The New York Department of Financial Services (DFS) announced its first ever penalty against a cryptocurrency platform this week, with a whopping $30 million fine assessed against Robinhood Crypto, LLC (RHC) for what it described as “significant failures in the areas of bank secrecy act/anti-money laundering obligations and cybersecurity that resulted in violations of the Department’s Virtual Currency Regulation (23 NYCRR Part 200), Money Transmitter Regulation (3 NYCRR Part 417), Transaction Monitoring Regulation (23 NYCRR Part 504), and Cybersecurity Regulation (23 NYCRR Part 500).

Following DFS’s supervisory examination and enforcement investigation, it found that RHC’s compliance program “did not fully address RHC’s operational risks, and specific policies within the program were not in full compliance with several provisions of the Department’s Cybersecurity and Virtual Currency Regulations.”

In particular, all DFS-regulated entities must certify annually that they have complied with DFS regulations, including its cybersecurity regulations. According to DFS, RHC certified to DFS that it complied with the DFS Cybersecurity Regulations. However, DFS stated in its press release that “[D]espite these weaknesses in its transaction monitoring and cybersecurity programs, RHC improperly certified compliance with the Department’s Transaction Monitoring Regulation and Cybersecurity Regulation. Pursuant to those regulations, companies should only be certifying to DFS if their programs are fully compliant with the applicable regulation. In light of the program’s deficiencies, RHC’s 2019 certifications to the Department attesting to compliance with these Regulations should not have been made and thus violated the law.”

In addition to the monetary penalty, the settlement requires RHC to be overseen by an independent consultant that will perform “a comprehensive evaluation” of RHC’s compliance and remediation efforts in response to the violations identified by DFS.

The discovered deficiencies and subsequent penalty are reminders to DFS-regulated entities that the annual certification to DFS will be scrutinized and enforced.

In view of Iran’s vows to retaliate against the United States for the death of Quassem Soleimani, the NYDFS has issued an industry letter to all regulated entities regarding the need for heightened cybersecurity precautions.

The letter notes that it “is particularly concerning that Iran has a history of launching cyber-attacks against the U.S. and the financial services industry,” citing 2012-2013 Iranian-sponsored cyber-attacks against several major U.S. banks. The letter also cites a June 2019 U.S. government advisory observing “a recent rise in malicious cyber activity directed at United States industries and government agencies by Iranian regime actors and proxies” using highly destructive attacks that delete or encrypt data.

The DFS letter calls for heightened vigilance against cyber-attacks and strongly recommends that regulated entities “ensure that all vulnerabilities are patched/remediated (especially publicly disclosed vulnerabilities), ensure that employees are adequately to deal with phishing attacks, fully implement multi-factor authentication, review and update disaster recovery plans, and respond quickly to further alerts from the government or other reliable sources. It is particularly important to make sure that any alerts or incidents are responded to promptly even outside of regular business hours – Iranian hackers are known to prefer attacking over the weekends and at night precisely because they know that weekday staff may not be available to respond immediately.”

Regulated entities are also directed to promptly notify DFS of any “significant or noteworthy cyber-attack,” noting that DFS’s cyber regulation requires notification as soon as possible but in no event later than 72 hours after a “material cybersecurity event.”

This week, the New York State Department of Financial Services (NYDFS) issued the Report on the SolarWinds Cyber Espionage Attack and Institutions’ Response. The Report begins with the statement that “The next great financial crisis could come from a cyber-attack,” And goes on to describe how the SolarWinds attack affected financial institutions and NYDFS’s response assisting financial institutions in its aftermath.

The Report states that “the SolarWinds Attack is, to date, the most visible, widespread, and intrusive information technology (“IT”) software supply chain attack – i.e., a cyber-attack that corrupts IT software and uses that software as an attack vector. Supply chain attacks are dangerous because the malware is embedded inside a legitimate product, and because supply chain attacks can allow an attacker to access the networks of many organizations in a single stroke.”

For this reason, the Report further notes that “this attack confirms the importance of vigorous third party risk management, which starts with a thorough assessment of an organization’s third party risk. Third party risk management is a key part of DFS’s Cybersecurity Regulation, and the Department is exploring ways to further address this critical component of cybersecurity.”

The Report also addresses the lack of transparency in information sharing regarding cybersecurity attacks and indicates that NYDFS is interested in improving information sharing and transparency among its regulated covered entities.

The Report summarizes the background facts of the SolarWind attack, remediation efforts taken by companies affected by the attack, recommendations to strengthen cybersecurity practices, and measures taken to respond to the attack.

The New York Department of Financial Services (NYDFS) has settled alleged violations of the Department’s strict cybersecurity regulations with National Securities Corp. (NSC) for $3 million, regarding four separate cybersecurity events suffered by it and its affiliate National Asset Management, Inc. (NAM) between April 3, 2018 and April 30, 2020.

The Consent Order reports that the “First Cyber Event” happened on September 13, 2019 “when a Human Resources representative received a suspicious email from an employee requesting assistance with a change to the employee’s direct deposit.” The HR representative reached out to the employee by telephone and confirmed that the request was not legitimate. However, the employee’s email account had been compromised through a phishing scheme and affected customers were notified. At the time, NYDFS noted that NSC did not have multi-factor authentication (MFA) implemented, which was required by the cybersecurity regulations.

A second cyber event occurred on April 30, 2020, when a broker of the firm noticed “a potential unauthorized transfer of funds from a client account in the amount of $200,000.” After review, two additional unauthorized transfers from client accounts were discovered. It was also found that forwarding rules were set up from the broker’s account. Although the customers were refunded the amounts that were transferred without authorization (presumably to a cyber-criminal), NAM “did suffer a resulting loss of $400,000.”

During the compromise of the broker’s account, NSC contacted affected individuals, changed their account credentials, and provided them with credit monitoring. At the time of the second cyber event, the brokers had not yet implemented MFA, which was not completed until August 14, 2020.

The Consent Order is a roadmap of NYDFS’ cybersecurity regulations and the requirements that must be met. The Consent Order states: “[P]ursuant to Section 500.12(b) of the Cybersecurity Regulation, MFA must be utilized for any individuals accessing a Covered Entity’s internal network from an external network. This requirement applies to third-party applications, including email platforms such as O365, that access a Covered Entity’s internal network. Section 500.12(b) became effective on March 1, 2018.” NYDFS found that as of that date, NSC did not have MFA implemented in compliance with the regulations. According to the Consent Order, “[D]uring the period between the effective date of Section 500.12(b) and the date MFA was fully implemented on National Securities’ email environment, National Securities did not have controls designed to protect the O365 environment.”

During the investigation, it was discovered that NSC “was the victim of two additional Cybersecurity Events, which were not reported to the Department as promptly as possible and no later than 72 hours of their occurrence, as is required by 23 NYCRR § 500.17(a).” One included a phishing incident that occurred on April 3, 2018, and another occurred on March 6, 2019, when a document management systems account that was part of NSC’s tax software program was compromised during a phishing scheme. Although NSC notified affected individuals of the incidents, NSC did not report the incident to NYDFS per the cybersecurity regulations. NYDFS stated that although NSC certified that it was in compliance with the regulations when it filed its annual report in 2019, it was not in compliance for the 2018 calendar year, and therefore the certificate of compliance with the regulations during that year “was false.”

The settlement includes a $3 million civil monetary payment, which NSC cannot deduct or credit, nor can it obtain reimbursement from its insurance policy; a requirement to “strengthen its controls to protect its cybersecurity systems and the private data of consumers;” and a requirement to implement a “comprehensive written Cybersecurity Incident Response Plan.”

NYDFS gave NSC special mention for its “commendable cooperation throughout this investigation” and “credits National Securities’ ongoing efforts to remediate the shortcomings identified in this Consent Order.”

If you are subject to the NYDFS Cybersecurity Regulations, the Consent Order is a worthwhile read for guidance. It can be accessed here.

In what the New York Department of Financial Services (NYDFS) is touting as the first guidance by a U.S. regulator on cyber insurance, NYDFS announced on February 4, 2021, in Insurance Circular Letter No. 2 (2021), that it has issued a new Cyber Insurance Risk Framework (Framework) addressed to authorized property/casualty insurers that write cyber insurance. Nonetheless, NYDFS states “property/casualty insurers that do not write cyber insurance should still evaluate their exposure to ‘silent risk’ and take appropriate steps to reduce that exposure.”

The Framework consists of seven practices that “all authorized property/casualty insurers that write cyber insurance should employ,” while stating that “[E]ach insurer should take an approach that is proportionate to its risk.” The seven practices include:

  • Establish a Formal Cyber Insurance Risk Strategy
  • Manage and Eliminate Exposure to Silent Cyber Insurance Risk
  • Evaluate Systemic Risk
  • Rigorously Measure Insured Risk
  • Educate Insureds and Insurance Producers
  • Obtain Cybersecurity Expertise
  • Require Notice to Law Enforcement

The background of the issuance of the Framework follows the growth of the cyber insurance market, the increase in cyber risks and payouts, and that “it is clear that cybersecurity is now critically important to almost every aspect of modern life—from consumer protection to national security.” NYDFS recognizes that “as cyber risk has increased, so too has risk in underwriting cyber insurance.” Statistics cited in the Framework include the fact that based upon a survey it developed, from early 2018 to late 2019, “the number of insurance claims arising from ransomware increased by 180%, and the average cost of a ransomware claim rose by 150%. Moreover, the number of ransomware attacks reported to DFS almost doubled in 2020 from the previous year…[T]he global cost of ransomware was approximately $20 billion in 2020.”

NYDFS cautions that insurers “are not yet able to accurately measure cyber risk” and before offering that line of product to certain organizations, insurers should assess the risk of the insured.

NYDFS calls the growing cyber risk “an urgent challenge for insurers.” The NYDFS Letter can be accessed here:

The New York Department of Financial Services (DFS), which regulates certain covered entities and licensed persons in the financial services sector doing business in New York, recently provided guidance to its regulated entities that the annually required Certificate of Compliance with the DFS Cybersecurity Regulations must be submitted no later than April 15, 2021.

To find out whether a company is covered by the DFS Cybersecurity Regulations, DFS has established a portal to search applicable regulated entities. The portal also is used to file the annual certification. According to DFS, “All Covered Entities and licensed persons who are not fully exempt from the Cybersecurity Regulation are required to submit a Certificate of Compliance no later than April 15, 2021, attesting to their compliance for the 2020 calendar year.”

The publication further states that “if a Covered Entity or licensed person has an exemption that is still valid, they do not need to file a new Notice of Exemption in 2021.”

For more information on the DFS Cybersecurity Regulation requirements, click here.

You probably heard about the recent hack of Twitter accounts that took place on July 15, 2020. The hackers took over several prominent Twitter accounts, which resulted in a scam that netted over $118,000 in bitcoin for the hackers. One of the most startling things about the cyberattack was that it was led by a 17-year-old along with his accomplices. The hackers took over the accounts of well-known individuals including Barack Obama, Kim Kardashian West, Kanye West, Bill Gates, Elon Musk and many others, and tweeted a “double your bitcoin scam” from these Twitter accounts directing people to send bitcoin to fraudulent accounts.

The New York Department of Financial Services (NYDFS) issued a detailed report last week regarding this hack into the social media giant. The report found that “the Twitter Hack happened in three phases: (1) social engineering attacks to gain access to Twitter’s network; (2) taking over accounts with desirable usernames (or “handles”) and selling access to them; and (3) taking over dozens of high-profile Twitter accounts and trying to trick people into sending the Hackers bitcoin. All this happened in roughly 24 hours.”

How did the hackers do it? According to the report, the first phase of the attack started with the hackers stealing credentials of Twitter employees the old-fashioned way by using social engineering. The hackers posed as Twitter IT employees and contacted several Twitter employees claiming there was a problem with Twitter’s Virtual Private Network (VPN). The report stated that the “hackers claimed they were responding to a reported problem the employee was having with Twitter’s Virtual Private Network (VPN). Since switching to remote working, VPN problems were common at Twitter. The Hackers then tried to direct the employee to a phishing website that looked identical to the legitimate Twitter VPN website and was hosted by a similarly named domain. As the employee entered their credentials into the phishing website, the Hackers would simultaneously enter the information into the real Twitter website. This false log-in generated an MFA [multi-factor authentication] notification requesting that the employees authenticate themselves, which some of the employees did.”

The hackers then went surfing within the Twitter system looking for employees with access to internal tools to take over accounts. This led to the second phase of the attack: taking over and selling access to original gangster (OG) Twitter accounts. According to the report, an OG Twitter account refers to accounts  designated by a single word, letter, or number and adopted by Twitter’s early users. The hackers discussed taking over and selling the OG accounts in various online chat messages. On July 15, the hackers “ hijacked multiple OG Twitter accounts and tweeted screenshots of one of the internal tools from some of the accounts to the accounts’ respective followers.

The final phase of the hack involved  taking over various cryptocurrency company accounts and directing users to a link to a scam bitcoin address. According to a tweet sent out by Twitter on July 16, approximately 130 accounts of high-profile verified users (those Twitter accounts that you see with the blue check mark) were taken over by the hackers with tweets asking people to send bitcoin, with the promise that the high-profile user would double the amount to be given to a charity. The bitcoin address was fraudulent, the tweets were not sent by the actual users, and the hackers were able to collect more than $118,000 in bitcoin.

The NYDFS began its investigation because the cryptocurrency companies are regulated entities. According to the report, the department instructed the cryptocurrency companies to block the hackers’ bitcoin addresses if they hadn’t already done so. This move prevented over a million dollars’ worth of fraudulent bitcoin transfers.

We write all the time about the critical importance of cybersecurity practices and protocols such as multifactor authentication, employee training regarding phishing, and using secure passwords. The general consensus appears to be that the Twitter hack was not a sophisticated one, but that the hackers knew what they were after and knew how to accomplish their goal. The NYDFS report stated that “the Twitter Hack is a cautionary tale about the extraordinary damage that can be caused even by unsophisticated cybercriminals. The Hackers’ success was due in large part to weaknesses in Twitter’s internal cybersecurity protocols.”

The New York Department of Financial Services (DFS) recently issued guidance to its regulated entities regarding heightened cybersecurity awareness as a result of the COVID-19 pandemic. DFS described three primary areas of heightened risk during this time: remote working, increased instances of phishing and fraud, and third-party risks.

With respect to remote working, DFS noted several areas of risk created by the shift to remote working. The prospect of more remote workers means additional security risks for all businesses. The DFS guidance focused on reminding regulated entities to use secure connections for remote workers – including the use of multi-factor authentication and VPN connections – to use secure wireless devices, and to provide guidance to employees regarding the secure use of wireless devices and other remote video conferencing tools.

DFS noted that there has been a significant increase in online fraud and phishing attempts and stated that the FBI has reported the use of fake emails purporting to be from the Center for Disease Control and Prevention (CDC), looking for charitable contributions or offering COVID-19 relief checks. DFS stated, “Regulated entities should remind their employees to be alert for phishing and fraud emails, and revisit phishing training and testing at the earliest practical opportunity.”

The third area DFS focused on was third-party risks. DFS suggested that regulated entities should coordinate with critical vendors to determine how they are adequately addressing new risks.

Finally, DFS issued a reminder that under 23 NYCRR Section 500.17(a), covered Cybersecurity Events must be reported to DFS as promptly as possible and within 72 hours at the latest.

On September 4, 2018, the third stage of compliance deadlines under the New York Department of Financial Services’ (DFS) expansive cybersecurity regulation went into effect. This deadline, scheduled for implementation 18 months after the regulation (23 NYCRR 500) initially went into effect in March 2017 triggers Covered Entities’ obligations under the regulation to:

  1. Maintain systems that include audit trails that can detect and respond to security incidents; (b) establish procedures (Section 500.06);
  2. Include in their cybersecurity program written procedures, guidelines and standards designed to ensure the use of secure development practices for in-house applications and to evaluate the security of externally developed applications (Section 500.08);
  3. Establish policies and procedures for the periodic disposal of nonpublic information no longer necessary for business operations or for other legitimate business purposes (Section 500.13);
  4. Implement risk-based policies, procedures and controls designed for training and monitoring authorized users of systems (Section 500.14(a)); and
  5. Based on the company’s risk assessment, implement controls, including encryption, to protect nonpublic information both in transit over external networks and at rest (Section 500.15).

As noted in Section 500.15, the requirement to implement encryption for nonpublic data both in transit and at rest is dependent on the company’s risk assessment. The regulation requires that each Covered Entity develop its cybersecurity program around. To the extent the company determines that encryption is not feasible, the regulation permits Covered Entities to implement alternative controls reviewed and approved by the Company’s Chief Information Security Officer.

Under the regulation, Covered Entities are required to certify compliance on an annual basis, with the next scheduled certification deadline set for February 15, 2019. The final deadline under the regulation is scheduled for implementation on March 1, 2019, and will require Covered Entities to implement a Third-Party Service Provider Security Policy as mandated under Section 500.11 of the regulation.

The New York Department of Financial Services (DFS) issued new regulations requiring every consumer credit reporting agency that “assembles, evaluates, or maintains a consumer credit report on any consumers located in New York State register with the Superintendent of the Department of Financial Services.”

As a result of credit reporting agencies’ new status of having to register with DFS, those agencies are subject to annual reporting and enforcement by DFS.

It also deems credit reporting agencies to be covered entities under the NY DFS Cybersecurity Regulations, with transition periods for compliance—October 1, 2018, April 1, 2019, and October 1, 2019. This means that a consumer credit reporting agency is required to have policies and procedures in place to assess and respond to cyber risks, as well as certify to DFS that it has implemented a cybersecurity program just like financial institutions.