enemy is increasing their attacks, utilizing new strategies and leveraging the existing base of compromised assets the picture is clear.

That suggests that many companies can significantly boost security and reduce their exposure by following basic and inexpensive measures. But even if your company has encryption in place (as Heartland did), don't rest too easy. "The sophistication and automation of financially motivated cybercrime is very steep today when compared with counter-efforts," says Ken Dunham, director of global response at iSight Partners, a provider of threat intelligence services. "Criminals are agile and able to outpace the rate of adoption of counter-technologies in the marketplace."

The motivation for cybercrime is even higher during economic hard times. A January report by iSight says that the economic decline in the United States and around the world will significantly increase the risk organizations face from employees who are laid off, fear being laid off, or face some form of personal financial trouble that may lead some to consider insider crime.


The insider remains a key focus for Operational Risk Management professionals because human behaviors are exaggerated during periods of stress, fear and uncertainty. This means that people who may not have any prior criminal history, have never considered doing something to jeopardize their reputations may now be up against a wall. When there is no exit and no way out, people do extraordinary things to get ahead, beat the odds and hedge their own risk portfolio of life. Study the women who have made decisions to strap on suicide vests or the dozens of "Mini Madoff's" yet to get their day in court. Both have similar attributes tied directly to human behavior.

In Joshua Cooper Ramo's new book "The Age of the Unthinkable", "Why the New World Disorder Constantly Surprises Us and What We Can Do About It" the author discusses the concept of Deep Security. His analogy of how to think about "Deep Security" is the biological immune system. "A reactive instinct for identifying dangers, adapting to deal with them, and then moving to control and contain the risk they present."

The key word in Ramo's writing is "Adapt". Being Adaptive. However, prior to this there are two other very vital words that we feel are even more imperative. Instinct. Identifying. In other words, Proactive Intuition.

Ask any savvy fraud investigator on how she solved the case and you may hear just that, "I had a hunch." Talk with a Chief Privacy Officer in any Global 500 company and you might get them to admit they have a sense that their organization will be the target of a data breach incident in the coming year or two. The complexity of IT systems, data networks and the hundreds of laptops circling the globe with company executives is enough to predict that a major breach will occur.

Being adaptive and having proactive intuition in the modern enterprise does not come natural. You have to work at it and it requires a substantial investment in time and resources to make it work effectively. Once you realize that all of the controls, technology and physical security are not going to keep you out of harms way, you are well on your way to reaching the clairvoyance of "The Age of the Unthinkable."

07 March 2009

Compliance: Workplace Security, Ethics & Governance...

Bernie Madoff clones and the 11,000 other unregulated investment advisors across the US will be subjected to increased scrutiny in 2009 and beyond. The SEC, FINRA, US Treasury FINCEN, FBI and the tribe of banking regulators are all gearing up for audits, inspections and more granular forensic accounting examinations.

Fraud and the corruption of corporate America is hard to detect. Even more difficult when the watchdogs are too busy or without the resources to do the job effectively. Post Enron and the whole SOX wave of documentation, controls implementation and testing the Big Four Accounting firms were very busy.

The cases are among a series of recent alleged frauds at financial firms. While they have been handled differently, they have shined a light on loopholes in federal regulations, such as fragmented regulations governing brokers, investment advisers, auditors and other firms. And the cases have underscored obstacles facing authorities, including inadequate resources for detecting wrongdoing and difficulties in gaining access to foreign financial accounts.

"Reform is needed to close the existing regulatory gaps that expose investors to risk," said Richard Ketchum, chief executive of the Financial Industry Regulatory Authority, Wall Street's self-policing agency.

SEC Chairman Mary L. Schapiro is looking to work with lawmakers to overhaul the nation's financial regulatory system. This week, the SEC announced that it would partner with a government-funded research center to study ways to better assess the thousands of tips and complaints that come in each year. The House and Senate plan to consider legislation as early as late spring that would bring all financial activities under federal regulation. The details, however, aren't clear.

At the SEC, Schapiro plans a new focus on spotting fraud and other market manipulation early on. She plans to create a large team to seek out where abuses might be occurring. Then she plans to direct the SEC's limited examination staff toward those places. "We've got to be able to conduct risk assessment that allows us to understand where problems might arise and connect the dots between different problems in different places -- whether they're generated by different products, different firms or different trends in the economy," Schapiro said in a recent interview.


The internal threat to your institution by your own employees who may do you harm, intentionally or not is just a core factor in day to day Operational Risk Management. Where it gets more interesting to plaintiff lawyers is when there is a clear pattern of ignorance or just plain lack of resource allocation or funding to policing the organization. The even more vulnerable facet of the OPS Risk mosaic could be the supply chain of companies and people who represent the vital outsourced functions. How many mission critical components of running your business have you handed over to call centers, ISP and hosting companies, distribution and delivery, back office administration including accounting and payroll?

One of the key areas of due diligence long overlooked at these investment advisers is the supply chain of feeder firms. The alternative investment industry has it's reach into the accountants and tax advisory services for a good reason. They are the ones who prepare your tax returns. Their insight into your cash flow, ability to invest and necessity for potential hedging of tax liability gives them the opportunity to be great referral agents. How many times has your tax advisor recommended you go see a friend in the alternative investment industry?

Creating awareness among the ranks of corporate America that everyone is going to be under the magnifying glass won't change the motivators:

  • Money
  • Ideology
  • Compromise
  • Ego

Economic challenges inside the corporation or on the home front can increase exposure to heightened threats in the workplace. These include violence, fraud and product theft at a minimum. However, the greatest asset of value being attacked, stolen and sold to the highest bidder is information. Corporate espionage and good old fashioned competitive intelligence is a 21st century Operational Risk Managers nightmare.

Workplace Security, Ethics and Governance programs will continue to be a focus for auditors and inspector generals. A lack of evidence of effective and robust efforts to deter, detect, defend and document withing the confines of the institution could be a differentiator when it comes time for any sentencing guidelines to be considered.

§8B2.1. Effective Compliance and Ethics Program

(a) To have an effective compliance and ethics program, for purposes of subsection (f) of §8C2.5 (Culpability Score) and subsection (c)(1) of §8D1.4 (Recommended Conditions of Probation - Organizations), an organization shall—

(1) exercise due diligence to prevent and detect criminal conduct; and

(2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

Such compliance and ethics program shall be reasonably designed, implemented, and enforced so that the program is generally effective in preventing and detecting criminal conduct. The failure to prevent or detect the instant offense does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct.

01 March 2009

Future Risk: Citizen Soldiers Extinct...

It's not often that we see an editorial article that prompts us to get the scissors out of the drawer to cut it out of the Washington Post. This opinion by Matthew Bogdanos is worth some additional review from an Operational Risk perspective. He is a Colonel in the U.S. Marine Corps Reserves and an assistant district attorney for New York City.

"A nation largely founded on the citizen-soldier ideal finds itself, following Vietnam and the expulsion of recruiters from campuses, with the military and civilian worlds warily eyeing each other across a cultural no man's land. As budgets shrink future forces, veterans will be fewer and the chasm wider -- to our peril.

No one wants everyone to think and act alike. Diversity is a major source of our nation's strength. But this diminishing shared experience leaves us ill-prepared against global terrorism. As the British general Sir William Butler warned a century ago, "A nation that will insist upon drawing a broad line of demarcation between the fighting man and the thinking man is liable to find its fighting done by fools and its thinking done by cowards."

We will leave it up to the Operational Risk Managers of the globe whether to agree with Col. Bogdanos and his comments. What is our take away from his words about "Duties That Are Best Shared?" We think it's quite simple.

How can an "Operational Risk Manager" make effective decisions without having walked a few "clicks" in another persons boots? Effective decision support from the Incident Command Center is far more effective if the person making those decisions has relevant and first hand experience. Asking a new hired employee to take the week long orientation training without having done it yourself, is not only bad management, it's reckless governance of the organization.

Years ago after the invasion of Baghdad, this OPS Risk manager (Bogdanos) did what we do every day. He adapted, improvised and overcame risks in order to recover stolen artifacts from the museums. The investigation was successful because not only was he someone that had experienced what it was like to operate in a war zone, he also was a subject matter expert on much of what was recovered.

If you are going to be an effective risk manager, you have to train with your troops in the business unit or the base. You have to know first hand what you are talking about. Without these, "we risk a future without all of us working towards the same ends --whatever society decides those ends should be."