Red Flags Rule: Reputations at Stake...

The "Red Flags Rule" is on the back burner in the United States until November 1, 2009. The Federal Trade Commission has delayed the compliance mandate again. Are you ready? Do you have to comply?

The Federal Trade Commission has postponed a deadline for many of the nation's businesses -- including banks, public utilities and health-care providers -- to comply with a controversial identity-theft prevention program.

The program, called the "Red Flags Rule," was to take effect Aug. 1 but will now be delayed until Nov. 1. The program is aimed at preventing the loss of billions of dollars as the result of the theft of consumer and taxpayer personal information. Under the regulation, companies and institutions would be required to establish a way to identify potential threats at the businesses, find ways of detecting such threats and install measures to prevent them. Employees would also have to be educated about the programs.

A survey commissioned in 2006 by the FTC revealed that more than nine million Americans have their identities stolen each year at a total estimated loss of $15.6 billion.

The nation is under a barrage of attacks from adversaries that lie in the shadows such as "Conficker" and other botnets or malware and business still delays the compliance measures asked of them. One only has to look deeply into the latest 2009 report from CISCO to better understand the state of risk from "Transnational Economic Crime":

Report Highlights

• Criminals are exploiting traditional vulnerabilities because they believe security experts and individual users are paying little attention to these types of threats.
• Compromising legitimate websites for the purpose of propagating malware remains a highly effective technique for criminals.
• Web 2.0 applications, prized for their ease of use and flexibility, have become lures for criminals.
• Criminals are now targeting online banking customers using well-designed, localized text message scams that leave virtually no trail in their wake.
• The Obama administration has made strengthening U.S. cybersecurity a high priority, and plans to meet threats by using technological innovations and partnering with the private sector. Other countries are similarly increasing efforts to enhance cybersecurity and prevent cybercrime.
• Compared to 2008, the number of vulnerabilities and discrete threats has not risen as quickly. According to research by Cisco, this is a clear sign that the security community is succeeding in making it more difficult for attacks to take root and grow.

Operational Risks are vast and the technology landscape is not getting more narrow, it is expanding. Cloud Computing is now the latest attempt to get cost savings and to make the IT puzzle less of an asset management nightmare. If you think that you understand it and where it's heading, think again. One only has to visit "Black Hat" and the briefings to get a better sense of what the true risks are going to be if not already. This one caught our eye and for good reason:

Nitesh Dhanjani

Psychotronica: Exposure, Control, and Deceit

This talk will expose how voluntary and public information from new communication paradigms such as social networking applications can enable you to remotely capture private information about targeted individuals.

Topics of discussion will include:

Hacking the Psyche: Remote behavior analysis that can be used to construct personality profiles to predict current and future psychological states of targeted individuals, including discussions on how emotional and subconscious states can be discovered even before the target is consciously aware.

Techniques on how individuals may be remotely influenced by messaging tactics, and how criminal groups and governments may use this capability, including a case study of Twitter and the recent terror attacks in Bombay.

Reconnaissance and pillage of private information, including critical data that the victim may not be aware of revealing, and that which may be impossible to protect by definition.

The goal of this presentation is to raise consciousness on how the new paradigms of social communication bring with it real risks as well as marketing and economic advantages.

The risks to "Social Networking" Twitter-based consumers and the extended digital enterprise are vast. The CISO's and internal audit teams have been having their own internal battle for years and will soon realize that once and for all, they are on the same side of the Cyberspace war. The risks to the organization may come in the form of a major business disruption, denial of service (DOS) or even worse, a significant loss of consumer Personal Identifiable Information (PII). Even if you are considered PCI compliant just as "Network Solutions" was, the loss of reputation can be significant:

Hackers have broken into Web servers owned by domain registrar and hosting provider Network Solutions, planting rogue code that resulted in the compromise of more than 573,000 debit and credit card accounts over the past three months, Security Fix has learned.

Herndon, Va. based Network Solutions discovered in early June that attackers had hacked into Web servers the company uses to provide e-commerce services - a package that includes everything from Web hosting to payment processing -- to at least 4,343 customers, mostly mom-and-pop online stores. The malicious code left behind by the attackers allowed them to intercept personal and financial information for customers who purchased from those stores, Network Solutions spokeswoman Susan Wade said.

The "Red Flag" may have turned to a "White Flag" as you surrender to the lawyers and the federal oversight.

operational risk

FCPA: Modern Day "Smoking Gun"...

Corporate malfeasance is on the mind of most global executives today. Their enterprise is consistently fighting the economic challenges and at the same time defending it's reputation as new "Smoking Guns" are revealed. Perhaps these modern day discoveries of wrong doing should be renamed "Smoking Digital Evidence" because this is exactly what it is. Information uncovered through normal monitoring practices or as the result of a specific investigation produces "Red Flag" alerts based upon acceptable use policy or corporate rule sets.

These "Red Flags" uncovered in the context of programs devoted to processing digital evidence is now a standard Modus Operandi for corporate governance, legal and operations risk management. These new tactical business units are being developed in a rapid response to new regulatory and compliance mandates yet the greater pressure is coming from the wake-up calls senior executives have been receiving lately.

The Justice Department's probe of the credit default swaps market is reportedly focusing on Markit Group Holdings Ltd., the London-based supplier of prices in OTC derivatives, and its relationship to a group of major banks that own a stake in the company. The DOJ is scrutinizing the ownership of Markit by a group of banks that control a large amount of pricing in the $28 trillion credit derivatives market.

The banks have received a notice of investigation from the DOJ asking them for details on their trading activity, including how much they have at risk in the market and their monthly value of their credit default swaps, according to Bloomberg News. Banks that own the largest stakes in Markit, include: J.P. Morgan, Bank of America (through its acquisition of Merrill Lynch), Deutsche Bank, Royal Bank of Scotland which acquired ABN Amro, as well as Credit Suisse, Goldman Sachs, Morgan Stanley and UBS, according to Bloomberg News.

"The DOJ is looking to find any wrongdoing in that marketplace," commented Paul Zubulake, senior analyst at Aite Group in an interview with Wall Street & Technology. "Obviously that is going to open up a large can of worms," he said. "It will be costly for the dealers that have to battle the DOJ given the discovery issues, about all the information, emails and instant messages they will need to turn over."

Digital Forensics, Records Management and eDiscovery units at some of the largest financial institutions are working overtime. Finding any "Smoking Digital Evidence" will be the standard operating procedure on most international transactions whether it be in the financial services industry or even telecommunications:

Good news for compliance officers: You now have solid evidence that the benefit of implementing an effective compliance program far outweighs the cost, in the form of the massive Foreign Corrupt Practices Act settlements swallowed by Siemens AG and three of its foreign subsidiaries.

Siemens, a German conglomerate that is one of the largest engineering firms in the world, agreed in December to pay more than $1.6 billion to U.S. and German regulators for a massive bribery scheme that felled the highest executives at the company. Penalties paid to the Justice Department and Securities and Exchange Commission alone topped $800 million, by far the largest sanction ever imposed in an FCPA case.

In the following excerpt, Linda Chatman Thomsen speaks on the massive Siemens investigation: "Furthermore, the $1.6 billion total that Siemens will pay in these settlements is the largest amount that any company has ever paid to resolve corruption-related charges.

And that is fitting because the alleged conduct by Siemens was egregious and brazen. It was systematic, it involved thousands of payments, and it occurred over an extensive six-year period. Siemens created elaborate payment schemes to conceal these corrupt payments to foreign officials. The company’s inadequate internal controls allowed the conduct to flourish.

The details tell a very unsavory story: employees obtained large amounts of cash for Siemens’ cash desks; employees sometimes carried that cash in suitcases across international borders to pay bribes; payment authorizations were recorded on post-it notes that were later removed to avoid leaving any permanent record; there were slush funds and a cadre of consultants and intermediaries to facilitate paying the bribes.

Investigating this intricate scheme and righting Siemens’ wrongs has taken a remarkable and unprecedented level of coordination among many law enforcement agencies around the world."

The internal threat of employees, partners and so called in-country agents who help facilitate business deals is one square in the risk management matrix. The business transactions themselves are becoming part of the Venn Diagram that includes:

• Business & Global Commerce
• Personnel Security & Integrity
• Rule of Law & Litigation

As global institutions continue their expansion across the continents where capital follows security and the rule of law, so too will the attacks on the corporate enterprise.

operational risk

Trusted Systems: Human Factors in Play...

The case is U.S. v. Dreier, 09-cr-00085, U.S. District Court, Southern District of New York (Manhattan). It's only the beginning of a long hard road for many unidentified subjects (unsubs) as the fall out from the U.S. Economic crisis uncovers who was stealing others peoples money for their own fraudulent schemes.

Marc Dreier, the New York law firm- founder who pleaded guilty to defrauding hedge funds of more than $400 million, should be sentenced to 145 years in jail, prosecutors said, as a defense lawyer sought a term of as little as 10 years.

The rival requests came in court filings today in federal court in Manhattan. Dreier will be sentenced on July 13 by U.S. District Judge Jed Rakoff. Investors who placed more than $740 million with Dreier lost at least $400 million, lawyers said.

Operational Risks associated with 3rd party suppliers is a continuous concern. Effective due diligence with partners and service providers is a necessary task, on a quarterly basis. Many institutions leave it up to the service level agreement (SLA) or the written contract to be the monitor. To their demise, written words on a contract are not enough. Especially, when the partners are the lawyers themselves.

New York prosecutors on Wednesday said 13 people and a mortgage origination company have been indicted on charges of running a multimillion-dollar real-estate fraud that cheated lenders through sham sales.

The defendants include employees at the Long Island, New York-based mortgage company AFG Financial Group Inc, several attorneys and other defendants, according to Manhattan District Attorney Robert Morgenthau.

The investigation is continuing, and Morgenthau said the size of the scheme could eventually total $200 million.

One lawyer accused of engaging in fraudulent transactions was involved in transactions adding up to more than $100 million, Morgenthau said.

Lenders who were victimized in transactions made by that one lawyer included New Century Mortgage Corp, WaMu/Long Beach Mortgage Co, Countrywide Financial, First Franklin Financial Corp and Mortgage Network USA Inc.

The financial services sector will continue to be a quagmire for transactions for decades to come. The due diligence, fact checking and assurance that the "Deal" is a solid one will continue to under go a tremendous burden on all parties. The consumer, the lender and the underwriters.

The human factors associated with crimes such as fraud are well known. The study of the "Ponzi Scheme" has been a text book case for study in business schools for years. What may not have been so obvious is the science behind the human motivators. And maybe not even noticeable, is how accustomed the human is to trusting the automated world we live in. The fact that computers calculate what we have purchased in the retail store is one of the first trusted information scenarios we grow up with. How many people actually add up all of the dozens of items in their grocery cart, calculate the tax and any discounts to see if the Point of Sale (POS) system has done it's math correctly?

So what is Human Factors Science?

Human factors are sets of human-specific physical, cognitive, or social properties which either may interact in a critical or dangerous manner with technological systems, human natural environment, or human organizations, or they can be taken under consideration in the design of ergonomic human-user oriented equipments. The choice/identification of human factors usually depends on their possible negative or positive impact on the functioning of human-organization and human-machine system.

Did someone try to steal Goldman Sachs’ secret sauce?

While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.

The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.

Trusted Systems and the information that flows from them is only as good as the programs that run them and the people who developed the millions of lines of code in the software. The trading systems at the NYSE, NASDAQ and Hang Seng Index are only as reliable as the calculations and the integrity of the systems themselves. When that trust is compromised in the trusted system, whether it be a program or a person, human factors take over.

operational risk

Digital Forensics: Right to Question CSI's...

The US Supreme Courts ruling in MELENDEZ-DIAZ v. MASSACHUSETTS will have significant impact on Digital Forensics expert practitioners. Legal cases utilizing the examination of computers and other digital assets containing relevant information will have more testimony by CSI analyst experts. The New York Times report by Adam Liptak says:

Crime laboratory reports may not be used against criminal defendants at trial unless the analysts responsible for creating them give testimony and subject themselves to cross-examination, the Supreme Court ruled Thursday in a 5-to-4 decision.

Noting that 500 employees of the Federal Bureau of Investigation laboratory in Quantico, Va., conduct more than a million scientific tests each year, Justice Kennedy wrote, “The court’s decision means that before any of those million tests reaches a jury, at least one of the laboratory’s analysts must board a plane, find his or her way to an unfamiliar courthouse and sit there waiting to read aloud notes made months ago.”

The outcome of the ruling for the prosecution is that forensic examiners and scientists will be more thoroughly scrutinized in the tests they perform. The process will require more effective documentation and the ability to play back for a jury exactly the process utilized to support any facts of evidence. This will not be difficult as Best Practices today are being utilized such as the video taping of the entire test and examination. Achieving a "Defensible Standard of Care" will however be even more of a priority for Operational Risk Management professionals.

The defendant will have the ability to cross-examine the analyst, whether it was making a determination on what the blood type was of the accused attacker or the date, time, and place that the defendant sent an e-mail from the office computer to a co-conspirator.

In the digital forensics environment, the ruling means that the subject matter experts will simply be spending more time in court and on the witness stand. This will impact the time it takes to conduct the trial yet the rights to examine the process, expertise and documented procedures for the evidence that has been introduced is an important issue.

From an Operational Risk Management point of view, this means that your eDiscovery and Digital Forensics certified examiners will be under the magnifying glass and subject to the questioning by counsel. We see an increased attention related in civil matters coming soon. Several states are asking that the outsourced entities associated with inspection of digital assets be licensed by the state itself, as a Private Investigator. This provision would subject the expert authority to also being legally certified in the knowledge of state laws pertaining to civil procedure, chain of custody and legal procedures on the handling of evidence.

The question remains on whether the Supreme Court Justice's were thinking beyond the test for the presence of a drug, as this case was focused on in MELENDEZ-DIAZ v. MASSACHUSETTS. The defense bar will be utilizing this ruling to go beyond the criminal courts to the civil trials where white collar cases are largely based upon the documents, e-mails and other digital evidence that has been retrieved using forensic procedures.

It will be interesting to see how this ruling impacts the professional licensing, certifications and documentation of examinations for the 21st century Digital Forensic "CSI".

operational risk

Proactive Risk Strategy: Transnational Asset Forfeiture...

Effective strategy execution and the application of intelligence to gain increased mission efficiency is the name of the game. The public / private convergence of people, processes, systems and the fusion of relevant international incidents data establishes the playing field. The threats to the very fabric of our economic and security well-being is directly tied to the rule of law, the safety of the environment and the ability for capital to be invested with prudent risk management mechanisms in place.

If any component of this fabric becomes frayed or torn, this vulnerability threatens the overall resiliency of this "Transnational Ecosystem". The homeostasis of the "Transnational Ecosystem" is dependent on the factors associated with it ability to gain new energy, (food, water, power, money) and to continually "Adapt" to it changing environment. The ability to adapt rapidly within this ecosystem will determine who the winners are and also the survivors. So what is a good example of this "Transnational Ecosystem" that we can apply to public / private convergence and Operational Risk Management?

Although pioneered in the USA, there now appears to be a global trend to use stand-alone civil proceedings as a means of recovering the proceeds of crime in the hope that they will be more effective than proceedings that are ancillary to and dependent on a criminal prosecution. Recent examples of jurisdictions that have introduced civil forfeiture legislation include Italy, South Africa, Ireland, the United Kingdom, Fiji, the Canadian Provinces of Ontario, Alberta, Manitoba, Saskatchewan and British Columbia, Australia and its individual States, and Antigua and Barbuda. In addition, the Commonwealth has produced model provisions to serve as a template for jurisdictions that wish to introduce such legislation.

This trend towards civil forfeiture has been prompted by the nature of organized crime. Organized crime heads use their resources to keep themselves distant from the crime that they are controlling and to mask the criminal origin of their assets. For this reason it has become extremely difficult to carry out successful criminal investigations leading to the prosecution and conviction of such individuals, with the result that finances derived from crime are often effectively out of the reach of the law and are available to be used to finance more crime. Such peaceful enjoyment of the proceeds of crime damages public confidence in the rule of law and provides harmful role models. This has led to a recognition that criminal confiscation regimes may be inadequate and ineffective in certain cases.

Traditionally, the use of OPS Risk strategies associated with civil asset forfeiture have their intersection with AML (Anti-Money Laundering) and Terrorist Financing. Moving money on a global basis utilizing the modern day "Hawala" or informal value transfer system requires smart people and sophisticated systems. Putting the person at the right place with the right evidence is the investigators "Holy Grail" yet there are other effective means for increasing that resiliency in the ecosystem.

The financial meltdown and economic crisis has impacted both the "Boy Scouts" and the "Wise Guys" on how to continue to prosper. The use of such tools such as Asset Forfeiture in combination with timely intelligence both Open Source and proprietary can provide the means for another effective Operational Risk strategy in a public / private consortium. The cooperation, coordination and collaboration of banking, hedge funds, broker dealers, insurance companies and private equity firms with federal and state task forces is a growing trend.

The mantra "Need to Know" is quickly being replaced with "A Responsibility to Provide" in the intelligence community and soon to be in the ranks of the financial private sector as it pertains to adapting to the transnational ecosystem. One good example of this momentum can be found in the rapidly growing education and awareness programs focused on this very subject:

Mission Statement

AssetForfeitureWatch.com is the indispensable source of news, information and training for law enforcement professionals and others working in the asset forfeiture field. At AssetForfeitureWatch.com, we understand that turning the proceeds of crime against criminals is one of the most powerful tools law enforcement agencies have for keeping communities safe, eliminating corruption, and crippling cross-border criminal enterprises. In offering training and education, an annual conference, live and Web seminars and an interactive community, AssetForfeitureWatch.com keeps its members on the leading edge of asset forfeiture strategy and practice.

The goal is to utilize the existing international legal framework to improve the resiliency of the "Transnational Ecosystem." Beyond the banking institutions are the governments and countries themselves who must make their decisions about their own business and commerce models. These havens across the globe will continue to exist because they don't have manufacturing capacity, IT outsourcing services or a port for trading and exporting raw materials. Therefore, they will continue to cater to the needs of suspect enterprises, non-state actors and even some rogue nations states.

So what is the lesson here? Reading between the lines. Assets in your portfolio, on your books, in the warehouse or even in your personal possession may soon be the property of a government entity near you.

operational risk

4GW: U.S. CyberSpace OPS Risk...

The Washington, DC beltway bandits are buzzing in anticipation of President Obama's selection for the next defender and policy maker for United States CyberSpace. We wonder what branch of the armed forces s/he will be associated with and to what degree they gain the agreement of the power base that CyberSpace is indeed a "Strategic National Asset", once and for all.

Meanwhile, OPS Risk Managers are dealing with transnational non-state actors (in some cases funded by nation states) that are robbing our private sector and government agencies blind. Stealing Personal Identifiable Information (PII), Corporate Intellectual Property, Defense R & D and classified State secrets. The next commander of U.S. CyberSpace has an even bigger job once the job starts; protecting and defending our country's vital Digital Infrastructure. This nexus of criminal, terrorist and irregular warfare is being waged on a 24/7 basis here in the homeland.

So how do you go about fighting this 4th Generation (4GW) war comprised of well organized, decentralized, clandestine subjects operating in the cyber shadows? This begins with creating an effective Information Sharing Environment (ISE), a fusion of who, what, when, how, where and maybe why. Defending the nation against the physical attacks of the likes of Al-Qaida or the virtual attacks from Yingcracker has some very interesting similarities.

If the next Secretary of U.S. CyberSpace is going to take the fight to those who wish to copy, delete, probe, scan, flood, bypass, steal, modify and spoof their way across our Digital Infrastructure, they could learn from this synopsis from Robert Haddick:

Does it take a network to beat a network?

On June 5 United States Joint Forces Command (USJFCOM) wraps up a week-long war game designed to test the Pentagon's vision of warfare in the future. The war game looks ahead to the year 2020 and examines how U.S. and allied military forces -- along with civilian government, non-government, and international institutions -- cope with a failing state, a globally networked terrorist organization, and a peer competitor. The results of the war game are supposed to influence the conclusions of this year's Quadrennial Defense Review, an in-depth review of the Pentagon's strategies.

Officials at USJFCOM won't discuss the results of the war game until at least July; many of the most interesting conclusions may remain classified. But the commander of USJFCOM, General James Mattis of the Marine Corps, described his vision of the future while delivering a speech at the Center for Strategic and International Studies.

Mattis discussed how today's adversaries have adapted to U.S. conventional military superiority by forming disaggregated networks of small irregular teams that hide among indigenous populations. United States military forces, by contrast, have only come under greater central control. According to Mattis, this shift is due to evolutions in intelligence-gathering and communications technologies. Call it the new iron law of military bureaucracies: when commanders gain the technical ability to micromanage, they will micromanage.

Mattis believes that in order to defeat modern decentralized networks, U.S. forces will have to become decentralized themselves. This will entail giving autonomy to and requiring initiative from the youngest junior leaders in the Army and Marine Corps. High-performance small infantry units, "a national imperative" according to Mattis, will need to operate independent from higher control, finding their own solutions to local problems as they implement broader policy guidance.

Whether the troops are fast roping out of helicopters or behind the flat screen detecting and analyzing the stealth cyber attack, the approach to defeating the adversaries is much the same. Infiltrating the "cells" and collecting valuable INTEL on the global enemy is what gives us the "Ground Truth." The commander for U.S. CyberSpace will soon be educated on the private sectors role in achieving this continuous and lofty goal of a creating more decentralized and clandestine citizen soldiers.

As the private sector battles the non-state actors for preservation and protection of valuable customer data, corporations are simultaneously being attacked by adversarial plaintiff lawyers.

U.S. insurer Aetna has been targeted in a lawsuit alleging it failed to protect personal information of employees and job applicants, documents indicate.

The lawsuit comes after Aetna, of Hartford, Conn., was struck by computer hackers to access a company Web site holding personal data for 450,000 current and former employees as well as job applicants, the Hartford Courant reported Wednesday.

The private sector would enjoy having our government involved in more proactive efforts to seek out and stop these criminal and terrorist entities that prey on organizations that remain vulnerable. The Operational Risks associated with litigation in the corporate enterprise are here to stay. If the public and private sector can once and for all coordinate, collaborate and "Share Information", we can disrupt, capture, prosecute and defeat our cyber adversaries.

operational risk

Economic Impact: Hedge Funds Beware...

In a recent ACFE study on the impact of an economic recession, the results are eye opening. More than half (55.4 percent) of respondents said that the level of fraud has slightly or significantly increased in the previous 12 months compared to the level of fraud they investigated or observed in years prior.

Additionally, about half (49.1 percent) of respondents cited increased financial pressure as the biggest factor contributing to the increase in fraud, compared to increased opportunity (27.1 percent) and increased rationalization (23.7 percent).

The survey also found that:

Employees pose the greatest fraud threat in the current economy. When asked which, if any, of several categories of fraud increased during the previous 12 months, the largest number of survey respondents (48 percent) indicated that embezzlement was on the rise.

Layoffs are affecting organizations' internal control systems. Nearly 60 percent of CFEs who work as in-house fraud examiners reported that their companies had experienced layoffs during the past year. Among those who had experienced layoffs, almost 35 percent said their company had eliminated some controls, while 44.2 percent said the layoffs had no effect on controls and only 3.2 percent said their company had increased controls.

Fraud levels are expected to continue rising. Almost 90 percent of respondents said they expect fraud to continue to increase during the next 12 months. Additionally, the fraud most expected to increase is embezzlement.

These results are not too surprising. Internal control systems could be an issue if there are layoffs in the risk management departments or reallocated enterprise resources. The embezzlement schemes come in many forms and they know where and what areas will be neglected in oversight during the economic belt tightening.

Most of these fraudsters are brilliant "con men". They know how to prey on the human factors of greed and fear. Powerful emotions must be monitored by a "Corporate Vigilance" and awareness program. This preempts potential breaches and crisis incidents that will ultimately impact personal and corporate reputations.

Three factors are generally accepted as being necessary for a fraud to occur: pressure, opportunity, and the ability to rationalize illegal behavior. Unfortunately, the presence of each of these factors may rise in periods of economic hardship. Organizations and individuals alike can experience the pressure of increased financial strain. Opportunities for fraud could proliferate as many companies cut their workforces and otherwise reduce expenditures, perhaps leading to reduced internal controls and fewer proactive fraud prevention measures. And bombardments of bad financial news could cause mounting feelings of helplessness, pessimism, and isolation, which may, in turn, allow individuals to rationalize previously unthinkable acts.

So what can you do to detect early the potential existence of a suspected fraudster in your organization without subjecting current employees to retribution or put them into harms way? One effective strategy is to hire an outside entity to perform ongoing interviews and investigations that is independent of the internal audit department or OPS Risk staff. The other step is to compartmentalize the unit in terms of information exchange and to increase overall operational security.

Harry Markopolos, who is responsible for investigating Bernie Madoff for 8 or 9 years did exactly this and for good reason. His team was operating in the field under his direction and was kept secret even while he was talking to the SEC. Why? Some of the off-shore funds Madoff was doing business with were only a few steps removed from organized crime, according to Markopolos. If these firms new that Mr. Madoff was stealing them blind, they could have put some adversarial actions into play.

Once the fraudster gets the indicator that any one is getting close to the point of questioning their behavior, you can bet the evidence will begin to be destroyed or masked. This destruction of evidence can begin with simple deleting of e-mails, documents or the creation of new e-mails or data to mask or cover up the trail of fraudulent activities. This is when the use of Digital Forensic examinations on weekends or evenings while employees are away from the workplace can help reveal the presence of "Anti-Forensics."

The presence of anti-forensic tools to cover their tracks, e-mails or where they are visiting on the Internet might be the first sign that you may have an actual fraud scheme in operational mode. Hidden or encrypted files found on an employees laptop or desktop utilizing unauthorized sofware tools or downloaded freeware is a huge "Red Flag."

It's important for any investigator to consider the human factors and the behavior associated with people under pressure and close to the end of their hidden occupational fraud operation. These typically have been going on for up to 24 months before they are discovered and you can be sure that they have thought about the day when they are finally discovered. The fight or flight mode kicks in at this point and organizations are obligated to mitigate the risks of harm to fellow employees.

Effective Corporate Integrity units in global enterprises require the right internal resources, independent outside expertise and a comprehensive OPS Risk framework to be more successful.

Hedge Funds have been on alert for months now. Marc Dreier, the New York law firm founder accused of defrauding hedge funds by selling $700 million in phony promissory notes, might face life in prison after pleading guilty to fraud charges.

According to prosecutors, victims of the fraud included Amaranth Group Inc., Perella Weinberg Partners, Eton Park Capital Management LP, Concordia Advisors LLC, Novator, Meyer Ventures LLC, Blackstone Group LP’s GSO Capital Partners and Elliott Management Corp.

The case is U.S. v. Dreier, 09-cr-85, U.S. District Court, Southern District of New York (Manhattan).

operational risk

Human Factors: Early-Warning System...

Predictive Intelligence And Analytics From 1SecureAudit Provides Transnational Organizations With A Preemptive Human Factors Early-Warning System

According to Managing Director and Chief Risk Officer of 1SecureAudit, Peter L. Higgins, the complexity of today's extended global enterprises requires a new governance lens to view hidden insider risks and to guide management executives to achieving a defensible standard of care.

"Our newest consulting practice accelerates the time line in identifying employee insider risks and potential threats associated with international client transactions," said Higgins. "Ms. Marcia Branco is launching our new client offering with more than a decade of experience identifying the complex connections between human behavior and corporate operational risk responsibility."

Advocating a "People First" approach, Ms. Branco, vice president, practice director of the Predictive Intelligence and Analytics practice, believes corporate personnel; partners and suppliers represent a tremendous asset and simultaneously a significant legal liability to a business. "People are the primary focal point to better understanding and resolving systemic risk problems within the walls of the enterprise and beyond to the extended supply-chain," said Branco.

The Association of Certified Fraud Examiners affirms "U.S. organizations lose an estimated seven percent of annual revenues to fraud," and insider negligence is the highest cause of data breaches, reports the Ponemon Institute & PGP Corporation. The complexity and quantity of insider threats is growing at the same time as businesses are facing shrinking budgets and mounting pressures to maintain and grow profits with fewer resources. "How successful has your company been at identifying and swiftly addressing issues, conflicts and preventing malfeasance? Whether originating internally from an employee or contractor or at your extended border of partners, suppliers and clients, predictive intelligence is essential?" asks Higgins.

1SecureAudit provides critical assessments, internal investigations, strategy execution and program development. These proactive governance and advisory services generate positive change to business culture, operations and bottom line.

"Our distinctive 'People First' approach examines your organization's human capital assets to gain unique insights on corporate culture, company issues and the workforce's attitude about management and business initiatives. We convert these human factor data into predictive intelligence to preemptively determine how to best shape current and new corporate strategies. Our clients are able to take advantage of short-lived opportunities, attract and retain employees, partners and customers, demonstrate a more defensible standard of care and promote a trustworthy corporate reputation," stated Branco. "Does your organization consistently adhere to and enforce corporate policies, ethical standards and procedures that value your employees and respond to shareholder advocates?"

Working with 1SecureAudit to integrate predictive intelligence in any business strategy and practices is a sound investment that directly contributes to corporate management's, Board of Directors', and shareholders' peace of mind. For more information, visit 1SecureAudit.com or e-mail RDU (at) 1SecureAudit.com.

operational risk

Economic Impact: Proving the Truth...

The Madoff investigations into so called "feeder firms" are now gaining momentum. The question on who are the victims and where fraud is suspected continues it's due course. The process of client referrals is not a crime and allegations that correlate this with fraudulent behavior is a flawed mindset. The current basis in the Merkin case has more to do with non-disclosure of where clients money was actually invested:

Andrew Cuomo, the New York attorney general, yesterday filed civil fraud charges against the hedge fund manager Ezra Merkin, alleging he secretly channeled more than $2.4bn to Bernard Madoff's Ponzi scheme in exchange for lucrative fees.

The move is the second regulatory action in two weeks against one of the big so-called "feeder" funds that sent billions of dollars to Mr Madoff, who pleaded guilty to one of history's biggest investment frauds.

Mr Cuomo accused Mr Merkin, a leading figure in the New York charity community and former chairman of financing company GMAC, of steering money from charities, universities and non-profit organisations to Mr Madoff without their permission and reaping about $470m in fees for his three funds.

"Merkin duped individual investors, non-profits and charities into believing he was responsibly managing their investments, when in actuality he was dumping them into history's largest Ponzi scheme,'' Mr Cuomo claimed yesterday.

Operational Risk professionals in these hedge funds and other alternative investment firms are getting prepared. These organizations will continue to be under the regulatory spotlight for years to come. Fraud and the fear of fraud will make their potential clients even more diligent in their understanding of where their funds are being invested. The federal watchdogs, oversight mechanisms and civil law suits will require firms to have their risk management "Act" together.

When it comes time to prove the truth, whether innocent or guilty, it will come down to information. The likelihood that this information is housed in a database, e-mail system or off-site disaster recovery repository is almost certain. Digital information that is part of any inquiry for civil or criminal action is subject to the "Rules of Evidence" and the "Federal Rules of Civil Procedure." This is where most of the alternative investment firms have their greatest exposure and vulnerability today. Call it the "Readiness Factor".

In a groundbreaking case from the past year, Qualcomm Inc. v. Broadcom Corp., No. 05CV1958, 2008 WL 638108 (S.D. Calif. March 5, 2008), the court found the plaintiffs to have committed "monumental and intentional" discovery violations for failing to produce thousands of documents requested in discovery. The court cited the "impressive education and extensive experience" of Qualcomm's attorneys to justify significant sanctions for failure to produce relevant e-mails, including reporting to the State Bar of California.

The "Readiness Factor" goes far beyond the process or procedures for preserving evidence. It starts with the creation of information inside the organization. How is it classified, where is it stored and who has access to it? These are fundamental Information Technology and Records Management 101 questions that any prudent organization has already answered. Where most firms find themselves with their backs up against the "legal wall" has to do with relevance, authenticity, and admissibility of information.

The "Alternative Investment" industry is quickly learning that their own IT professionals are going to end up on the witness stand and in early depositions. They are going to be hearing questions such as:

• What policies or procedures do you manage in your department/organization?
• What training do you have on the collection and preservation of "Electronically Stored Information"?
• Explain your responsibility or supervision of access controls, folder management, indexing, purging controls and metadata?
• Describe the procedures your firm utilizes to identify the places, people (custodians) and quality of the data that has been preserved for this case?

The list continues and the IT professionals better be ready. Adversarial counsel will be digging deep to get after the key components of authenticity and spoilation issues. The unfavorable outcomes from a lack of readiness can produce an "Economic Factor" that far exceeds the cost of just finding and producing the information for e-Discovery.

The economic impact of proving the truth in any case can be significant. If you were a savvy and smart prosecuter, the cases that would filter to the top for scrutiny may very well be those firms that display the most "IT Immaturity." Getting some wins under your belt with some relevant case law could determine how fast future cases are settled far in advance of ever getting to trial.

For those "Alternative Investment" firms that are behind the 8 Ball, here is a good place to start your own discovery of the total cost of proving the truth. The E-Discovery Road Map.

operational risk

4GW: Irregular Warfare in the Homeland...

Why is the US House Armed Services Subcommittee holding a hearing soon that is entitled: "Terrorism, Unconventional Threats and Capability on Terrorism and the New Age of Irregular Warfare: Challenges and Opportunities"?

Here is one good reason:

Baitullah Mehsud, the leader of the Pakistani Taliban recently claimed responsibility for the deadly attack that took place at a police academy on Monday in Lahore, Pakistan. But that’s not all. According to Mehsud, the next attack is going to be much closer to home. In a phone interview with the Associated Press, Mehsud indicated that his terrorist organization was planning a devastating attack on Washington D.C. that would “amaze” the world. Heritage analyst James Phillips told Fox News:

It should be taken seriously because [Mehsud] has ordered the deaths of many Pakistanis and Afghans and has a close alliance with Al Qaeda. It’s not too much of a stretch to think he might be involved in an attack on the U.S. if he’s able to get his followers inside the United States. He’s a militant extremist whose threats cannot be ignored.

Though most Americans associate terrorist attacks with bombings, armed ground assaults can just as deadly and disruptive. The most dramatic recent example was the Terrorist attacks that took place in Mumbai, India last November, killing almost 200 people.

Ground assaults are not just a terrorist tactic that might happen over there. Over here, it has been less than two years since six terrorists were thwarted in their attempt to assault Fort Dix in New Jersey.

The 4GW (Fourth Generation Warfare) strategy is well over five years old. We are glad to see that one of the best on this topic will be at the Armed Services hearing on Capitol Hill. Let's hope John Robb gets an opportunity to outline the following:

Differences
Many of the methods used in 4GW aren't new and have robust historical precedent. However, there are important differences in how it is applied today. These include:

• Global -- modern technologies and economic integration enable global operations.
• Pervasive -- the decline of nation-state warfare has forced all open conflict into the 4GW mold.
• Granularity -- extremely small viable groups and variety of reasons for conflict.
• Vulnerability -- open societies and economies.
• Technology -- new technologies have dramatically increased the productivity of small groups of 4GW warriors.
• Media -- global media saturation makes possible an incredible level of manipulation.
• Networked -- new organizational types made possible by improvements in technology are much better at learning, surviving, and acting.

Corporations, Government Agencies and owners of strategic critical infrastructures owned by the private sector are continuing their vigilance in light of the 4GW emergence. More than ever the need for effective OSINT (Open Source Intelligence) gathering at the street level is imperative. Yet all the Humint and sensor based collection of data will not change the myopia of insight unless there is a rapid adoption of the new mantra: "Responsibility to Provide."

The "Responsibility to Provide" statement is rapidly replacing the old and ineffective rule of "Need to Know". Our adversaries realize that our "Need to Know" mentality is one of our greatest vulnerabilities and they will continue to exploit this weakness. Washington, DC is has just emerged from a period of coordination, cooperation and unprecedented effectiveness across legal, political and jurisdictional boundaries. The fact is that the 44th Presidential Inauguration bound together thousands of people across the country to keep our Nations Capital safe and secure in January. This mission was accomplished and the result has been ever so felt by those who were in the middle of the operational command centers, such as WRTAC, the Washington Regional Threat and Analysis Center.

WRTAC provides DC Metro partner agencies and local jurisdictions with a watch command, plus an Open Source Daily Brief of current news articles relating to terrorism, homeland security, critical incident response and public safety. The key factor here is "Relevance" on the ground level to your own community and the local assets needed to raise situational awareness.

If Baitullah Mehsud is telling the truth, then it is not so much a matter of "what" 4GW tactics will be utilized, it is a matter of "when."

operational risk

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.

operational risk

Oversight Risk: Evidence of Compliance...

In light of the tremendous announcements of corporate and financial malfeasance over the past few months, there is a "cramdown" in the works. The US Office of the Special Inspector General for the Troubled Relief Asset Program (SIGTARP) is gearing up.

The Office of the Special Inspector General for the Troubled Asset Relief Program ("SIGTARP") was established by the Emergency Economic Stabilization Act of 2008 ("EESA").

Under EESA, the Special Inspector General has the responsibility, among other things, to conduct, supervise and coordinate audits and investigations of the purchase, management and sale of assets under the Troubled Asset Relief Program ("TARP"). SIGTARP’s goal is to promote economic stability by assiduously protecting the interests of those who fund the TARP programs - i.e., the American taxpayers - by facilitating transparency in TARP programs.

Transparency and effective oversight in the TARP will be accomplished in coordination with other relevant oversight bodies, and by robust criminal and civil enforcement against those, whether inside or outside of Government, who waste, steal or abuse TARP funds.

The Special Inspector General, Neil M. Barofsky, was confirmed by the Senate on December 8, 2008, and was sworn into office on December 15, 2008.

As the new Stimulus Package works it's way to the local and state governments additional oversight will be placed on the bidding, procurement and contracting processes. Compliance with federal and state laws will become ever so vital as funds are applied under TARP in the mortgage markets and "shovel ready" projects are funded for maintenance and repair of critical infrastructures.

As the government ramps up to spend trillions of dollars to revive the economy, loopholes in federal law and a shortage of FBI agents assigned to investigate white-collar crime could lead to a big payday for perpetrators of mortgage fraud and other schemes.

That's the view of lawmakers who want to extend federal fraud laws to private mortgage companies that aren't regulated at the federal level, and provide $155 million a year to the U.S. Justice Department to triple the number of active mortgage-fraud task forces and help the FBI rebuild its white-collar investigation program.

So what should a Chief Compliance Office or Vice-President of Operational Risk Management at an institution be concerned with over the next few years? Get ready. First and foremost, the Board of Directors will be focused on "Corporate Governance Strategy Execution." Public institutions who have most recently taken on the role of becoming a more traditional bank in order to become eligible for government funds are most at risk. Some of these include traditional insurance companies and credit or charge card institutions. This is because they have not had the controls, staff and policy programs in place to effectively deal with all of the new banking regulations and compliance mechanisms the oversight agencies will be scrutinizing during their audits.

Securities and Exchange Commission Chairman Mary Schapiro plans to look into whether the boards of banks and other financial firms conducted effective oversight leading up to the financial crisis, according to SEC officials, part of efforts to intensify scrutiny of the top levels of management and give new powers to shareholders to shape boards.

As she examines what went wrong, Schapiro is also considering asking boards to disclose more about directors' backgrounds and skills, specifically how much they know about managing risk, said the officials,

As new sources of funding flow to the organizations for redistribution to consumers or small businesses the oversight process must be implemented up front. The human factors will play a tremendous role in how ethics are either applied consistently or are absent all together, in day to day operations. Boards of Directors will ensure that corporate management are injecting the correct amount of corporate governance and compliance management oversight to keep human behavior and red flags in check. Operational Risk Managers will be busy expanding their breadth and reach into the corporate enterprise for years to come.

operational risk

PII: Achieving a Defensible Standard of Care...

A data security breach of "Personal Identifiable Information" (PII) will impact your organization in the future. This incident is no different than other Operational Risk loss events to your global enterprise this year, such as occupational fraud or the settlement of a lawsuit. Correct?

This time however, the difference is that now your own employees or your customers are the victim. Their PII has been lost or stolen and your organization has been the safeguarding entity of that valuable data until now. Your response is vital and the way you legally and ethically behave is a significant risk factor in itself.

Your brand reputation in the marketplace is on the line and the potential churn in lost customers or employees is at stake. Like many post 9/11 companies, your crisis response protocol is already in place for incidents that require your senior executives and the establishment of an immediate Incident Response Team (IRT).

So why is lost or stolen PII such an important executive issue for any organization?

In privacy, PII is less restrictive than in Information security and one definition can be found in the EU directive 95/46/EC:^[1]

Article 2a: 'personal data' shall mean any information relating to an identified or identifiable natural person ('data subject'); an identifiable person is one who can be identified, directly or indirectly, in particular by reference to an identification number or to one or more factors specific to his physical, physiological, mental, economic, cultural or social identity;

Although the concept of PII is ancient, it has become much more important as information technology and the Internet have made it easier to collect PII, leading to a profitable market in collecting and reselling PII. PII can also be exploited by criminals to stalk or steal the identity of a person, or to plan a person's murder or robbery, among other crimes. As a response to these threats, many web site privacy policies specifically address the collection of PII, and lawmakers have enacted a series of legislation to limit the distribution and accessibility of PII.

As your General Counsel and Chief Privacy Officer begin to assess the magnitude and breadth of your recent PII exposure, so too does the plaintiff lawyers. Now the clock starts ticking and each tick gets louder and louder, as different litigation strategies are discussed. In Board Rooms and judges court chambers across the United States, the Federal Rules of Civil Procedure (FRCP) and the admissibility of "Electronically Stored Information" (ESI) is being discussed as a legitimate component of evidence and it's relevance in the case.

What if you could now "Rewind" this scenario and find yourself in a "legal safe zone" to adequately prepare, prevent and even preempt a "Data Security Breach" in your organization. This "legal safe zone" is available today and is as close as your corporate executive conference room, with several "Subject Matter Experts" working side-by-side. It's a professional service solution from the data breach services leader, idexperts.

The "Achieving a Defensible Standard of Care" Readiness workshop in your organization begins with a two day facilitated process for discovery and convergence with your fellow company executives. You will be engaged in a proactive, preventive and preemptive tactical plan in preparation for the day of your next PII-involved Data Security Breach. Upon completion, this operational plan establishes the baseline framework for a complete team-based drill. This outcome will then test the readiness of your key stakeholders internally and external to the company. More importantly, it provides the strategic insight on what vulnerabilities still exist in your particular organizations approach to remediation and legal compliance.

Each year, despite security efforts, millions of personal records are compromised as a result of corporate and public-sector data breaches. Breach response costs - mandated notification, PR, call handling, credit monitoring and legal fees - can add up, yet traditional approaches don't fully mitigate the risk to your business or your customers.

A data security breach of "Personal Identifiable Information" (PII) will impact your organization in the future. The next one will be different.

operational risk

Vigilance: Human Factors of Complacency...

Two days from now, Washington, DC will be in the midst of a historic Presidential Inauguration and President Obama will be moving into his new house on Pennsylvania Avenue.

The day after, on January 21, 2009 our Operational Risk Managers from across the spectrum of government will be looking to set their respective agendas for the next four years. The outgoing administration is quickly getting their new offices set up with lobby shops and law firms to continue their power agendas. Some are headed to the private sector, to return to their roots in business.

Regardless of the complexity and the change factors associated with all of the political fan fare, there are still "Black Swan" risks to our economic and global vitality. These operational risks continue to interface with Homeland Security, the Department of Defense (DoD), Treasury, Justice, and the State Department priorities. It all exists with great anticipation.

The United States will continue it's quest to secure the homeland from foreign and domestic terrorism. She will defend our allies against the aggression by other rogue states or countries in political turmoil. She will work harder than ever before to help other nations rebuild or build the foundations for economic stability, democracy and the rule of law. So what has or will change in the next four years in the context of Operational Risk Management?

It's almost like the feeling when you lose a loved one, to some catastrophic event. Or hear the news from a co-worker that your boss is being indicted for some corporate financial malfeasance. There is a feeling of despair and uncertainty. The event and sudden impact brings on a form of decision paralysis. Everyone starts to question each other and there is a tremendous amount of finger pointing on what could have prevented or what caused the incident to occur.

What will change for Operational Risk and managing the current and yet to know "What If's" is that it can't be ignored any longer. In analyzing the 1-in-a-100-year event, people have to go far beyond the mathematical equations and start looking at human behavior. Operational Risk managers across our international governments and business will now realize that even the "Human Factors" in Operational Risk can't always be counted.


Writers Wilber and Smith from the Washington Post have this to say about a vital component of our continued national risk management vigilance:

"A special federal appeals court yesterday released a rare declassified opinion that backed the government's authority to intercept international phone conversations and e-mails from U.S. soil without a judicial warrant, even those involving Americans, if a significant purpose is to collect foreign intelligence.

The ruling, which was issued in August but not made public until now, responded to an unnamed telecommunications firm's complaint that the Bush administration in 2007 improperly demanded information on its clients, violating constitutional protections against unreasonable searches and seizures. The company complied with the demand while the case was pending.

In its opinion, a three-judge panel of the U.S. Foreign Intelligence Surveillance Court of Review ruled that national security interests outweighed the privacy rights of those targeted, affirming what amounts to a constitutional exception for matters involving government interests "of the highest order of magnitude."

Our greatest threat to national security or business and global economic welfare may well come down to the ability to mitigate complacency and a lack of vigilance. A high degree of complacent people, working in an environment of non-vigilance, could set the stage for those human factors to play a major role in exploiting our vulnerabilities as a business and a nation.

The weight of protecting our nation from economic tidal waves and well trained non-state actors is a tremendous responsibility. Operational Risk Management will continue to be a vital aspect of all the existing and new decision makers over the next four years. Becoming ever vigilant and eliminating complacency will keep us from falling victim to the risk of "Human Factors". Gods speed to the 44th Presidency!

operational risk

Managing the Business Risk of Fraud...

Operational Risk Management is in full swing at distressed institutions as the TARP funds continue to flow to these needy corporations. One thing is certain; you can expect increased oversight. The risk management mechanisms to determine how and where funds are being utilized will be the focus. Anti-fraud planning and investigative projects are on the radar of the Board of Directors and the Audit committee chair. The US government Anti-Fraud Task Force is gearing up:

Six more U.S. government agencies, including the Federal Reserve, will take part in a federal anti- fraud task force to strengthen its focus on uncovering mortgage and securities crimes.

Deputy Attorney General Mark Filip announced the expansion yesterday of the President's Corporate Fraud Task Force, which was formed in 2002. Joining the group are the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Department of Housing and Urban Development and the Office of Inspector General for the financial industry rescue program approved last year by Congress.

"These new members reflect the breadth and depth of the mortgage crisis that we are now confronting and the urgency of the task before us," Filip said in a statement.

Current members of the task force include the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Gil Soffer, associate deputy attorney general, said the task force expansion would let FBI officials coordinate with monitors of the Troubled Asset Relief Program.

"To be able to bring in our resources and to be able to tap into our expertise and to be able to work with our investigators and our prosecutors when there's criminal activity afoot, it's a tremendous boon" to TARP investigators, he said in an interview.

Congress passed the $700 billion TARP rescue package in October, and lawmakers have said oversight is needed to ensure the funds aren't misused.

The business of Fraud Risk Management has been spelled out for years and continues to be a high priority. Most Fortune 50 organizations have established sophisticated frameworks for addressing compliance, ethics and governance in their organizations. However, the question remains how well they understand their respective roles, responsibilities and jurisdictions. This organizational challenge is no different than the battle between the physical security and information security domains who are now converging. The ACFE, AICPA and the Institute of Internal Auditors have released their latest Practical Guide for Managing the Business Risk of Fraud. Here are the key principles:

Only through diligent and ongoing effort can an organization protect itself against significant acts of fraud. Key principles for proactively establishing an environment to effectively manage an organization’s fraud risk include:

• Principle 1: As part of an organization’s governance structure, a fraud risk management program should be in place, including a written policy (or policies) to convey the expectations of the board of directors and senior management regarding managing fraud risk.
• Principle 2: Fraud risk exposure should be assessed periodically by the organization to identify specific potential schemes and events that the organization needs to mitigate.
• Principle 3: Prevention techniques to avoid potential key fraud risk events should be established, where feasible, to mitigate possible impacts on the organization.
• Principle 4: Detection techniques should be established to uncover fraud events when preventive measures fail or unmitigated risks are realized.
• Principle 5: A reporting process should be in place to solicit input on potential fraud, and a coordinated approach to investigation and corrective action should be used to help ensure potential fraud is addressed appropriately and timely.

Operational Risk Management issues still exist in Tier II organizations who have market caps below $1B. in assets and are more vulnerable. This is typically due to the lack of resources and extensive staff devoted to a an enterprise wide program that incorporates the mission from the Board of Directors and the "Tone-at-the-Top". 2009 will be busy and you can bet the General Counsel and CxO's will be burning the midnight oil.

operational risk

2009 Outlook: OPS Risk Top Priorities...

In light of the 2009 outlook and the fact that Operational Risk is now a much greater priority, here are vital areas to focus on for the New Year. As restructuring, downsizing, layoffs and overall corporate strategy and governance initiatives are kicked-off for the 2009 calendar year; here are the top priorities according to Peter L. Higgins, Managing Director of OPS Risk advisory firm 1SecureAudit.

"Operational Risk will continue to be a major focus for Boards of Directors in 2009 and for good reason. Governance Strategy Execution, Information and Records Management and Legal Risk are all in need of a critical review and a robust injection of new resources. We are at the beginning of a new "S" curve cycle on the down slope just as we saw in late 2001 post 9/11 and the "Dot Com" era, Higgins said."

"This requires a renewed and substantial commitment to keeping our code of practice guidance and implementation advice narrowly focused on several key areas of the corporate enterprise:"

• Organizational Security
• Information Security Infrastructure: Cooperation between organizations
• Appropriate contacts with law enforcement authorities, regulatory bodies, information service providers and telecommunications operators shall be maintained.
• Asset classification and control
• Information Classification: Information labelling and handling
• A set of procedures shall be defined for information labelling and handling in accordance with the classification scheme adopted by the organization.
• Personnel Security
• Responding to security incidents and malfunctions: Reporting security weaknesses
• Users of information services shall be required to note and report any observed or suspected security weaknesses in, or threats to, systems or services.
• Communications and operations management
• Operational procedures and responsibilities: External facilities management
• Prior to using external facilities management services, the risks shall be identified and appropriate controls agreed with the contractor, and incorporated into a contract.
• Exchanges of information and software: Security of electronic mail
• A policy for the use of electronic mail shall be developed and controls put in place to reduce security risks created by electronic mail.
• Access Control
• Monitoring system access and use: Monitoring system use
• Procedures for monitoring the use of information processing facilities shall be established and the result of the monitoring activities reviewed regularly.
• Business Continuity
• Aspects of Business Continuity Management: Testing, maintaining and re-assessing BCP
• Business continuity plans shall be tested regularly and maintained by regular reviews to ensure that they are up to date and effective.
• Compliance
• Compliance with legal requirements: Collection of evidence
• Where action against a person or organization involves the law, either civil or criminal, the evidence presented shall conform to the rules for evidence laid down in the relevant law or in the rules of the specific court in which the case will be heard. This shall include compliance with any published standard or code of practice for the production of admissible evidence.

Here are some of the top cases to review for OPS Risk lessons learned in 2008:

01/04/08 - Detroit: Eleven Indictments in International Illegal Spamming and Stock Fraud Scheme - Eleven individuals were indicted in a wide-ranging international fraud scheme which manipulated stock prices through illegal spam e-mail promotions.

02/15/08 - Washington: DOD Employee Arrested in Chinese Espionage Case - Gregg William Bergersen, a Weapons Systems Policy Analyst at the Defense Security Cooperation Agency, Department of Defense, was arrested for passing classified documents to the People’s Republic of China.

02/22/08 - Miami: Five Individuals Indicted for $200 Million Hedge Fund Fraud - Michael Lauer, founder of Lancer Group Hedge Fund, and four others were indicted on conspiracy and wire fraud charges in a $200 million hedge fund fraud.

02/29/08 - Houston: Chinese Chemist Indicted for Theft of Trade Secrets - Qinggui Zeng, aka Jensen Zeng, a legal permanent resident from China, was indicted and charged with theft of trade secrets and computer fraud.

03/14/08 - Cincinnati: Financial Enterprise Executives Found Guilty in $3 Billion Fraud Scheme - Five former executives of National Century Financial Enterprises were found guilty of conspiracy, fraud and money laundering in a $3 billion security fraud scheme.

05/16/08 - Washington: Guilty Plea in Espionage Charge Involving China - Tai Shen Kuo pled guilty to conspiracy to deliver national defense information to the People’s Republic of China.

06/20/08 - Operation Malicious Mortgage Nets 406 Individuals - Charges in Operation Malicious Mortgage, a nationwide takedown of mortgage fraud schemes which inflicted approximately $1 billion in losses, were brought in every region of the country.

10/17/08 - FBI Coordinates Global Effort to Nab “Dark Market” Cyber Criminals - A two year undercover operation, Dark Market, which joined forces with international law enforcement, resulted in 56 arrests and $70 million in economic loss prevention.

11/28/08 - Dallas: Holy Land Foundation and Leaders Convicted - The Holy Land Foundation of Relief and Development and five of its leaders were found guilty of illegally funneling at least $12 million to the Palestinian terrorist group, Hamas.

12/12/08 - Chicago: Illinois Governor Arrested - Governor Rod R. Blagojevich and his Chief of Staff John Harris were arrested on federal corruption charges including conspiring to trade or sell the Illinois’ Senate seat vacated by President-elect Barack Obama.

Beyond the Bernie Madoff fraud scheme that rocked the Hedge Fund universe the real systemic risks to deal with in 2009 will continue to be tied to the housing and mortgage sector:

• Recent statistics suggest that escalating foreclosures provide criminals with the opportunity to exploit and defraud vulnerable homeowners seeking financial guidance.
• Perpetrators are exploiting the home equity line of credit (HELOC) application process to conduct mortgage fraud, check fraud, and potentially money laundering-related activity.

The Operational Risks in corporate enterprises will be increasing as the economy adjusts and finds it's new equilibrium. Hang on for a wild ride in 2009!

operational risk

Security Governance: Siemens FCPA guilty plea...

One only has to look a few layers deep into the corporate hierarchy, to see the root cause of why Siemens AG violated the Foreign Corrupt Practices Act (FCPA).

At a hearing before U.S. District Judge Richard J. Leon in the District of Columbia, Siemens AG pleaded guilty to a two-count information charging criminal violations of the FCPA’s internal controls and books and records provisions. Siemens S.A.- Argentina (Siemens Argentina) pleaded guilty to a one-count information charging conspiracy to violate the books and records provisions of the FCPA. Siemens Bangladesh Limited (Siemens Bangladesh) and Siemens S.A. - Venezuela (Siemens Venezuela), each pleaded guilty to separate one-count informations charging conspiracy to violate the anti-bribery and books and records provisions of the FCPA. As part of the plea agreements, Siemens AG agreed to pay a $448.5 million fine; and Siemens Argentina, Bangladesh , and Venezuela each agreed to pay a $500,000 fine, for a combined total criminal fine of $450 million.

Where the compliance and ethics culture begins to break down in this example and others lies within the "Modus Operandi" of the "Deal Makers" themselves. The sales and marketing mechanisms that funded the budgets of front line managers to perpetuate the corruption are to be thoroughly examined. The competitive environment and the "wink and nod" of selling 101 at Siemens has brought them into the ranks of Enron, Worldcom, and other global transnational corporations soon to be announced for their misdeeds and corporate malfeasance. This NYT article by Siri Schubert and T. Christian Miller highlight the culture factors:

“Bribery was Siemens’s business model,” said Uwe Dolata, the spokesman for the association of federal criminal investigators in Germany. “Siemens had institutionalized corruption.”

Before 1999, bribes were deductible as business expenses under the German tax code, and paying off a foreign official was not a criminal offense. In such an environment, Siemens officials subscribed to a straightforward rule in pursuing business abroad, according to one former executive. They played by local rules.

Inside Siemens, bribes were referred to as “NA” — a German abbreviation for the phrase “nützliche Aufwendungen” which means “useful money.” Siemens bribed wherever executives felt the money was needed, paying off officials not only in countries known for government corruption, like Nigeria, but also in countries with reputations for transparency, like Norway, according to court records.

The line item utilized by business development executives at Siemens to secure business is not an exclusive there or in Germany. It is utilized by almost every major global corporation to obtain the opportunity to compete and to make the short list on major procurements. So how does the internal audit and operational risk professionals deal with the fact that money is budgeted each year for these kinds of activities?

Corporate Integrity Management and the ethics programs is a great place to start. This blog highlighted these in a previous post a few months ago:

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?

Security Governance is a discipline that all of us need to revisit and rededicate ourselves to. The policies and codes we stand by to protect our critical assets should not be compromised for any reasons. More importantly, security governance frameworks must make sure that the management of a business or government entity be held accountable for their respective performance. The stakeholders must be able to intervene in the operations of management when these security ethics or policies are violated. Security Governance is the way that corporations or governments are directed and controlled. A new element that has only recently been discovered is the role of risk management in Security Governance.

Security Governance, like Corporate Governance requires the oversight of key individuals on the board of directors. In the public sector, the board of directors may come from a coalition of people from the executive, judicial and legislative branches. The basic responsibility of management, whether in government or the corporate enterprise is to protect the assets of the organization or entity. Risk and the enterprise are inseparable. Therefore, you need a robust management system approach to Security Governance.

If a corporation is to continue to survive and prosper, it must take security risks. A nation is no different. However, when the management systems do not have the correct controls in place to monitor and audit enterprise security risk management, then we are exposing precious assets to the threats that seek to undermine, damage or destroy our livelihood.

operational risk