Corporate Accountability: The New Era of Governance

“No more easy money for corporate criminals -- just hard time.”

George W. Bush signed the Sarbanes-Oxley Act of 2002, the most far-reaching corporate reform legislation since the New Deal in the 30's. The legislation is the result of billion-dollar corporate accounting scandals like Enron, Tyco, and WorldCom, and is designed to send a message to employees that the American public will no longer tolerate corruption in the companies they invest in. Welcome to the new era of corporate governance, where the stakes for wrongdoers has been raised dramatically.

Now with AIG and Warren Buffet under the latest round of questioning, it's further proof we are in a new era of governance.

Spitzer's office and the Securities and Exchange Commission are investigating the questionable use of a product known as finite reinsurance that can be used to make a company appear stronger financially than it really is. The focus of the investigation is a transaction in late 2000 between General Re, a Berkshire affiliate, and AIG, the world's leading insurance company.

Regulators say that the transaction artificially increased AIG's premium reserves, ultimately helping its stock price and its ability to acquire another company.

As Maurice Greenberg, the former CEO of AIG sits and waits for the story to unfold, he must be asking himself how did this happen? In the "New Era of Corporate Governance" the question should be, why did it take so long for it to happen? As stockholders are paying the price of corporate incivility it becomes clear that the real heros in all of this are those in Eliot Spitzer's office.

Without the continuous oversight of our regulators and the people who represent the common stock holder to enforce the law, we will not achieve what we all seek in any business relationship. The truth.

Sarbanes-Oxley and the other laws being chastised by some business executives as over protective and unjust in the quest to reach compliance will eventually achieve their goal. We are almost at the "Breakpoint" in the bottom of the "S" curve where this corporate biologic system will begin to rise and grow again. Where companies investments in education, technology and processes will turn them towards greater investor confidence and therefore greater levels of investment.

The "New Era of Governance" is just around the corner and the companies who continue to see that the investment will eventually pay off will be the real winners.

Breaking Down Organizational Walls...

The organizational walls are coming down in the risk management department and we have witnessed what Jeremy Ward is advocating in this article. We agree much has to be done to create a collaborative relationship with OPS Risk, INFOSEC, Internal Audit, Security and Finance.

Until recently organisations were able to put operational risk and information security into separate, watertight compartments. Operational risk sat in the audit department and probably reported to the CFO. While information security (if such a function existed) sat in the IT department and reported to the CIO (eventually).

Today this approach is not a true solution to adequate risk management. Today’s information dependent organisation requires the walls of these separate compartments to be broken down.

The most obvious reasons for breaking down the compartments, and the subsequent consequences of failure to do so, are easy to understand. In recent years we have been bombarded with legislation and regulation; such as Basel II (if you’re a bank), the Turnbull report (if you’re quoted on the London Stock Exchange) or the Sarbanes-Oxley Act (if you’re quoted on the New York Stock Exchange). All of these effectively say that if you do not have in place adequate mechanisms for controlling and auditing the flow of information through your organisation; then your company will lose a lot of money, or someone important in it will go to jail – or both.

Operational Risk has much to learn from IT INFOSEC and they have more to learn about the intersections of risk across all the business units. The goal should continue to be to develop a management system that encompasses the entire enterprise.

The conclusion is obvious. Operational risk and information security cannot afford to engage in a battle for who owns the responsibility for business risk. They must agree to a contract of mutual support. Operational risk needs to know more about the threats to, and vulnerabilities of, those vital networked assets; and information security needs to understand more about how to determine the business criticality of the assets for which they are responsible. In short, they need to meet and shake hands over the level three controls.

Better INTEL Can Make a Difference...

In case you missed this announcement from the Financial Services ISAC, the sector has finally figured out that it's really about the relevance of the INTEL that makes a difference, namely iDEFENSE.

iDEFENSE and the Financial Services Information Sharing and Analysis Center (FS/ISAC) today announced a partnership to equip financial services organizations with intelligence and proactive countermeasures to combat critical cyber threats.

The agreement represents a major initiative for FS/ISAC as the organization aims to fulfill its mission of providing members with the highest caliber and most timely analysis on information security threats. Sponsored by the Department of the Treasury, FS/ISAC has more than 900 chartered members, including banks, credit unions, insurance firms, credit card companies and securities firms. Its board members include executives from Bank of America, Wells Fargo, Merrill Lynch, Goldman Sachs and Fannie Mae.

"The increasingly sophisticated and aggressive cyber threat landscape requires new solutions and approaches to ensure that our members and their customers are fully protected," said Byron Yancey, FS/ISAC’s executive director. "This partnership is a turning point for the security of America’s financial infrastructure: a new front line of defense against cyber attacks."

iDEFENSE’s "flash" cyber intelligence reports will fuel FS/ISAC’s national "urgent" and "crisis" alerts, the first time the industry group has leveraged proprietary threat data to protect the sector. The company is the leading provider of cyber security intelligence for Global 2000 companies, 8 of the top 10 financial services providers and the U.S. government. It engages 170 analysts to research thousands of new malicious codes, software vulnerabilities and hacker activity in 31 countries and 13 languages.

"Electronic criminals inherently have an advantage against their targets — they have the funding, knowledge, creativity and element of surprise to strike first," said John Watters, president and CEO of iDEFENSE. "The key is to mobilize and share actionable intelligence before attacks strike, combining vigilant intelligence gathering and immediate delivery."

Having first hand knowledge of the iDEFENSE operation and the Archer platform that powers the FSISAC, they are well on their way to having the best possible chance to mitigate risks in their organizations.

CIO: Head of ERM?

Are CIO's as executives best positioned to champion enterprise risk management? This article by Allan Holmes has some merit. Who should chair the ERM committee?

Steve Randich, CIO with Nasdaq, relies on regular tests of his data center's business continuity plans to remind his staff that ERM is a core principle for the organization. About 3,300 companies are listed on the Nasdaq, which processes about 20,000 transactions a second and receives information from about 350,000 desktops and workstations worldwide. If Nasdaq can't operate its transaction systems, it has to close the market. "We're then out of business," says Randich.

After 9/11, it took four months for Nasdaq to permanently relocate its New York City offices. The data center was able to continue operating (although the government shut down the markets for four days), but Randich realized that the company needed a more detailed risk management plan. Nasdaq's new plan included the extra equipment it would need (such as desktops and Internet access), procedures for communicating with employees and alternative work sites in case of a disaster.

We agree that the CIO should be part of the Enterprise Risk Management Committee although we don't agree they should be the chair. If there is any one person that should be considered, it would be the head of Operational Risk. Think of them as the most capable of knitting together the intersections of the physical and digital world, along with the human aspects of internal and external events.

Savvy Operational Risk Managers understand the intersections of various kinds of risk that the organization is facing. That includes the companies in the supply chain and the "Go-to-Market" plans for new marketing and sales initiatives. While the CIO is a key component and certainly data touches almost every aspect of the organization, the CIO may overlook some key facets of the ERM matrix.

If you don't have someone who is in charge of Operational Risk, maybe it's time to appoint or hire an executive for this vital position.

Security Governance rivals SOX 404...

All enterprises confront a category of unforeseen risk. Such risks hinge on events that “might happen,” but haven’t been considered by the organization and, therefore, yield too little information to disseminate to stakeholders. However, stakeholders can demand a management system for Security Governance that is comprehensive, proactive and relevant. The management system, as provided by executives, board members and oversight committees, includes organizational structure, policies, planning activities, responsibilities, practices, procedures, processes and resources. The system also incorporates a top management strategic policy that focuses on managing risk for Security Governance while reflecting the location, assets and purpose of the organization, enterprise or entity.

In establishing a process for risk assessment, the organization should consider:

· Impact, in the event the risk event is realized;
· Exposure to the risk on a spectrum from rare to continuous, and
· Probability based upon the current state of management controls.

An organization will encounter dynamic strategic security risks. Its executives must use the management system to identify and assess these risks, develop a strategy for dealing with them to achieve Security Governance.

Security Governance is evolving rapidly and taps the thinking of various standards organizations, including OECD, BSI, NIST, ISSA, GAISP, BSA, ITAA, ASIS and dozens of other bodies of influence and knowledge. However, no matter what best practices an organization attempts to standardize on, it must weight the attitudes of the employees and stakeholders.

Unless these stakeholders fully understand the motivation behind tasks and guidelines, the system will fail. The organization that embraces change and introduces a Security Governance framework that manages not only the foreseen human risks but also the unforeseen will greatly enhance its chance of survival. Culture plays a paramount role in the risk for Security Governance because:

1. Any changes in risk management may require changes in the culture and

2. The current culture is a dramatic influence on current and future security initiatives.

Internal controls can provide reasonable assurance that an organization will meet its intended goals. Yet people (Human Factors) will fail an organization in material errors, losses, fraud and breaches of laws and regulations. People will generate constant change, and this cumulative uncertainty mandates a resilient management system for Security Governance that controls risk.

With the system in place, the board of directors soon realizes that managing risk for Security Governance rivals Section 404 of Sarbanes-Oxley as a key to success. In fact, without Security Governance, rules won’t matter and the stakeholders will again ask: How could this happen to us?

Business Benefits of BS 7799 Compliance...

Here are several business benefits of implementing BS 7799 as a management system for achieving compliance in organizations that are highly regulated:

BS 7799 brings your organization to compliance with legal, regulatory, and statutory requirements including HIPAA, Gramm-Leach-Bliley (GLBA), Sarbanes-Oxley, California SB1386, CFR21:Part 11, EU-Directive, and many others...

Market differentiation due to positive influence on company prestige, image and external goodwill parameters, as well as a possible effect on the asset or share value of the company

Demonstrates credibility and trust – satisfaction and confidence of stakeholders, partners, and customers

Reduced liability risk; demonstrates due diligence; lower rates on insurance premiums

Increases vendor status of your organization · Increase in overall organizational efficiency

Minimizes internal and external risks to business continuity· Management sets the example for appropriate security/privacy practices

The many sources of significant loss events are changing as we speak. Here are a few that should not be overlooked:

·Public perception
·Unethical dealings
·Regulatory or civil action
·Failure to respond to market changes
·Failure to control industrial espionage
·Failure to take account of widespread disease or illness among the workforce
·Fraud
·Exploitation of the 3rd party suppliers
·Failure to establish a positive culture
·Failure in post employment process to quarantine information assets upon termination of employees

Frankly, corporate directors have their hands full managing risk and continuity on behalf of the shareholders. The risk management process will someday have as big an impact on the enterprise as other key functions because shareholders will be asking more questions about the changing landscape of managing risk for corporate governance.

BS 7799, so what? So what? Boards of Directors have the responsibility to insure the resiliency of the organization. The people, processes, systems and external events that are constantly changing the operational risk landscape become the greatest threat to an enterprise. It’s the shareholders duty to scrutinize which organizations are most adept at “Continuous Continuity” before they invest in their future.

Get Ready for Section 6302...

In the latest US legislation to help prevent terrorist financing, the Intelligence Reform and Terrorism Prevention Act of 2004 is doing just that. Including Section 6302:

SEC. 6302. REPORTING OF CERTAIN CROSS-BORDER TRANSMITTAL OF
FUNDS.Section 5318 of title 31, United States Code, is amended by
adding at the end the following new subsection:
‘‘(n) REPORTING OF CERTAIN CROSS-BORDER TRANSMITTALS OF
FUNDS.—
‘‘(1) IN GENERAL.—Subject to paragraphs (3) and (4), the
Secretary shall prescribe regulations requiring such financial
institutions as the Secretary determines to be appropriate to report
to the Financial Crimes Enforcement Network certain
cross-border electronic transmittals of funds, if the Secretary determines that reporting of such transmittals is reasonably necessary
to conduct the efforts of the Secretary against money
laundering and terrorist financing.
‘‘(2) LIMITATION ON REPORTING REQUIREMENTS.—Information
required to be reported by the regulations prescribed under
paragraph (1) shall not exceed the information required to be
retained by the reporting financial institution pursuant to section
21 of the Federal Deposit Insurance Act and the regulations
promulgated thereunder, unless—
‘‘(A) the Board of Governors of the Federal Reserve System
and the Secretary jointly determine that a particular
item or items of information are not currently required to
be retained under such section or such regulations; and
‘‘(B) the Secretary determines, after consultation with
the Board of Governors of the Federal Reserve System, that
the reporting of such information is reasonably necessary to
conduct the efforts of the Secretary to identify cross-border
money laundering and terrorist financing.

Translation please. Get ready for additional reporting to the Financial Crimes Enforcement Network in the near future. See FinCEN

Offshore Outsourcing Revisited...

The risk of offshoring is a growing concern. If this study by Deloitte is correct, your valuable and private financial information is likely to be off shore already.

Deloitte estimates that $356 billion, or 15 percent, of the financial service industry's current cost base is expected to move offshore within the next five years. Further, the range and number of offshored job functions within individual institutions is expected to increase, with the average number growing from two to four functions per institution. In particular, the traditional focus on IT alone, which accounts for 70 percent of current offshore activity, will change to a business-process emphasis. Competitive pressures are the primary motivator for financial institutions to move higher-risk functions offshore.

The banking industry has a list of Offshoring Risks that is in need of greater care and oversight.

Domestic outsourcing and offshoring share most risk characteristics. However, the more complicated chain of control incurred when offshoring financial services and related data may create new risks when compared to domestic outsourcing. Offshoring also introduces an element of country risk to the outsourcing process. In particular, geographic distance from the function and timing lags in reporting heighten the potential risk exposures. Significant offshoring risk areas include:

Country Risk: political, socio-economic, or other factors may amplify any of the traditional outsourcing risks, including those listed below.

Operations/Transaction Risk: weak controls may affect customer privacy.

Compliance Risk: offshore vendors may not have adequate privacy regulations.

Strategic Risk: different country laws may not protect "trade secrets."

Credit Risk: a vendor may not be able to fulfill its contract due to financial losses.

It is currently standard FFIEC examination procedure for examiners to review outsourcing arrangements during examinations. Part of a standardized procedure should include:

Identifying and reviewing contracts between financial institutions and data service providers that allow for subcontracting or subsequent outsourcing to occur;

Determining whether subsequent outsourcing has in fact occurred as indicated in the contract or outside the terms of the contract;

Determining if the financial institution is aware of the subsequent outsourcing and the location of the outsourcing; and

Determining if the financial institution has procedures for monitoring all outsourcing arrangements to ensure adequate controls are in place or the service provider has proper procedures and controls to monitor their outsourcing arrangements.

We recommend that your CSO, CCO and General counsel revisit your last audit on high risk outsourced relationships such as customer data-base type work, including mortgage servicing and customer-assistance/help-desk services.

You've Been Indicted: The Most Feared Words in the Board Room...

Lew Platt, Chairman at Boeing has done the right thing.

An explicit e-mail led to the downfall of Boeing chief executive Harry Stonecipher, who had been called from retirement to boost the US aerospace giant’s tainted image, it was revealed today.

And if this article by an anonymous CSO is correct, then "Doing the Right Thing" could only be about the rules and policies set down by the ethics committee. Right?

"Directors and executives now must take an active leadership role for the content and operation of compliance and ethics programs," the U.S. Sentencing Commission's statement reads in part. "Companies that seek reduced criminal fines now must demonstrate that they have identified areas of risk where criminal violations may occur, trained high-level officials as well as employees in relevant legal standards and obligations, and given their compliance officers sufficient authority and resources to carry out their responsibilities."

The commission notably adds: "If companies hope to mitigate criminal fines and penalties, they must also promote an organizational culture that encourages a commitment to compliance with the law and ethical conduct by exercising due diligence in meeting the criteria."

Every Fortune caliber organization from financial services to health care has already implemented a pervasive compliance program to mitigate the risk of ending up with the SEC or US Attorney in the lobby.

The catalyst behind these initiatives is generated from the U.S. Sentencing Commission's Organizational Sentencing Guidelines. They allow for more lenient sentencing if an organization has evidence of an "effective program to prevent and detect violations of law."

The Guidelines contain criteria for establishing an "effective compliance program."

These include oversight by high level officers, effective communication to all employees, and reasonable steps to achieve compliance such as:

· Systems for monitoring and auditing
· Incident response and reporting
· Consistent enforcement including disciplinary actions

Yet the corporate incivility continues. Why is it that we can’t pick up the morning paper or listen to the news on the way to work without hearing about a new indictment of a top ranking officer?

Here lies the question many Board of Directors are scratching their heads about these days. How can we avoid these ethical and legal dilemmas and how can they be addressed without creating a state of fear and panic?

That’s when I really learned that this game of business is just about the human factors. It’s really not about the controls, the monitoring or even the awareness programs. It’s about being a model manager, and a model human being.

The odds are it will be the human factors that are going to be what gets you on the steps of the local federal building. And it all comes back to good old-fashioned management 101.

As indicated, the great manager can impact the lives of tens or hundreds of people in your company. Conversely, the uncivil manager can wreak havoc with a similar numbers of lives. The position of management is every so powerful to influence those around them.

Your company wide compliance initiative has the elements that provide guidance for creating a program that the government is likely to look favorably upon. The problem is that these same criteria inadvertently communicate the message that implies building a program based on this formula is enough. It isn’t.

Fraud: #1 Operational Risk...

We could not agree more with Ron Hagenbaugh in his article in Corporate Boardmember.

To conduct an effective fraud risk assessment follow these steps:

1. Organize and define the assessment objectives with company management and your internal audit committee. Form a team of fraud and control experts, and get senior management and audit committee buy-in: Ask them to communicate their endorsement and sponsorship of both the process and a strong anti-fraud program to the entire organization.

2. Determine the business and accounting process(es) to be assessed and investigated. Usually, the initial processes selected are those where fraud or abuse has previously occurred or that management has identified as critical business processes that may be susceptible to fraud or abuse.

3. Identify potential schemes and scenarios specific to the process(es) to be examined against current controls. Fraud schemes and scenarios should be selected based on the specific business process, the industry, physical location of the process operation and any known frauds or abuses concerning the process.

4. Determine the likelihood of a fraud occurring within each scheme and scenario. The Public Company Accounting Oversight Board has defined risk levels as remote, more than remote or reasonably possible, and probable. If assessing a public company, assess the risk levels in relation to SOX compliance efforts.

5. After the fraud risks for individual processes have been identified, documented, and rated as to risk level, match the controls within each process to the identified fraud risks. Determine the effectiveness of each control in preventing or providing a means of early detection for the fraud risk. Group the risks as to their probability of occurring within the process.

6. Estimate the probable loss in dollars should the fraud or abuse occur. Try to place a value on loss of reputation if that is a possible outcome.

7. Prepare recommendations for strengthening controls and present to management.

One big question on fraud is this. Has Sarbanes-Oxley been any help? A recent survey by Oversight Systems has some interesting statistics:

Of those surveyed, 79 percent report having stronger internal controls as a result of SOX compliance. Nearly three quarters (74 percent) say their companies realized a benefit from SOX compliance. When asked to identify the benefits from SOX, the survey reports that:

* 46 percent say SOX compliance ensures the accountability of individuals involved in financial reports and operations

* 33 percent say SOX compliance decreases the risk of financial fraud
* 31 percent say they have reduced errors in their financial operations
* 27 percent say SOX improvements in the accuracy of financial reports
* 25 percent say SOX compliance empowers the board audit committee by providing it with deeper information, and

* 20 percent say SOX strengthens investors’ view of the company.

However, the bottom-line benefits of SOX compliance seem fuzzier when the group was asked what impact SOX compliance had on shareholder value. Many, 37 percent, of those surveyed say SOX increased shareholder value because investors know they operate as an ethical business, and 25 percent report that SOX boosts shareholder value by building overall confidence in the market. However, 33 percent say SOX compliance created a cost burden that suppresses stock prices, and 14 percent feel that SOX decreased their ability to pay out dividends because compliance expenses are a significant drain on earnings (respondents could select all that applied).

SOX may be expensive, yet we are confident that as most executives realize that this is not another Y2K exercise, they will invest even more wisely in the years to come.

DHS - Time to Use The Carrot Instead of the Stick...

The US Department of Homeland Security - PSO (Private Sector Office) has begun it's push to get the private sector to do it's share with the "Carrot" instead of the "Stick."

Homeland Security officials in the Bush administration are considering ways to use the insurance industry as a free-market-friendly vehicle to drive chemical facilities, food companies, utilities, and other businesses to take greater precautions against terrorist attacks without heavy-handed new regulations.

The concept of using insurance to spur companies to spend on counterterrorism measures may solve a vexing homeland security problem: Despite improvements the government has made to upgrade security at public facilities since the 2001 Al Qaeda attacks, 85 percent of American infrastructure is privately owned and underprotected.

Any attack on chemical, ground transportation, banking, food, energy, or utility sectors could cause massive destruction and cripple the economy. But companies have lobbied hard to defeat legislation to force them to upgrade their security practices, finding allies among free-market Republicans in Congress.

Proponents hope the insurance proposal will be a sweeping solution to the impasse. The basic idea would be to have the government or each industry develop a minimum set of security "best practices." Then, insurers would audit companies for compliance with those standards, with the power to reduce premiums for those who comply.

Current Situation
The private sector has a fragmented approach to critical infrastructure preparedness in a new “all hazards” worldview. Each trade association with an interest in protecting commercial buildings, malls, hotels and other soft targets is creating policy and direction for its respective membership based on political agendas and other influences by local government and regional initiatives. Local jurisdictions are equally fragmented and looking for funding to train additional CERT (Corporate Emergency Response Team) volunteers and are still waiting for significant funding to have a real impact on their high profile properties. DHS Private Sector Office (PSO) has launched “Ready Business” and is working closely with critical infrastructure sectors to help coordinate communication between constituents and coalitions such as the National Capital Region. In the mean time, our preparedness level is not increasing at an acceptable pace due to a number of issues.

Desired Situation
The private sector needs a rapid and more effective program to extend the DHS Ready campaign for Business into the nation’s critical infrastructures. One way to do this is to use a combination of 15,000+ “Feet on the Street” InfraGard citizen soldiers and cooperation with key industry groups and the real estate sector would provide the framework for rapid implementation of preparedness training and exercises. A smart approach is a “Train-the-Trainer” methodology to provide key incident command, emergency communications, evacuation, first aid, and shelter-in-place skills and knowledge transfer to selected InfraGard members in major metro areas. Working in concert with local officials, members of the Real Estate ISAC and InfraGard Certified Trainers, building owners, landlords and tenant businesses can be trained to handle an “All Hazards” threat scenario. Each identified soft target building or critical infrastructure facility will have a local plan that is rolled up by geographic proximity to its nearest firehouse or emergency response unit and exercised in tandem.

Frank Cilluffo, who until 2003 served as President Bush's special assistant for homeland security, said he is fascinated by the idea of offering less expensive insurance against terrorism to companies that take appropriate precautions. He said it would constitute "a business case for homeland security to ensure that the private sector is fulfilling its share of their responsibility."

The system would encourage companies to protect against limited threats, such as truck bombs or internal sabotage, and the government would guard against greater threats, such as nuclear terrorism.

"Hopefully, these steps, which will be incentivized and/or mandated, will raise the bar higher and improve our countermeasures against terrorism," said Cilluffo, now head of the Homeland Security Policy Institute at George Washington University. "This is not the panacea. This is not the solution. But it takes us a whole lot closer."

In a recent survey conducted by Robert Half Management Resources the top two areas of potential vulnerability and concern cited by CFOs are disaster recovery (37%) and the security of information systems (24%). A common theme between these exposures is the need to better identify and understand the full range of risks that companies face today and the need for all organizations to develop new ways to more effectively manage these risks. By developing cross-company approaches for addressing all areas of risk, companies will begin to move toward a systematic, enterprise risk management process that most effectively reduces risk and controls cost.

"These two top areas of vulnerability in the eyes of a Chief Financial Officer stem from the perceived weaknesses in the organizations readiness and from the constantly evolving regulatory pressures to comply with new laws," said Peter L. Higgins, Managing Director of 1SecureAudit. "Operational Risks that evolve from inadequate or failed processes, people, systems or from external events are on the CFOs mind, and this includes acts of terrorism."

The Modern Day "Bonnie and Clyde"...

As Bank of America now joins ChoicePoint to try and explain the theft of not just thousands but millions of data records, one has to wonder. Does the modern "Bank Robber" need a mask and a weapon to pull off a six figure heist?

Not so according to some of the latest operational risk losses by major financial services institutions. The modern day "Bonnie and Clyde" only needs to purchase one of the latest downloads from the Internet to create a portfolio of bait for a contemporary "Phishing" expedition. Or in the case of B of A, a supplier who seems to have lost a few data tapes on their way to a secure location.

If it isn't apparent already, the real issue here is the lack of controls and auditing of the supply chain of outsourced services or the key lego blocks in the Enterprise Architecture.

Sen. Charles Schumer, a New York Democrat, said he had been informed by the Senate Rules Committee that the data tapes were likely stolen off a commercial plane by baggage handlers.

"Whether it is identity theft, terrorism or other theft, in this new and complicated world, baggage handlers should have background checks and more care should be taken for who is hired for these increasingly sensitive positions," Schumer said.

Bank of America, based in Charlotte, North Carolina, said it will continue to monitor government cardholder accounts included on the data tapes and cardholders would be contacted if unusual activity is detected."

It won't be long before the Privacy Advocates give way to the reality that it's time to seriously revisit authentication beyond today's US norms.

One of the key drivers behind the push to take up biometric technologies is that governments are beginning to mandate that biometric identifiers such as facial images and fingerprints be used in official documents, including passports. And biometrics is also seen as essential for the provision of e-government services to citizens to ensure accurate authentication to prevent fraud.

However, in the long term, biometrics, by their very nature, will compromise privacy in a deep and thorough fashion. If and when face-recognition technology improves to the point where surreptitious cameras can routinely recognise individuals, privacy, as it has existed in the public sphere, will in effect be wiped out. No doubt there will be some benefits: fraud, in particular the persistent and increasingly annoying problem of identity theft, might be substantially reduced if biometric-identification systems, introduced in the form of passports, visas and identity cards, become widespread. But privacy advocates argue that such benefits are not worth the risk of “function creep”—that once biometric passes have been issued by governments, it will be tempting to use them for all sorts of things, from buspasses to logging on to your office PC.

See the Economist to see what the experts were thinking two years ago.

This of course won't have much impact on the savvy baggage handlers who are now becoming this generations equivalent of "Bonnie and Clyde".

Why just having a Disaster Recovery Plan is not enough!

Association of Contingency Planners | Washington DC Chapter | February Chapter Meeting

Disaster Recovery Plans are only part of the picture! Do not forget your most important asset – your employees! In the fast moving readiness wave of global assurance and operational contingency, there is an important element missing from many plans. They are all predicated on having the key people actually surviving the disaster. Shouldn’t you be just as concerned with getting through the disaster when and as it occurs? Remember, in large-scale disaster, the professional rescuers may be hours or even days away from responding.

"FEMA defines an emergency as related to businesses as “any unplanned event that
can cause deaths or significant injuries to employees, customers or the public; or that can shut down your business, disrupt operations, cause physical or environmental
damage, or threaten the facility’s financial standing or public image.”

Obviously, there are many events that can be classified as emergencies. Of primary importance is creating a plan for dealing with various types of emergencies that may happen to your business. While you may not initially plan for every type of emergency, it is prudent to at least plan the likely scenarios and always try to improve your emergency response to other scenarios over time. This requires an “All Hazards” approach to your preparedness and response. All hazards planning are a clear step in the process of making sure your organization can survive an emergency event. All hazards planning include operational risks dealing with people, processes, systems and external events.

NFPA 1600: Are you Ready?

NFPA 1600 Included in the Intelligence Reform and Terrorism Prevention Act of 2004 Senate Bill : S.2845

Passed by the U.S. Congress and signed into law by the President on December 17, 2004 (Public Law 108-458)

Intelligence Reform and Terrorism Prevention Act of 2004 (Enrolled as Agreed to or Passed by Both House and Senate) SEC. 7305. PRIVATE SECTOR PREPAREDNESS.

(a) FINDINGS- Consistent with the report of the National Commission on Terrorist Attacks Upon the United States, Congress makes the following findings:

(1) Private sector organizations own 85 percent of the Nation's critical infrastructure and employ the vast majority of the Nation's workers.



(2) Preparedness in the private sector and public sector for rescue, restart and recovery of operations should include, as appropriate--

(A) a plan for evacuation;

(B) adequate communications capabilities; and

(C) a plan for continuity of operations.

(3) The American National Standards Institute recommends a voluntary national preparedness standard for the private sector based on the existing American National Standard on Disaster/Emergency Management and Business Continuity Programs (NFPA 1600), with appropriate modifications. This standard establishes a common set of criteria and terminology for preparedness, disaster management, emergency management, and business continuity programs.

(4) The mandate of the Department of Homeland Security extends to working with the private sector, as well as government entities.

(b) SENSE OF CONGRESS ON PRIVATE SECTOR PREPAREDNESS- It is the sense of Congress that the Secretary of Homeland Security should promote, where appropriate, the adoption of voluntary national preparedness standards such as the private sector preparedness standard developed by the American National Standards Institute and based on the National Fire Protection Association 1600 Standard on Disaster/Emergency Management and Business Continuity Programs.

See NFPA 1600

ID Theft: SB-1386 on it's way West...

The latest ID Theft scandal with ChoicePoint is just the "Tip of the Iceberg".

The reputational losses will soon be felt as firms like Lexis Nexis pick up accounts from the fall out of this unfortunate criminal act. "Social Engineering" and plain old fraud will continue to haunt the companies who make it there job to know who we are, right down to the places we eat and where we shop.

If you get the warning letter from Choicepoint that you are one of the 145,000 people whose identity could be compromised, what are you going to do?

Disclosure of the incident was required under California's SB-1386,which took effect July 1, 2003. According to the law, any state agency, person, or business that does business in California and owns or licenses electronic data that includes personal information, is required to disclose any data security breach to California residents whose unencrypted personal information may have been accessed by an unauthorized person.

Last year, according to the Federal Trade Commission, consumers reported fraud losses of more than $547 million. Internet-related fraud accounted for 53% of all reported fraud complaints. According to the Better Business Bureau, 9.3 million Americans were victims of identity-theft fraud in 2004.

These are operational risks that not only the financial and health care institutions are responsible for mitigating, but also the Data Information Brokers who sell and share our identities to direct marketing firms. Remember that there really is only one way to keep yourself protected. Constantly monitor your identity and the details that exist in these companies databases. Make sure it is accurate. Put alerts on your account for suspicious activity. Consider using your middle initial or entire middle name when opening new accounts. This will help you differentiate yourself from every one else who shares your same first and last name.

Finally, review the security and privacy policies of your most trusted institutions. You will be amazed at what you have already accepted them to do with your personal information.

DNI: Gods Speed...

President Bush on Thursday named his top representative in Iraq John Negroponte as the new DNI or director of national intelligence, a position created as part of the investigation into the Sept. 11, 2001 attacks.

The role of national intelligence chief emerged an investigation into lapses before the Sept. 11 attacks prompted Congress to overhaul the nation's intelligence efforts in 50 years. As part of the Intelligence Reform and Terrorism Prevention Bill of 2004 and in response to what members saw as failures in communication between the country's intelligence agencies, Congress called for one position to direct national intelligence.

The new position will oversee 15 agencies including the CIA, according to Reuters, and as its chief Negroponte will be charged with giving the president daily intelligence briefings.

"If we're going to stop the terrorists before they strike, we must ensure that our intelligence agencies work as a single, unified enterprise," the president said.

If we are forecasting a terrorist strike in the US as Porter Goss and company are predicting, then Mr. Negroponte has accepted the job between a "bomb and a hard place."

In a Senate Intelligence Committee hearing, CIA Director Porter Goss said the United States still faces threats from Islamic extremists groups such as al Qaeda, who are using the war in Iraq to recruit terrorists from around the world.

With an annual budget estimated at $4 Billion, we are going to eventually find out why all of the intelligence in the universe will not prevent another attack on the American Homeland. In the mean time, the private sector itself should be spending more time and money on preparing their respective employees, suppliers and stakeholders in the event of another attack on our economy. If business waits for government to protect its assets, critical infrastructure or overall well being, business will again be disappointed if and when an attack occurs.

If you are the CEO or Chairman of the Board, what are you going to do to protect your people, processes, systems and supply chain assets from an event as predictable as the next major earthquake? It's only a matter of when. Not what or how.

As President Bush so kindly stated to John Negroponte today at the press conference podium: "Gods Speed".

Operational Risk: Outsourcing

BIS has a white paper on outsourcing in the Financial Services Sector

Case study 4: OCC action against a bank and service provider

In 2002, the Office of the Comptroller of the Currency (OCC) in the USA took enforcement action against a Californian bank and a third-party service provider to the bank. The service provider originated, serviced, and collected certain loans booked by the bank in 18 states and the District of Columbia. Among other things, the service provider failed to safeguard customer loan files. The files, which represented loans carried on the books of the bank, were discarded in a trash dumpster in 2002.

The OCC alleged that the improper disposal of loan files resulted in violations of laws and regulations. The OCC also determined that the service provider committed unsafe and unsound practices that included a pattern of following the policies and procedures of the bank and a pattern of mismanagement of the bank's loan files. This case demonstrated the risks national banks expose themselves to when they rent out their charters to third-party vendors and fail to exercise sound oversight.
In the case of the bank, the OCC found that it failed to manage its relationship with the service provider in a safe and sound manner. In addition to violating the Equal Credit Opportunity Act and the Truth in Lending Act, the bank violated safety and soundness standards and also violated the privacy protections of the Gramm-Leach-Bliley Act, which sets standards for safeguarding and
maintaining the confidentiality of customer information. These violations and unsafe and unsound practices led to a cease and desist order against the bank. The order required the bank to pay civil money penalties and to terminate its relationship with
the service provider.

The service provider also paid a sum in penalties and was ordered to not enter into any agreement to provide services to a national bank or its subsidiaries without the approval of the OCC. To protect the privacy rights of consumers, the order also required the bank to notify all applicants whose loan files were lost. This notification was to advise the consumer of any steps they could taketo address potential identity theft.

Relief for the "A" word...

The thought of the "A" word (Audit) brings shortness of breath to many in executive management these days. As this Audit Agitation continues to occur, many corporate managers are welcoming their next audit. As this anonymous CSO so clearly states:

What do you do when your customers want you to do an independent security audit—and your CEO doesn't?

Whether your CEO is backing any initiative to improve the performance of the enterprise they still want to know what it really means to the organization. In this case, the CSO uses the fact that customers are asking for it. And because the customer is the almighty entity to serve and listen to, then we must have to comply.

While customers do provide the core catalyst for many corporate projects, the first priority is to make sure that you select the correct solution for what your customer is really asking for. In the case of a customer asking for a SAS 70, many uninformed CEO's would respond with a large question mark above their head.

For those who don't know, a SAS 70, or Statement on Auditing Standards No. 70, is an internationally recognized standard developed by the American Institute of Certified Public Accountants. A SAS 70 audit represents that an IT services provider (for example, a financial services organization) has been through an in-depth audit of its control activities, which generally include information technology, security and related processes. The Sarbanes-Oxley Act of 2002 makes SAS 70 audits even more important to the process of reporting on effective internal controls at IT services organizations. That's because the reports signify that a service organization has had its control objectives and control activities examined by an independent accounting and auditing firm, as Section 404 of Sarbanes-Oxley requires.

All of the SAS 70 audits will never change the culture or the skills of the people who are responsible for the areas of the organization that a SAS 70 audits. In many cases, the fear is that there will be so many "red lights" at the end of the examination that they will not get a favorable opinion letter. One way to avoid this potential hazard, is to inject the organization with a management system far in advance of the SAS 70 audit. A good example is the BS 7799 Information Security Code of Practice.

A brief history of BS 7799


In the early 1990s concern was growing about the security of information due to the proliferation of computer networks and the reliance of businesses on electronic data collection and processing. Security threats to organisations include fraud, espionage, sabotage, vandalism, fire, flood, computer hacking and computer viruses. The concern of the UK government’s Department of Industry (DTI) led them to ask BSI to work with businesses and other concerned communities to develop a standard that would increase awareness of security issues and suggest controls to help protect information within all types of organisations in the UK.

BS 7799 was originally published in 1995 to give guidance on implementing Information Security Management and was substantially revised in April 1999 to take account of developments in the application of information processing technology, particularly in the area of networks and communications. It also gave greater emphasis to business involvement in and responsibility for information security. New controls were included in areas such as e-commerce, teleworking, mobile computing and so on but remained technology-independent.

Against this backdrop was the implementation of the revised UK data protection legislation, the 1998 Data Protection Act, which includes increased obligations on organisations to adopt appropriate data security measures. The objective of this is to prevent unauthorised or unlawful processing and accidental loss or damage to data that relates to living individuals. The new legislation has been extended to include non-computerised, or manual, records. Material held in filing cabinets, index cards, microfilm collections and videotape collections are now also subject to the Act. Consequently, BS 7799 also covers security of all types of information, held both electrically and non-electronically.

By implementing a culture of risk management utilizing the published standards of BS 7799 the enterprise is not only becoming more prepared for the SAS 70, they are well on their way to achieving compliance with US and other Global standards. Relief for the "A" word is only a few key strokes away. See BSI

Operational Risks are Taking Executives by Storm...

Executive Summary

There is a growing threat on the business horizon. The risk of loss from inadequate or failed processes, people, and systems or from external events is taking executives by storm. This definition of Operational Risk also includes legal risk, which is the risk of loss from failure to comply with laws as well as prudent ethical standards and contractual obligations. It also includes exposure to litigation from all aspects of institutions activities. In the course of a single day the organizational exposure to threats ranges from low to severe on the horizontal axis. It isn’t until you put the vertical spectrum into consideration that you arrive at your "Operational Risk Profile" for that particular slice of time. This vertical axis is the range of consequences that would impact the business should the threat event actually occur. It ranges from minor to disastrous. Each day our organizations live in a dynamic spectrum of tolerable and intolerable threats to our most precious corporate assets

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The Take Away

While you were in the Board of Directors meeting, your Operational Risk Profile changed. When you were asleep last night it changed again. The people, processes, systems and external events are interacting to create a new and dynamic threat matrix for your organization. Who is responsible for Operational Risk Management in your business? Everyone is. You see, if everyone in the organization was able to understand and perform the mission flawlessly, then the business could stay in the lower left quadrant. This is where the threat exposure is low and the consequences are minimal. This is exactly why you are spending less and less time here. Only a guarded few understand the mission of operational risk management in your company. Only a guarded few can do it flawlessly. If you want to protect your corporate assets better than you do today, then turn those guarded few into the mission ready many.

Why geolocation?

Quova has their act together when it comes to compliance and security issues for e-commerce.

The idea of the Internet as a borderless business realm, free of "real world" rules, has been exposed as a myth. While any company of any size can deploy an economic presence online, true e-commerce success has turned out to be a function of —and dependent on —the same business principles that determine success in the brick-and-mortar world. And one of those principles is geographic knowledge. Geolocation — knowing where the online customer is coming from — is as vital to e-commerce as the location of a store is to offline business operations. Consumers have distinct regional preferences based on where they live, and the online merchant must tailor his products, marketing strategy and messaging content to the customer’s language, currency and cultural priorities to earn his business — and his loyalty. Fraud is significantly higher in cyberspace, and the originating location of the transaction is a key indicator to its fraud risk. And both regulations and digital rights vary by jurisdiction, so the business-critical issue of compliance is heavily dependent on the geographic knowledge that can only be provided by a best-practice geolocation solution.

The knowledge that online fraud is frequently a geographically—based phenomenon, with 60% of fraudulent transactions emanating from just 15 nations, has provided a focal point for combating the problem. Leading companies in a variety of industries have incorporated Quova's GeoPoint as a key element in a "best practices" security solution for online fraud prevention. Quova has leveraged this experience to develop new sources of information and enhanced data analysis services specifically designed to protect against fraud and preserve assets and revenues. See Quova

OREA: Operational Risk Enterprise Architecture

UBS has their own interpretations of Operational Risk and it's definitions. Of particular note is this:

Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external causes, whether deliberate, accidental or natural. It is inherent in all our activities, not only in the business we conduct but also from the fact that we are a business – an employer, owning and occupying property, and holding assets, including information, belonging to ourselves and our clients. Our operational risk framework is not designed to eliminate risk per se but, rather, to contain it within acceptable levels, as determined by senior management, and to ensure that we have sufficient information to make informed decisions about additional controls, adjustments to controls, or risk mitigation efforts.

Without an effective Operational Risk Enterprise Architecture (OREA) an institution is driving blind in a blizzard of incidents that increases their potential for losses and diminishes their performance. In order to make certain that you have sufficient information in order to make informed decisions, you must have a system. Not only a management system. But a software system to provide relevant and actionable intelligence.

When operational risk ‘events’ occur – actual failures of processes, people or systems – we assess their causes and the implications for our control framework, because an event such as a virus attack or a customer complaint, even if it does not lead to a direct or indirect financial loss, may indicate that our standards are not being complied with or that they are ineffective, and that remedial action must be taken. --UBS

OREA enables enterprises to establish a cohesive framework for enterprise risk management in their organizations. OREA is a management system supported by an enterprise software platform that enables organizations to automatically collect, manage and distribute real-time operational risk content. This includes homeland security alerts, business continuity policies, emergency response procedures, control standards, facilities and IT assets, baselines, threats/vulnerabilities and delivers education and awareness programs to customers, employees and partners.

In light of new global terrorist threats, government regulation, increasing investor scrutiny, continuous litigation and changing response to risk, the stakes for public companies and complex organizations have never been more extreme. The solutions never more challenging. Today more than ever, it is vital that senior executives and board members have all the information, tools and answers they need to fulfill their fiduciary duties.

Is Your CIO Getting More Complex?

If this Optimize survey is an indicator, the CIO's job is becoming more complex each day.

The CIO's role continues to evolve, and by all indications the job isn't getting any easier. In addition to overseeing day-to-day technology needs, IT executives increasingly must generate new business opportunities, contribute to regulatory-compliance efforts, bolster information security, reduce risk, and improve supply-chain efficiency.

How well-equipped are CIOs to meet these growing responsibilities and where are they turning to gain additional expertise? Are companies doing enough to help IT support the business and take advantage of new technologies, even as security and regulatory compliance take up more time and resources? This month, Gap Analysis examines the CIO's expanding role.

Multifaceted CIOs Conventional wisdom says the CIO's role is becoming more complex, particularly with the addition of regulatory-compliance and risk-management responsibilities.

More CIO's should make time to have lunch with external partners and the CFO, CRO and CEO than ever before. New regulations such as SOX and other new emphasis on Anti-Money Laundering are keeping everyone on their toes and the CIO needs to understand the big picture to see how they can achieve corporate goals.

And yet only 22% of the business and technology managers surveyed expect their CIO or VP of IT to work more closely with external business partners in supply-chain development during the next 12 months. A greater number (49%) said the CIO will work with external partners on business-process improvements, development of new-business opportunities (46%), information security (46%), regulatory compliance (44%), risk management (42%), and application development (41%).

U.S. Public Readiness Index...is Business Ready?

The Public Readiness Index is on the way and the question is: Is business ready?

In one of his last public speeches as the head of the U.S. Department of Homeland Security, Secretary Tom Ridge shared his insights about critical next steps for public preparedness, and encourage a ground-breaking "public readiness index" for communities.

Ridge made his remarks at a breakfast event hosted by the Council for Excellence in Government tomorrow, Friday, Jan. 28 at 8 a.m. at the Willard Hotel in Washington.

In conjunction with Ridge's remarks, The Council for Excellence in Government, in partnership with the American Red Cross, the George Washington University Homeland Security Policy Institute, and the U.S. Department of Homeland Security will announce plans to create a Public Readiness Index. The Index will gauge the readiness of citizens, schools, businesses, and other community organizations to respond to emergencies -- from terrorism to public health emergencies and natural disasters -- and allow individual citizens and community leaders to measure, track and address gaps in local preparedness.

More than 100 leaders in the nation's homeland security enterprise have already signed a commitment to work together to create the Public Readiness Index, which will be independent from government.

The "Public Preparedness, A National Imperative" Report is 52 pages of great information from the consortium of "Brain Power" who assembled in July last year. Their conclusion is summed up with the following quote:

“I know no safe depository of the ultimate powers of the
society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform their discretion.”

—Thomas Jefferson

If we can interpret Mr. Jefferson's and the consortiums conclusion correctly, business is in for a whole lot of readiness exercises. Again, the question remains: Are they ready?

Terrorism Risk Management for Critical Infrastructure Protection

The process and systems for managing Terrorism Risk are changing as the commercial real estate finance and building owners or developers strive to establish new standards. Critical Infrastructure Protection is a national priority. The key catalysts for change could further motivate implementing new risk reduction programs and measures.

Some of the key catalysts for change are:

Insurance – those institutions that are sharing risks that a building owner faces.

Finance – banks, REIT’s (Real Estate Investment Trusts), and others such as pension funds that provide the capital for investments in commercial infrastructure.

Regulation – Federal, State and Local jurisdictions that regulate building design, construction and operations.

Overall Terrorism Risk Reduction begins with these key catalysts in concert with owners of critical infrastructure, whether that is an office building, a hospital or a hotel. These soft targets are where the risk management decision-making is already taking new directions.

In order to introduce new changes in process or design that impacts the physical or operational aspects of buildings (to reduce terrorism risk), it is important to better understand how these change levers can provide the incentives for owners. Being forced is never as appetizing as being induced to do anything. In order for changes to take place, the environment must reward investments in preparedness and safety. First however, we must understand the character of terrorism risk in critical infrastructure and the tools currently available to help manage that risk.

For more information see 1SecureAudit

Basel II: Investment Advisors Operational Risks

If Pat McAnally from Sungard is correct, then Information Technology Risk is here to stay especially when it comes to Continuity of Business Operations.

"Basel II represents the first time technology entered the definition of operational risk," McAnally says. "In Basel it’s the first time we’ve seen this enter the lexicon—normally it’s all about credit risk and liquidity and market portfolios. We’re hearing from our clients that it’s trickling down even to institutions that are not top-tier because they believe that eventually, if the big firms will have to adhere to that, then they will, as well. And the whole issue of it coming out of some of the European accords as the market moves more into global outsourcing of business processes means it doesn’t matter if you’re headquartered in the US if your processes are being managed elsewhere."

McAnally sees similar beefed-up business continuity requirements in the SEC’s new mandates for hedge funds and investment advisors.

"From the hedge fund perspective, the SEC’s registration rule follows rules 206 and 38A for registered investment advisors passed last February," she says. "These rules require board approval for a chief compliance officer, and specifically spelling out security and privacy, and they’re specifically spelling out business continuity plans. So if you want to register as an investment advisor with the SEC, if that’s important to your business model, then they’re requiring those things."

For hedge funds with institutional investors and that utilize incubators, ASP providers or other third parties for their business continuity function, McAnally recommends extensive due diligence—fund managers themselves should make sure their providers can duly support any business interruption.

"If institutional investors are not careful, they’re going to be exposed to risks that are not under their control, and smaller hedge funds utilize things like technology incubators," McAnally says. "You’ve got to find out if they did their due diligence to see what the provisions are for availability, for continuity."

Lessons Learned...

What did the US learn about security from the Presidential Elections and the respective conventions in New York and Boston? Michael Smith and Fred Klapetzky remind us of a few of them:

Lesson 1: Preparation Equals Prevention

Lesson 2: Security Saturation makes an Attack more Difficult

Lesson 3: Heightened Awareness makes all the Difference

Lesson 4: Monitoring News Coverage can be Helpful

All of the companies and organizations in these two metro areas should be better prepared than others in the country, right? A recent study (8/2004) by AT&T entitled, "Disaster Planning in the Private Sector: A Post 9/11 Look at the State of Business Continuity in the U.S., surveyed 1000 executives from 10 large metro areas. The survey indicated, surprisingly, that New York and Washington, DC were among those least prepared. In both cities, nearly 25% of companies lacked a plan. According to the survey, even those with BC plans are failing to test or update them on a regular basis. See BC Study

Let's just hope the convention has changed the stats in NYC.

Compliance is a Strategic Differentiator...

We have to agree with Simon Moss of Mantas.

Prior to September 11th and the USA PATRIOT Act, financial institutions had a similar outlook and level of investment into their anti-money laundering efforts. "The systemic 'wall' to stop money launderers was generally at the same height," says Moss.

Differences in the size of that wall are beginning to emerge. "Over the last three years, firms have been making decisions that have essentially changed that landscape," notes Moss. "The firms that invest more into a serious culture of awareness, serious technology, serious training, and take this problem seriously, will drive money launderers or fraudsters or employees looking to do malfeasant actions to other institutions."

The feds are coming to an institution near you, and they will most likely be the neighborhood or community regional bank. These unfortunately are the institutions that the OCC and other US federal regulators are concerned about. Their programs are going to be tested for CIP (Customer ID Programs) compliance and other BSA/AML/OFAC related issues.

ChoicePoint: Your Identity is Big Business...

Why are people getting nervous about companies like ChoicePoint? This article in the Washington Post by Robert O'Harrow comes from his book, "No Place to Hide," published by Free Press, copyright 2005. O'Harrow also received financial assistance from the Center for Investigative Reporting. He outlines the arguments from both sides of the "Big Brother" issues:

Now the little-known information industry giant is transforming itself into a private intelligence service for national security and law enforcement tasks. It is snapping up a host of companies, some of them in the Washington area, that produce sophisticated computer tools for analyzing and sharing records in ChoicePoint's immense storehouses. In financial papers, the company itself says it provides "actionable intelligence.

The question remains whether legislation will ever have as much control over ChoicePoint as they have over companies like Equifax or the other credit reporting agencies. However, everyone must accept that our lives are about full disclosure of who we are and what our historical "Modus Operandi" can tell someone about how we might act into the future.

Public information is there because each one of us has opend a bank account, filled out a credit application, applied for a job and traveled on an airplane. ChoicePoint is there to make sure that risks are managed and losses are mitigated. Period.

One only has to imagine in these times of Identity Theft and Suspicious Activity Reports how important it is for the good and law abiding citizen not to be confused with the person with a questionable history. Frankly, I don't want to be mixed up with the other John Q. Public's on the planet. All the decisions I have made in my life have defined who I am, the zip code I live in, the car I drive and the schools and jobs that I've had.

There is one word of advice for those who don't mind the fact that their information is available to any one who wants to buy it. Make sure that it is accurate. This is where the Fair and Accurate Credit Transactions Act (FACT Act) and other legislation allows the consumer to get access to a majority of the information on file and to see that it is correct. If you can't live with what you are reading, then maybe it's time to make some changes in your life.

COSO: Operational Risk Standard?

Will COSO become the Operational Risk standard for Basel II? This paper by Patrick McConnell argues:

The wording of Basel II is sufficiently vague that banks are in danger of developing internal ORM systems that run the risk of not complying with interpretations of Basel II by local supervisors.

However, there are mature frameworks2 from other industries upon which the processes of Operational Risk Management could be based.

In particular, there are two risk management standards - AS/NZS 4360/2004 and COSO/ERM – that, alone or in combination, could satisfy the requirements of Basel II for systems that are ‘conceptually sound’; and

The adoption of operational risk management processes that are based on proven, practical and usable standards, should reduce the overall costs to the industry of complying with Basel II.

COSO notes that the ERM Framework is “purposefully broad”, capturing “key concepts fundamental to how companies and other organizations manage risk, and may be applied across “organizations, industries, and sectors.”

People: Travel Risk Management...

This iJet advertorial explains many of the benefits of having a travel risk management provider for your global corporate executives.

"They were rushing to catch the overnight train and wondered whether that was a secure option. With the train leaving in five minutes, he asked if they should get on? He was advised to take the train only if the meeting was absolutely time-critical. If they took the train, he was cautioned to stay awake for the second half of the trip because people had recently been robbed, removed from the trains and beaten up after crossing into Macedonia."

Combining real-time intelligence with a focused surveillance and threat detection-training program is exactly what savvy corporate executives and Chief Security Officers are looking for from a single source. Personnel threat management is a prudent risk mitigation solution. This combination is one key strategy to mitigate the operational risks associated with key personnel in any global organization.

Without the application of survivability and surveillance skills with relevant intelligence, employees traveling in harms way will continue to be at significant risk. The CSO is responsible for getting the correct INTEL and even more important, making sure those employees can take care of themselves without having to rely on third party executive protection or outsourced security firms. Sometimes you just have to think and act on your own.

OFAC Compliance in U.S. Financial Institutions...

Foreign Assets Control Regulations for the U.S. Financial Services industry is a vital area of operational risk management in the enterprise. Institutions need to make sure that their employees and not just the compliance officer are enforcing the regulations.

The Office of Foreign Assets Control (OFAC) administers a series of
laws that impose economic sanctions against hostile targets to further
U.S. foreign policy and national security objectives. Economic sanctions
are powerful foreign policy tools. Their success requires the active
participation and support of every financial institution. The use of
sanctions by the U.S. goes back to the earliest days of the Republic
through trade embargoes, blocked assets controls, and other commercial
and financial restrictions. Many of them have been multilateralized
within the global community against pariah countries, as well as being
used against groups, such as narcotics traffickers and terrorists, who
threaten the security, economy, and safety of the United States.
Management of sanctions on the U.S. side is entrusted to the Secretary of
the Treasury.

It is often difficult to balance the demands of Federal and State bank
examiners with limitations on time, resources, and manpower imposed
by bank management. While every financial institution must comply
with the same laws and regulations, no one compliance program can be
prepackaged for everyone in the open marketplace. Every program must
be tailored to meet the needs and structure of individual financial
institutions.

"financial institutions" include:

* banks, including:
o insured
o commercial
o trust companies
o private bankers
o U.S. branches of foreign banks
o credit unions
o thrift institutions
* introducing brokers
* commodities broker dealers
* commodity trading advisors
* commodity pool operators
* securities broker dealers
* futures commission merchants
* issuers, redeemers or cashers of travelers checks, checks, money orders, or similar instruments
* operators of credit card systems
* telegraph companies
* insurance companies
* loan or finance companies
* investment bankers or companies
* persons or companies involved in real estate closings and settlements
* currency exchanges
* casinos, card clubs, and gaming establishments
* money transmitters
* pawnbrokers
* travel agencies
* automobile, airplane and boat dealers
* dealers in precious metals, stones or jewels
* U.S. Postal Service or any agency of U.S., state or local government carrying out a duty or power of business

Under the provisions of the Patriot Act, the Department of Treasury has, or soon will specify anti-money laundering compliance program regulations specific to each above-listed industry. The Patriot Act, at a minimum, requires that these programs include:

1. the development of internal policies, procedures, and controls;
2. the designation of a compliance officer;
3. an ongoing employee training program; and
4. an independent audit function to test programs.

Each financial institution is also required to implement a Customer Identification Program (CIP) that includes reasonable procedures to:

1. collect identifying information about customers opening an account
2. verify that the customers are who they say they are
3. maintain records of the information used to verify their identity
4. determine whether the customer appears on any list of suspected terrorists or terrorist organizations

For more information on how you can tailor your compliance program for your institution contact 1SecureAudit who can provide you with:

Compliance Policies & Procedures Customization

> Employee Training

> Due Diligence & Internal Investigations

> Automated Systems for SDN

> Independent Audits

> Anti-Money Laundering Compliance Programs

Ops Risk for Tier II Institutions...

Operational Risk is not just for the big banking institutions any longer. The latest research from Financial Insights indicates that the ramifications of Basel II are impacting four key areas of U.S. financial institutions:

1. Integration difficulties. Although most large institutions have robust risk-management processes, there's much to be done to achieve Basel II compliance. Most risk processes and systems that are currently used grew up within the individual silos of particular business units. The systems aren't integrated and may have different data requirements and formats.

2. New competitive pressures. Even small banks that aren't required to comply with Basel II will face peer pressure, and they may need to comply anyway. If they don't comply, they'll be at a competitive disadvantage.

3. Consistent methodologies for different risks. Regulators require that different risks be treated the same. Institutions using the advanced internal-ratings-based approach for credit and market risk must also use the advanced-measurement approach for operational risk. This poses problems since credit and market risk are well-established practices in most firms, but operational risk is not.

4. Continuing presence of silos. Silos between business units and systems must be removed for effective risk management. This task is especially daunting for larger institutions, since there are more people and systems involved.

What is your 2005 Corporate Resolution?

If you don't have one yet, consider this one:

A Model 2005 Operational Risk Resolution

The organization shall develop, implement, maintain and continually improve a documented risk management system. Identify a method of risk assessment that is suited for the organizations business information to be protected, regulatory requirements and corporate goverance guidelines. Identify the assets and the owners of these assets. Identify the threats to those assets. Identify the vulnerabilities that might be exploited by the threats. Identify the impacts that losses of confidentiality, integrity and availability may have on the assets. Assess the risks. Identify and evaluate options for the treatment of risks. Select control objectives and controls for treatment of risks. Implement and operate the system. Monitor and review the system. Maintain and improve the system.

If you can agree with this then you are already a candidate for implementing a management system and becoming a BS 7799 compliant organization.

For more info see: BSI Management Systems

Tsunami Contingency Planning and Early Warning...

The latest catastrophic Tsunami natural disaster as a result of a huge undersea earthquake reminds us of the need for effective contingency planning and preparedness. The warning signs and detection devices can only go so far in helping with the potential threats that our planet throws our way.

This article by Beldeu Singh compares the sequence of events and makes the point for a more effective early warning system.

Firstly, it is common knowledge that undersea earthquakes cause tsunamis and these waves can come ashore within minutes of nearby earthquakes. An undersea earthquake must have been picked up by some seismic center in the region but it failed to issue. This inaction exacerbated the death toll because most people in this region do no know what to do in the event of a "felt" earthquake in low lying coastal areas. There was little or no preparation by the Governments in the region for catastrophic calamities caused by convulsions of nature with the exception of an incipient disaster relief systems more suitable for monsoon floods. Typical in Asian management culture is the lack of contingency planning or planning for the uncertain outcomes of events or worst case scenario planning. Structured long term models with comprehensive plans, strategies, systems, logistics and training is also not a norm. The management speaks more of tactical responses and reactions after the tragedy.

On a planet continually being challenged by all types of natural catastrophic events there seems to be only one real way to mitigate the potential losses. Intelligence from early warning systems are only a part of the answer. Emergency Preparedness and Response is the other proactive strategy for dealing with the risk of future threats of this magnitude by mother nature.

Beldeu makes the comparison of this event to the Japanese attack on Pearl Harbor in 1941.

Half a century later, in spite of advances in seismic science and a vast network of modern communications supported by satellite technology, the world relives another day of infamy in the month of December that bears some semblance to the attack on Pearl Harbour. Only this time, it was not failure of collection or analysis of data but one of communication and proper response. In fact, the situation as it unfolded in the region devastated by the tsunami shows that there was no organized response to protect people from the impending impact of the tsunami.

Whistle-blower laws go global...

As the U.S. recovers from yet another accounting scandal at Fannie Mae, other countries are getting on board with the Sarbanes-Oxley Act.

Japan is considering a new whistle-blower law if a local worker has his way in court.

A JAPANESE executive allegedly forced to weed the company car park for 30 years is at the centre of a major shake-up in corporate whistle-blowing law.

Tomorrow a district court in Toyama will hand down a verdict that could shape Japanese business practice for years to come. If Hiroaki Kushioka is successful in his suit against his employer, Tonami Transportation, the way could be open for startling revelations from within corporate Japan. If he fails, the culture of bullying and cover-ups will be given a tacit vote of support. The Kushioka case comes as Japan is preparing a massive overhaul of its legal treatment of whistle-blowers.

Fannie Mae executives may be some of the first to be successfully prosecuted under the laws in the U.S. that require companies to set up a whistle-blower program. It seems that Mr. Kushioka is finally getting his revenge for ratting on workers over 30 years ago thanks to the trend in improving corporate governance across the globe.

External Events: Legal Liability

Pfizer has 10% of it's revenues coming to a halt as a result of the Celebrex Warnings about it's link to greater risk of Heart Attacks.

Pfizer Inc. said it would immediately stop advertising arthritis drug Celebrex to consumers after a study showed that high doses were associated with an increased risk of heart attacks, according to a published report.

The suspension of advertising is indefinite and includes television, radio, newspaper and magazine ads and other promotions to consumers, The New York Times reported on its Web site Relevant Products/Services from Verisign -- Free E-Commerce Start-up Kit, citing Pfizer spokeswoman, Mariann Caprino. Some magazine ads may appear for a few more weeks because of the long lead time of magazine advertising, she said.

If the Merck scenario with Vioxx is any indicator of the legal implications then Pfizer can also expect a series of class action suits to follow.

Who is the right choice for the US DHS Secretary?

In the rush to get someone into the job, most high level qualified candidates have already said no and the current US administration is scrambling after the Kerik affair. So who is the best candidate for the next US Secretary of the Department of Homeland Security?

What the country needs is a career CEO. Not a cop, a lawyer or a politician. Think about what this job is all about and you can see that with over 170,000 employees and warring business units over a finite budget it's going to take someone from private sector business who also understands security.

The kind of security that we have been focused on for the past three years is on the physical aspects of homeland security more so than the intelligence side of the equation. And now with the new Intelligence Act signed and sealed, it's about time we hired someone who truly understands the fusion of data, information, and knowledge to gain "wisdom" aspects of the job.

We already have plenty of cops on the streets keeping their eyes and ears open. What we need now is someone who can get all of the DHS business units working in "concert" and more importantly with the DOD. Homeland Defense is gearing up more than you know and Northern Command is now expanding it's reach beyond it's traditional borders.

Our prediction is that someone will emerge from the ranks of the private sector to take on this enourmous task of getting all of the pieces of the "Homeland Security" puzzle put together. Let's also pray that they understand the difference between Phishing and Fishing. In that case, look hard in the financial services sector.

Tower Group Study: $362.B for Financial Services IT

The latest Tower Group Study says spending will be up to $362.B with 72% in North America and the EU.

Tower said consumer banking will dominate spending globally. The firm predicted that consumer spending will continue to represent the largest share of IT spending while wholesale banking will experience a continued recovery during the year.

As for the securities and investment industry, TowerGroup projects IT spending in the segment will grow four percent during 2005, partially driven by a return to markets by investors who were burned by declining stock markets a few years ago.

People Risk: Avian Flu

The Gartner Group has determined that their clients need to prepare for the upcoming Avian Flu pandemic that is being discussed among the World Health Organization (WHO)as a possibility.

On 13 December 2004, health leaders from around the world met in Geneva to discuss the potential threat posed by the predicted future mutation of avian influenza into a highly contagious and virulent form that could quickly pass from person to person. The World Health Organization (WHO) has warned that avian flu variant H5N1 ("bird flu") could combine with an influenza strain already contagious in humans to cause a pandemic that might kill millions of people. H5N1 has been found in poultry in 11 Asian countries. Attempts to eradicate the disease have not succeeded, despite the destruction of 100 million birds. To date, 44 human cases of avian influenza have been reported, all in Thailand and Vietnam. Most of the victims had direct contact with birds; 32 of the victims died.

The difference with this virus and the digital type is that this one can take out key personnel and requires a whole different contingency planning mindset.

Recommendations:

* Use scenario planning to understand and prepare for the possible impact on your business.
* Make your workforce aware of the avian flu threat and the steps you are taking to prepare for it.
* Assess your business continuity preparedness and try to improve it.
* Assign someone in your business to track biological threats such as avian flu. He or she should regularly review business continuity plans and update them in response to new information.
* Establish or expand policies and tools that enable employees to work from home, with broadband access, appropriate security and network access to applications.
* Expand online transaction and self-service options for customers and partners.
* Work with customers and partners to minimize disruption by developing coordinated crisis response capabilities.

While these are great recommendation from Gartner, I think most savvy contingency planners might have a big yawn reading these over.

ORM: Systems Integration Challenges

In Deloitte's 2004 Risk Management Survey more than half of the respondents say integration of systems to handle Operational Risk is a big concern. More Chief Risk Officers (CRO)have been hired and are reporting directly to the CEO or the Board of Directors.

Operational risk management - according to the survey, operational risk management (ORM) continues to be a relatively new and developing field compared to the more established risk management disciplines, with the majority of respondents still in the beginning stages of implementation. However, the survey shows an increase over 2002 in the number of firms that have established ORM programs. The capability of ORM systems continues to be a challenge for a substantial majority of respondents who indicated that at least some improvement in functionality is needed.

Risk systems and technology - while information technology is considered to be the key enabler of a risk management architecture, respondents report a host of continuing challenges in developing adequate risk systems. More than half (52 percent) cited a lack of integration among systems as a major concern and 42 percent cited it as a minor concern. Lack of flexibility and scalability as well as performance issues were also noted as key challenges. Improving regulatory related systems capabilities and implementing operational risk management and advanced credit risk systems were the three highest priority items cited by respondents in the systems development and technology area.

"Financial institutions are recognizing the need for strong risk management governance, now more than ever," said Jack Ribeiro, managing partner of Deloitte's Global Financial Services Industry practice. "They are responding to increased expectations from regulators, counterparties, the public, and others to ensure sound governance of their risk management programs."

The Most Feared Words in the Boardroom...

You have been indicted. This Boardmember article by Peter Higgins of 1SecureAudit articulates the essence of an effective OPS Risk compliance program. Even today it is a great reminder of why ethics and education are a key component of an effective system.

Every Fortune caliber organization from financial services to health care has already implemented a pervasive compliance program to mitigate the risk of ending up with the SEC or US Attorney in the lobby.

The catalyst behind these initiatives is generated from the U.S. Sentencing Commission's Organizational Sentencing Guidelines. They allow for more lenient sentencing if an organization has evidence of an "effective program to prevent and detect violations of law."

The Guidelines contain criteria for establishing an "effective compliance program."

These include oversight by high level officers, effective communication to all employees, and reasonable steps to achieve compliance such as:

* Systems for monitoring and auditing
* Incident response and reporting
* Consistent enforcement including disciplinary actions

Yet the corporate incivility continues. Why is it that we can’t pick up the morning paper or listen to the news on the way to work without hearing about a new indictment of a top ranking officer?

Here lies the question many Board of Directors are scratching their heads about these days. How can we avoid these ethical and legal dilemmas and how can they be addressed without creating a state of fear and panic?

The answer lies in the human factors of what motivates people’s behavior. This requires programs, controls and good old fashioned vocational counseling. However, the real facts are that all of these alone will not be able to stem the tides of corporate malfeasance.