In August 2015, the FBI issued an alert describing the newest form of cyberattack: business email compromise (BEC). BEC is a sophisticated mutation of the now-common spear phishing data-breach technique. In a BEC scam, a hacker often impersonates a high-ranking corporate executive and sends a spoof email to a carefully selected target, who generally has the access and authority to transfer large sums of money on behalf of the company. Unlike traditional phishing schemes, BEC scams are well researched. Successful hackers troll the social media sites of the target employee, review corporate Web pages for contact information and read professional writings to better understand the corporate culture, as well as the individual characteristics of the target employee, all with the goal of convincing that employee to part with the company’s cash. Consider the following three scenarios (all based on actual cases reported to the FBI):
- A corporate accountant receives a spoof email that appears to be from the CEO of the company requesting an urgent wire transfer relating to a top-secret acquisition. The email contains instructions to wire corporate funds to a new bank account of a known business partner at an offshore bank. The accountant, wishing to appear responsive to the CEO, drops everything and wires the funds immediately. By the time the accountant and CEO speak in person and realize the error, the money is long gone from the fraudulently opened offshore bank account.
- A business receives a fraudulent invoice from what appears to be a longstanding supplier, requesting that the next payment be sent via wire to an alternate account. The spoofed email contains a PDF file of an invoice that appears to be from the trusted supplier, and the email text and header information contain the hallmarks of an actual business communication from the supplier. Because the supplier is located overseas and in a different time zone, it is common practice that communication about payment of invoices is done electronically, rather than verbally. The unsuspecting business wires the funds to the new account, and the money disappears almost immediately. Weeks later, the supplier follows up with the business, sending an angry email expressing frustration that the funds were not sent in a timely manner. When the two business partners realize the mix-up, it is too late to recover the funds.
- An employee’s hacked personal email account sends fraudulent invoices to a number of vendors, requesting immediate payment to phony company bank accounts. The hacker has researched the vendor relationships and knows that several of the invoices are overdue. As a result, the scheme uses social engineering—a form of manipulation and trickery based on the human tendency to obey orders—to influence the actions of the vendors by inserting a sense of urgency (“Please send payment immediately or future deliveries will be cut off!”). Many of the vendors quickly comply for fear of having their supplies embargoed. The result is a windfall to the hacker and a loss to both the vendors and the victim company.
Taking the Bait
In the first generation of phishing schemes, most attacks relied on a combination of fraudulent emails with links to bogus websites to obtain Internet users’ information. In recent years, however, cybercriminals have refined their methods and increased the amount of research performed on each target to maximize the return from each cyberattack. Whereas a traditional phishing attack may have blanketed an entire database of email addresses, spear phishing schemes target specific individuals within specific organizations.
A BEC scam, therefore, usually begins in one of two ways: (i) by getting an unsuspecting employee to click on an email attachment that compromises the network (i.e., malware); or (ii) by sending a spoof email from a high-ranking official in the company. Spear phishers, however, usually research their target and the company as a whole in order to craft highly convincing emails. The telltale signs of scam emails – poor grammar, suspicious requests and uncharacteristic language – won’t give a BEC scammer away. By mining corporate Web pages and social networks, for example, the personalization and impersonations used in spear phishing emails can be extremely accurate and compelling. Because the email appears to come from a known and trusted source, the request to release valuable data or to take urgent action appears more plausible. Thus, hackers actually employ low-tech tactics to achieve high-dollar corporate fraud.
Hook, Line and Sinker
The metaphoric spear in spear phishing is the email itself, received by a carefully selected yet unsuspecting employee. The email looks official, appears to come from a high-ranking corporate executive and generally contains attachments on company letterhead that direct the target employee to wire corporate funds to a particular person (usually a trusted vendor contact) at an overseas bank. But before the hacker ever spoofs the email account of the high-ranking corporate executive or drafts the text of the email, the attacker does a significant amount of legwork.
- In many cases, the hacker has gained access to the corporate email server and may have access to the high-ranking executive’s calendar. As a result, the hacker knows to send the email when the executive is traveling or otherwise out of the office (and unavailable for verbal confirmation before the wire transfer is made).
- The hacker has also likely researched—perhaps extraordinarily carefully—the target employee and possibly compromised his or her email account, as well as the account of someone in the accounting department. The amount of money requested in the fraudulent transfer is carefully tailored to be within the expected range of the payments that the target employee is capable of authorizing. The language of the request mimics past email requests; uses similar vocabulary; pertains to goods, services or business partners with whom the company normally deals; and is requested in accordance with usual payment schedules.
- In some cases, the spoof email identifies or even cc’s an employee in the accounting department to give an added sense of authenticity. Although the email address of the target employee is accurate, all others cc’d have slightly modified email addresses, so only the hackers receive the messages. At times the emails are modified so subtly that the change is not noticeable without very close inspection. For example, [email protected] instead of [email protected].
- In another scenario, a hacker may compromise and monitor the email account of someone who receives invoices from vendors or suppliers. The hacker then modifies a legitimate invoice to reroute payment to a new bank account number or address. The hacker doesn’t need to compromise the vendor’s system; a spoof email from [email protected] instead of [email protected] including the fraudulent invoice is enough to accomplish the goal.
- Hackers often use social engineering to trick their victims into acting quickly. The hacker may insert a false sense of urgency into the text of the email to spur the target employee to wire the funds while the executive is out of the office. In other cases, the hacker may convince the target that the financial transaction relates to a secret business acquisition or a merger, thereby encouraging the target not to disclose the transfer of funds to others. Both tactics are designed to manipulate the target by portraying the orders as coming from an authority figure.
Unfortunately, the hacker’s research efforts are often successful. Recent examples demonstrate that companies of all sizes in all sectors are at risk. Over the past several months, many have fallen victim to similar schemes, losing millions of dollars.
Once the target employee wires the money, the hackers work to quickly transfer the funds from the overseas bank account before the company discovers the breach.
Removing the Hook
Discovering a data breach within your organization can be alarming, especially in the early hours and days, when it is impossible to ascertain the full extent of the damage to corporate systems and reputation. At the outset, there are a number of questions that the company’s in-house legal team should explore on both an operational level and a legal and strategic one, such as the scope of the breach and the nature and extent of insurance coverage. (See BEC Attack Checklist.)
When a company is confronted with evidence of a data breach that has potentially compromised its systems, an effective corporate internal investigation protected by the attorney-client privilege can benefit the company in a number of ways:
- Revealing all of the relevant facts so that management and/or the board can make a fully informed decision regarding whether to report the breach to law enforcement or other government entities;
- Stopping the conduct to prevent further breaches; and
- Memorializing the company’s good-faith response to the facts as they become known.
Each of these benefits can be achieved if the investigation is well designed, with a specific work plan that addresses document collection and review, witness interviews, careful analysis, and a final report in the format that best serves the company’s interests. Use of experienced outside counsel and/or a cybersecurity consultant may be helpful to focus the internal investigation and efficiently identify and contain the source of the breach.
Don’t Become a Trophy Phish
Many governments now require companies to undertake reasonable security measures to avoid data breaches and other cybercrimes that potentially expose unencrypted personal information. For example, the U.S. Gramm-Leach-Bliley Act (GLBA) Safeguards Rule and the broader European Directive 95/46/EC, Article 17 both require that companies employ reasonable or appropriate administrative and technical security measures to protect consumer information. In addition, states, including California and Nevada, have passed laws that impose similar responsibilities. Massachusetts has gone so far as to specifically require companies to train their employees on the importance of personal information security. Failure to utilize due diligence in avoiding data breaches and other cyberincidents generates exposure to both civil litigation and government enforcement actions, not to mention intangible costs, such as loss of customer trust and brand damage.
The prevalence of phishing attacks, and the above-referenced legal obligations to employ reasonable security measures to prevent data breaches, makes it increasingly urgent that companies undertake basic precautions to prevent significant harm. Start by reviewing and strengthening the controls around wire transfers and, in particular, international wire transfers. But policies without training offer a reduced benefit, so be certain to provide all executives and employees with periodic education tailored to their job description. Every employee should be capable of identifying a potential fraud.
Then assess your technology for vulnerabilities. The FBI recently issued warnings regarding Web-based email accounts and applications, since they are often more susceptible to being hacked. Take the necessary precautions when applicable, be it two-step verification or switching to a more sophisticated sign-on service. And of course, technology is never static: You must continually audit, test and improve it. Up-to-date software and systems are an important defense.
Perhaps most fundamentally, know your customers, the frequency of their payment requests, the amounts and reasons for certain practices. If you become aware of a change in their payment location, verify that request for transfer of funds to new accounts. (For more on these recommendations, see 5 Steps to Prevent Catastrophic Damage.)
Hard Costs and Intangible Harm
Spear phishing in general, and BEC in particular, is increasingly prevalent because it is effective. In 2014, the average total cost of one data breach to a U.S. company was $6.5 million, up from $5.9 million in 2013. Moreover, these estimates do not include intangible harms that accompany data breaches, such as damage to corporate reputations and brands, as well as dips in customer confidence. Recent case examples demonstrate that the threat posed by spear phishing and BEC scams is truly global in nature.
Unfortunately, cybercriminals will continue to use these tactics as long as they are able to infiltrate the emails and servers of corporate organizations. Although there is no way to prevent a spear phishing attack, risk mitigation measures—such as employee training, two-step authentications for wire transfers and open communication—can significantly decrease the risk of losing corporate dollars and help companies avoid the phish hook. In addition, these measures make it easier to defend against civil litigation, as well as government regulators who may, in the wake of a significant cyberincident, claim that a business failed to comply with its legal obligations to undertake reasonable measures to prevent data breaches.
BEC Attack Checklist
Ask the crucial questions in those early hours to appropriately plan the company’s response.
- Has a breach occurred?
- When did such a breach occur?
- What is the scope of the breach?
- How can we isolate the breach and limit damage?
- Is it safe to use company email, or should we consider alternative methods of communication?
- Should we report the fraud to the relevant bank/financial institution and request that the funds in the fraudulent account be frozen?
- Is it possible to retrieve corporate funds improperly sent to offshore bank accounts?
- In the short-term, how should we interact with our customers and vendors to minimize business disruption?
Legal and Strategic Questions
- Do we have any legal obligation to give notice of the data breach?
- Do we have insurance coverage for this breach, and if so, do we want to submit a claim?
- Are any third parties (e.g., business partners, vendors, service providers) liable to us for this breach?
- Should we notify law enforcement of the breach?
- How can we repair any damage to the corporate brand or to the company’s reputation within the industry?
- How can we rebuild relationships with our vendors and customers who may have received the spoof emails and been victims of the BEC scam?
- How do we quickly train employees to recognize spear phishing attacks so as not to fall victim to BEC scams in the future?
5 Steps to Prevent Catastrophic Damage
1. Review wire protocols.
Require two forms of authentication before a wire will issue (for example, email followed by a phone call to a known company number). Limit the individuals who are authorized to approve fund transfers, varying the dollar thresholds for each approver and flagging those with new approval authorization. Require approvals from two employees apart from the requestor to initiate a wire and mandate that the recipient be authenticated before an internally authorized wire will issue.
2. Train employees about data security in general and BEC in particular.
Update materials to account for new schemes and repeat the training regularly. For finance or treasury employees, include clear direction that employees should be suspicious of requests for secrecy or pressure to act quickly. Encourage all employees to question suspicious wires, without fear of retaliation, by using confidential hotlines if necessary.
3. Revise procedures with a focus on data security.
This includes confidentiality agreements with employees, consultants and third parties trusted with confidential information. Consider implementing strict controls on users with privileged access, such as two-person integrity, for access to highly sensitive information.
4. Institute safeguards when using Web-based email and applications.
Enable two-step verification/two-factor authentication. Consider using a security assertion markup language-based single sign-on service to control usernames, passwords and other information used to identify authorized users.
5. Audit, test and improve company technology.
Update patches for anti-phishing software, operating systems and browsers. Register Internet domains that are only slightly different from the company’s legitimate domain name. Likewise, create a system that flags emails with extensions that are similar but not identical to the company’s e-mail (e.g., “.co” instead of “.com”).
Conduct audits that include BEC scenarios. If IT notices what appears to be a breach but there is no immediate fallout, proceed as though the company’s systems have been compromised.
 Federal Bureau of Investigation, Internet Crime Complaint Center ("FBI IC3"), Alert No. I-082715a-PSA, "Business Email Compromise" (Aug. 27, 2015); see also FBI IC3, Alert No. I-012215-PSA, "Business Email Compromise" (Jan. 22, 2015).
 "Phishing" refers to hackers' attempts to steal the identities of online users by gaining personal information; "Spear phishing" is a more sophisticated version of phishing that targets specific individuals that fit a certain profile, rather than mass amounts of online users.
 See FBI IC3, Alert No. I-012215-PSA, supra note 1. A "spoofed" email is one that has the appearance of legitimacy but in reality is fraudulent. The goal of a spoofed email is to fool the recipient into thinking it came from a specific, trustworthy source. A spoof may approximate the legitimate email address, but insert an extra letter in the text, change a letter, or delete a letter. For example, [email protected] instead of [email protected], or [email protected] instead of [email protected]. By using an email alias that matches the impersonated target, the spoof may be even less detectable. For example, the sender field only displays "Jane Smith," but a click into more details will expose the "[email protected]" address
 See Federal Bureau of Investigation, "Business E-Mail Compromise: An Emerging Global Threat," Aug. 28, 2015.
 See FBI IC3, Alert No. I-012215-PSA, supra note 3.
 For example, the 1995 "AOHell" scam "mail bomb[ed]" users' email accounts," and the 1996 "Samy" scam sent virus-infected links to users through their MySpace profiles. See Simson Garfinkel, "Illegal Program Troubles America Online," The Boston Globe, April 21, 1995; Daniel Bukszpan, "6 Notorious Hackers and Their Second Careers," Fortune (March 18, 2015, 1:06 PM EDT).
 These emails are sent one at a time from a specific account to a specific individual. The email messages may come from outside networks using look-alike domain names and/or impersonating the domain names used by a trusted vendor/supplier. Sometimes, however, the emails are sent from within the targeted organization using a compromised account or email server. As a result, the email never crosses the network perimeter where email content filtering controls are positioned to quarantine potentially fraudulent messages and malicious attachments.
 The FBI's August 27, 2015 Alert cautions, "[t]here has been a 270 percent increase in identified victims and exposed loss since January 2015. The scam has been reported in all 50 states and in 79 countries." FBI IC3, Alert No. I-082715a-PSA, supra note 1. San Jose-based tech company Ubiquiti revealed it had fallen victim to a $46.7 million spear phishing scheme in 2015. See Ubiquiti Networks, Inc., Form 8-K, at 1(Aug. 4, 2015). Similarly, the Scoular Co., an 800-employee company based in Omaha, Nebraska, was conned out of $17.2 million in February 2015. See Russell Hubbard, "Imposters bilk Omaha's Scoular Co. out of $17.2 million," Omaha World Herald (Feb. 5. 2015, 1:00 AM).
 See CAL. CIV. CODE § 1798.81.5 (Deering 2015); NEV. REV. STAT. ANN. § 603A.210 Lexis-Nexis 2015)
 See 200 MASS. CODE REGS. 17.04(8) (LexisNexis 2015).
 Ponemon Institute, "2015 Cost of Data Breach Study: United States," Ponemon Institute Research Report, May 2015, at 1 (sponsored by IBM).
Published October 21, 2015.