Virtual Truth: False Information Risk...

How does "False Information" impact the risk to your organization? 

Decisions based upon faulty or inaccurate information is the root of many of the systemic failures of catastrophic history. The Titanic, Challenger Shuttle and Three Mile Island nuclear incident can all be attributed to the integrity of vital information.

Fast forward to the financial crisis and the past decades of consumer credit expansion strategies. What data have you been collecting from US consumers or clients about their personal identifiable information attributes?

The Information Age has drawn us into a more dangerous business operating environment as these digital assets have become another commodity to be sold in an international market place, to the highest bidder. Are you ready when the federal "Suits" or the local LEO's (Law Enforcement Officer) knock on your door in pursuit of the truth:

The Fair Credit Reporting Act (FCRA) spells out rights for victims of identity theft, as well as responsibilities for businesses. Identity theft victims are entitled to ask businesses for a copy of transaction records — such as applications for credit — relating to the theft of their identity. Indeed, victims can authorize law enforcement officers to get the records or ask that the business send a copy of the records directly to a law enforcement officer. The businesses covered by the law must provide copies of these records, free of charge, within 30 days of receiving the request for them in writing. This means that the law enforcement officials who ask for these records in writing may get them from your business without a subpoena, as long as they have the victim’s authorization.

The financial integrity of your future as a business and as a consumer is at stake. Christopher Burns brings this to light in a dramatic fashion in his book; Deadly Decisions:

"First, it is often extremely difficult to validate, corroborate, or verify the information we are dealing with, except by comparing it to the other information we are dealing with. And often the whole system is contaminated by misunderstanding, bad data and false assumptions that are hard to spot. The truth test rarely works. And second, the real issue of truth is not whether you or I should believe this or that, it is what we believe together. The truth that matters is group truth, and where we get into trouble is when a whole organization--a company, a community, a nation--starts to act on information that has been gathered from many sources and processed by many people but has come to contain significant elements that are false.”

Trusted Information is at the core of current global trading, business transactions and the fabric of our own personal identities. False information and knowledge is what creates operational risk factors that can change a whole company or the integrity of a whole nation.

Systems that comprise vast databases of "so called" trusted information are at our fingertips being utilized to make coherent and effective decisions. Yet what may be the more catastrophic Operational Risk beyond the simple stealing of information is the potential opportunity for the destruction of vital information.

The vulnerability of our institutions and the critical infrastructure of the United States economy is ever more at risk of a systemic loss. While our stolen data will continue to be sold to the highest bidder on a global platform for trading, the 4GW "Non-State" actors will change their modus operandi. This is a given.

Trusted Information systems that have certified integrity and the oversight controls to ensure the highest level of virtual truth is the "Holy Grail.”

The degree to which these same systems include false knowledge is our most complex problem for business and government in the next decade…

CyberCom: Real-Time Situational Awareness...

The Operational Risks to your enterprise that are associated with your digital assets, networks and infrastructure are vast.

What is your organizations exposure today?

The amount of daily "Cyber Intelligence" flowing into the organization is growing exponentially and there are few hours in the day to analyze it. You have invested hundreds of thousands if not millions on cyber security to keep your corporate systems protected and ready for any significant business disruptions.

Electronic Stored Information (ESI) is continuously being discussed at the Board of Directors meetings. Data Breach Notification Laws are being amended and the congressional pipeline for privacy and cyber laws is in full swing in the United States.

The Fortune 500 is already paying for "White Hat" hackers to test their online and data security. The only way to continuously determine the effectiveness of risk management controls, is to continuously test them in a lab or scenario environment.

This "Red Cell" approach to attacking the corporate assets from the "inside out" or the "outside in" provides the intelligence necessary to close the gaps and vulnerabilities. These penetration or vulnerability tests are necessary and the ecosystem of companies of sources and methods is expansive.

A Fortune 500 organization may currently subscribe to annual services that provide the intelligence that gives them an alert of a "Red Flag" in their security landscape.

The company that provides the intelligence is paying a substantial fee to a network of sophisticated professionals to exploit the vulnerabilities in software coding. Namely, the design, configuration or implementation of a complex set of technologies to determine where and how these vulnerabilities may pose a threat to your assets.

The model for Enterprise OPS Risk Management in the most savvy and enlightened critical infrastructure dependent organizations realize that cyber security is not a department or a unit at the company.

It remains a horizontal platform on which all business units and the departments of the organization rest and it's pervasive mechanisms for the security and safety of people, processes, systems and external events must operate 24 X 7 X 365.

Our future is about "Defend Forward" or an "Real-Time Situational Awareness" strategy.

"The “defend forward” concept outlined in the DoD’s 2018 cyber strategy charges Cyber Command to get as close to adversaries in networks outside the United States before they reach the nation. The command uses its authorities to operate in networks abroad to discover malware and enemy tactics that could be used against the American people or election infrastructure.

The command can either share that with relevant partners — such as the Department of Homeland Security, the FBI or private companies — so they can take necessary measures, or the command can unilaterally take action thwart malicious activities before they impact American networks."

The public and the consumer are becoming used to the fact, that the challenge continues to be an iterative process and worthy of some levels of patience. 

"Operational Risk Management (ORM) is not about eliminating all threats to the enterprise. It is about the speed and accuracy of understanding the current levels and threat vectors so you can effectively deter, detect, defend and document."

This "4D" approach to risk management in the rapidly changing, digitally mobile organization of 2020 and beyond is a shift away from pure information security thinking that is housed within the Information Technology Department...

Product Innovation: Individual Responsibility for Risk Management...

The next generation of Operational Risk Management professionals will be focused on a whole new set of thinking. Mitigating business risks that are associated with running the day to day functions of the enterprise will require people who have a command of their own accountability. The management of risks in their particular area of operations, will have an acute sensitivity to the level of experimentation, testing and innovation. This responsibility for individual levels of proactive risk management, begins with a new mind-set shift about the world of work itself, and our own management of our personal work product.

When you analyze where the financial services industry has exposed itself to tremendous losses over the years, it will no doubt be tied to some innovative instrument or product that was invented by some very creative and innovative people. These losses surrounding Credit Default Swaps (CDS) or Collateralized Debt Obligations (CDO) as an example, all started when an innovative person utilizing the latest tools available created a new product to be introduced to the marketplace. Sure, there were risk management professionals involved in the pipeline to production including lawyers, math quants and finance experts. Yet a failure of Operational Risk Management, led to serious losses and a global crisis, that may well be just the precursor to something even more sinister.

The humans quest for innovation, creativity and the ability to adapt is built into our DNA. So is the ability to survive and to overcome the adversities of our environment to sustain ourselves. Whether that is in the form of food and water or capital and manpower doesn't really matter. Leveraging the available resources to stay alive, being competitive and gaining more power in the conference rooms of Wall Street, or the Madrasahs in South Waziristan, remains a constant.

Innovation in the workplace, is vital for our employees to thrive and for new products to be discovered and old ones to be enhanced. Those new products are invented by people who will have the simultaneous task of doing a sound operational risk assessment. Managing risks at the same time you are innovating, is hard to separate from each other. The trade-offs and the decisions on whether to use this material or algorithm based upon use, shelf-life and the environment that the new product innovation will be operating in, takes prudent risk analysis.

So what will be different for our next generation of Operational Risk Managementprofessionals? What will the new thinking be all about? It will be about engineering the four-step process into everything we do, and to reinforce the compliance with each step of the teams process:

1. Assess the situation.

The three conditions of the Assess step are task loading, additive conditions, and human factors.

• Task loading refers to the negative effect of increased tasking on performance of the tasks.
• Additive factors refers to having a situational awareness of the cumulative effect of variables (conditions, etc.).
• Human factors refers to the limitations of the ability of the human body and mind to adapt to the work environment (e.g. stress, fatigue, impairment, lapses of attention, confusion, and willful violations of regulations).

2. Balance your resources.

This refers to balancing resources in three different ways:

• Balancing resources and options available. This means evaluating and leveraging all the informational, labor, equipment, and material resources available.
• Balancing Resources verses hazards. This means estimating how well prepared you are to safely accomplish a task and making a judgement call.
• Balancing individual verses team effort. This means observing individual risk warning signs. It also means observing how well the team is communicating, knows the roles that each member is supposed to play, and the stress level and participation level of each team member.

3. Communicate risks and intentions.

• Communicate hazards and intentions.
• Communicate to the right people.
• Use the right communication style. Asking questions is a technique to opening the lines of communication. A direct and forceful style of communication gets a specific result from a specific situation.

4. Do and debrief. (Take action and monitor for change.)

This is accomplished in three different phases:

• Mission Completion is a point where the exercise can be evaluated and reviewed in full.
• Execute and Gauge Risk involves managing change and risk while an exercise is in progess.
• Future Performance Improvements refers to preparing a "lessons learned" for the next team that plans or executes a task.

So what does the renewed emphasis on the process being embedded into our work actually do for our work product? It gives the human a sense that the innovation is now ready for experimentation and field testing. This means that it is still not ready for prime time or the marketplace. You see, this realization is important. The recent focus on rapid prototyping and a push to get products to the marketplace before the competition, has produced the sinister and evil outcomes we have all witnessed. Why does it take so long for a new drug to make it through the pharmaceutical pipeline and end up being advertised on the CBS Evening News?

And even then, after so much testing and study, we find that a new drug (product) is not really so safe compared to the long term complications of using it as prescribed. The risk reward equation is at stake in our financial services industry and every other economic sector that is striving to be more innovative in todays global marketplace: For individuals, here are $18 Million reasons:

Attorney Lynn Szymoniak had spent a career investigating insurance fraud when a bank moved to foreclose on her Florida home in 2008. Almost four years later, the fraud she said she uncovered by combing through mortgage documents earned her $18 million.

Szymoniak, 63, is among six whistle-blowers who will pocket $46.5 million as part of a $25 billion national foreclosure settlement that state and federal officials reached in February with five banks, including Bank of America Corp. andJPMorgan Chase & Co. (JPM), according to the U.S. Justice Department.

“When they did this to her, they picked the wrong person at the wrong time in the wrong place,” Richard Harpootlian, Szymoniak’s attorney in two whistle-blower cases, said in an interview. “They stuck their hand into the beehive.”

Szymoniak’s examination, in which she relied on her experience as an insurance-fraud investigator, led to her claims against banks for submitting fraudulent documents to the federal government asserting that they owned loans insured by the Federal Housing Administration, she said.

The national foreclosure settlement with the five banks, which resolves claims of abusive foreclosure practices, provides mortgage relief to borrowers, pays $1.5 billion to those who lost their homes to foreclosure, and sets standards for how the banks service mortgage loans.

Who will be your choice for effective operational risk management as your new innovative products are consumed by the marketplace?

A. Your employees or workplace stakeholders

B. Your customers or consumers

The choice is yours as your institution puts new resources and new incentives in front of your workplace stakeholders.

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.

ID Risk Management: Protective Intelligence Factors...

The root cause of the safety and security threat to corporate personnel and assets can be traced back to an identity of someone. It can be said that protective intelligence utilizing the proper Operational Risk Management framework will mitigate the impact of a successful attack. Whether the intelligence is based upon monitoring or proactive and preemptive factors to be alerted to any threat actors who wish to do us harm; you still have to have a valid identity of the "unsub."

Today as you walk into your employer, you may be happy that you are there. This is your sanctuary away from the threat at home. Your work place provides a potential "safe zone" for the next 8 to 10 hours until the work day is over and you have to return to an environment filled with physical and emotional violence. The growing workforce of women in today's corporations are faced with an increasing challenge to keep their jobs and to mask the problems on the home front.

Simultaneously, those who are the root cause of much of the domestic violence are also walking into the same corporation. Who would know that they are the same people that have never been convicted of a crime and yet are beating their wife or girl friend at home? The point is that in your corporate environment today you have a mix of both kinds of people that are the potential threats to your organizational security and safety. Workplace violence is an Operational Risk that requires a proactive protective intelligence mechanism operating on a 24/7 basis. The identities of your employees may be known upon hire, but their changing profiles over the course of their career could change dramatically. Let's illustrate the true picture with some real incidents.

The US Bureau of Labor Statistics has data on 5,488 workplace fatalities in the US in 2007. 610 were homicides, 491 of these were shootings. 22% of these homicides involved former employees yet 43% were current employees. The remaining incidents were committed by non-employees. Understanding the red flags on your current employees and those who have left the organization is the focus here. Your Operational Risk Framework should incorporate the processes, systems and tools to mitigate this relevant internal threat in the enterprise.

The implications of effective identity management go far beyond the operational risks associated with the work place. ID Management encompasses the following domains:

• Public Safety: Identity theft, cyber crime, computer crime, organized criminal groups, document fraud and sexual predator detection
• National Security: Cyber security and cyber defense, human trafficking and illegal immigration, terrorist tracking and financing
• Commerce: Mortgage fraud and other financial crimes, data breaches, e-commerce fraud, insider threats and health care fraud
• Individual Protection: Identity theft and fraud

The research and development community has been focused of late on the use of biometrics. For access controls and other ways to validate true identities; these tools and systems for authentication are vital. Yet the stolen identity to fraudulently obtain a drivers license, passport or visa comes back to our root cause issue. Dr. Gary Gordon and his team at CAIMR are on the right track:

Those challenges, aggravated by the rapid changes in our society, include identity theft and fraud, cyber crime, computer crime, travel and immigration document fraud, and data breaches. They impact individuals, public safety, commerce, government entitlement programs, and national security. As the concept of an identity (or entity) expands in the physical and digital worlds, determining if the person claiming an identity is really that person becomes critical to conducting business, providing access to services and systems, and tracking cyber criminals and terrorists. Responding to these challenges requires a collective effort by the key thought leaders from the public and private sectors, working in concert with academe.

The Center's mission is to conduct applied research in order to provide pragmatic outcomes, utilizing a multi-disciplined approach that draws on the expertise of its diverse members. The results will be specific and measurable, whether they are in the form of industry or law enforcement best practices, technologies, policy adjustments, or training and educational materials.

The Center's purpose is to convene key stakeholders and marshal their respective strengths to help solve very challenging societal problems. Our partners include organizations such as the United States Secret Service, the United States Marshals Service, LexisNexis, VISA, Cogent Systems, Indiana University, Intersections, Wells Fargo & Company, and Fair Isaac Corporation. Our government/law enforcement partners must adapt to quickly evolving identity fraud and cyber crimes. As such, they must understand current attack vectors and prepare for future ones. They need to become more proactive by improving investigations and enhancing training. Corporations are faced with many challenges, including increased fraud losses, compliance and regulatory oversight, and enhancing products and improving services to keep up with the rapidly changing environment. The academic research community is challenged with gaining access to key data sets, tight funding budgets, a limited ability to interact with corporate and government decision makers, and the need to infuse their curricula with cutting-edge research.

Establishing effective tripwires and situation awareness begins with people and may be augmented by technologies and software. CCTV, biometrics and other access controls can become the catalyst for a complacent environment and is no replacement for effective training, education and scenario exercises with personnel.

Protective Intelligence is the front line for early warning and proactive measures to interdict the loss of corporate assets. Having the correct combination of human and technology capabilities will create the most effective means for a myriad of incidents internal to the work place. Application of these these same measures of countersurveillance, monitoring of identities and the lawful use of systems will provide the red flags necessary to preempt incidents external to the institution. In the 21st century, "soft targets" in our critical infrastructure will continue to be exploited for their vulnerabilities:

India picked up intelligence in recent months that Pakistan-based terrorists were plotting attacks against Mumbai targets, an official said Tuesday, as the government demanded that Islamabad hand over suspected terrorists believed living in Pakistan.

A list of about 20 people — including India's most-wanted man — was submitted to Pakistan's high commissioner to India on Monday night, said India's foreign minister, Pranab Mukherjee.

India has already demanded Pakistan take "strong action" against those responsible for the attacks, and the U.S. has pressured Islamabad to cooperate in the investigation. America's chief diplomat, Secretary of State Condoleezza Rice, will visit India on Wednesday.

The Indian government faces widespread accusations of security and intelligence failures after suspected Muslim militants carried out a three-day attack across India's financial capital, killing 172 people and wounding 239.

FACTA: Red Flags & eCrime...

The "Red Flags" rule has some banks and financial institutions scrambling to get compliant by the upcoming November deadline. The corporate governance and compliance teams are working hard to make sure the Operational Risks associated with the rule are being addressed in a timely and prudent manner:

Federal Trade Commission (FTC) and five Federal financial regulatory agencies published a series of final rules and guidelines entitled "Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit Transactions Act (FACTA) of 2003." Red Flags are relevant indicators of a possible risk of identity theft and Section 114 of FACTA specifically explains rules about the development and implementation of a written identity theft prevention program. The provision recommends that both financial institutions and creditors in the United States assess the likelihood that their customers' accounts are prone to identity theft, and mandates that they then implement a program to identify, detect and respond to its indicators.

Organizations who have many of the Information Security and Enterprise Risk functions under the CISO or CIO will have to make sure that they are communicating effectively with the Board of Directors, just as they did with SOX. Senior management is on the line when it comes to the security and safety of the vital information on clients and customers.

"Financial institutions or creditors could look at this as a governance strategy to get the Operational Risk objectives on the Board Room agenda," said Peter L. Higgins, Managing Director and Chief Risk Officer of 1SecureAudit. "When Board Members themselves are having their own personal identities compromised by Transnational eCrime Syndicates, senior management can bet that they will have to have their house in order, especially by November 1st." "Our advisory teams are recommending integrated enterprise solutions alongside software tools such as Norkom Technologies, Memento and Actimize to mitigate these specific compliance and eCrime business problems," Higgins said.

And just when the financial institutions have their hands full with ID Theft, so do the health care and medical sectors:

To be sure, the most recent data available suggests medical ID theft affects a relatively small number of people. In 2005, more than 8 million Americans were victims of identity theft, and 3% of them, or about 249,000, had their personal information misused for the purpose of obtaining medical treatment, supplies or services, according to a 2006 study from the Federal Trade Commission.

But state and national lawmakers are beginning to take notice. Starting this year, California extended its security breach law to require companies that handle medical and health-insurance information to notify people when the security of their medical data has been compromised.

In May, the U.S. Health and Human Services Department's Office of the National Coordinator for Health Information Technology awarded a $450,000 contract to Booz Allen Hamilton to study the extent of the nation's medical identity theft problem.

The last to know?

Victims often realize they have a problem when they receive their insurer's explanation of benefits for services they never received, collections companies come calling for charges they didn't incur or their credit report shows changes, Dixon said.

"Right now where we are with medical identity theft is where we were at the beginning of financial identity theft," she said. "We're starting at square one with this crime. The good news here is financial identity theft laws are going to help these victims for debt collection and credit report issues."

Information Risk: The Zero's & One's Don't Lie...

The Bear Stearns implosion has been predicted as a casualty of failed hedge funds. These entities are less regulated than banks and don't have to keep a minimum capital reserve. The limits on the amount of leverage they utilize can sometimes come back to burn you.

Angry Bear Stearns Co Inc shareholders have wasted no time in bringing legal claims following the company's stunning stock collapse and $2-a-share fire sale to JPMorgan Chase & Co.

At least one federal lawsuit in New York seeking class- action status for alleged securities fraud was filed on Monday by an investor contending the company hid its true financial condition from shareholders.

"Who Knew What When" is the focus of the legal mechanism now in full swing as investigators at the SEC and other federal regulators begin their forensic examinations and interviews. Eliot Spitzer is finally a back story after his demise in the FINCEN money laundering investigation:

But what really snared Spitzer was a money laundering investigation that was flagged by suspicious activity reports (SARs) that banks have to file with the Treasury to surface everything from money laundering to terrorist activity. This network has been around for a while, but its importance escalated following the Sept. 11, 2001 terrorist attacks. According to the FBI’s charges the prostitution ring that counted Spitzer as a customer was investigated due to some shady bank accounts, checks and wire transfers with big totals ($39,000, $400,000 and others).

The nexus of eDiscovery, Data Mining and Operational Risk Management are in the news as these incidents are unraveled. The information and evidence from the data analysis will reveal the truth and those caught shredding documents or deleting files will no doubt become part of one of these inquiries.

Even today at 2AM JP Morgan Chase was searching Google with the terms "information operations risk management" and landed here on this Operational Risk Management Blog. Then they "Out Clicked" to A Defensible Standard of Care in hopes of finding answers to their questions.

The law suits and the lawyers are busy these days with the Federal Rules of Civil Procedure (FRCP) as they defend ongoing data breaches and bad behavior by employees and interested 3rd parties:

A security breach at an East Coast supermarket chain exposed 4.2 million credit and debit card numbers and led to 1,800 cases of fraud, the Hannaford Bros. grocery chain announced Monday.

Hannaford said credit and debit card numbers were stolen during the card authorization process and about 4.2 million unique account numbers were exposed.

The breach affected all of its 165 stores in the Northeast, 106 Sweetbay stores in Florida and a smaller number of independent groceries that sell Hannaford products.

The company is aware of about 1,800 cases of fraud reported so far relating to the breach.

If the latest economic studies are correct, that's going to cost about $98.00 per record on the low side when it comes to the amount of money that these organizations will spend (unless insured) to clean up this operational risk related incident.

New York State has a new Governor at the same time the Bears are descending on Wall Street:

David A. Paterson became New York’s 55th Governor on March 17, 2008. In his first address as Governor, Paterson spoke about the challenges New York faces and his plan for New York’s future.

This month it's New York in the news but our prediction is that California will soon be next to capture the nations headlines. The legal buzzards are soaring overhead...

Lessons Learned: The Impact of Executive Decisions...

In times of economic downturn the Operational Risks within your institution will begin to rise. Enron, Worldcom and HealthSouth are the few names people recognize as the major casualties of the last significant dip in our economy. When times get tough, people get desperate and try to keep the schemes and any red flags from being discovered.

So what are some of the areas that encompass Operational Risk:

• Internal Fraud - bribery, misappropriation of assets, tax evasion, intentional mismarking of positions
  
• External Fraud - theft of information, hacking damage, third-party theft and forgery
• Employment Practices and Workplace Safety - discrimination, workers compensation, employee health and safety
• Clients, Products, & Business Practice - market manipulation, antitrust, improper trade, product defects, fiduciary breaches, account churning
• Damage to Physical Assets - natural disasters, terrorism, vandalism
• Business Disruption & Systems Failures - utility disruptions, software failures, hardware failures
• Execution, Delivery, & Process Management - data entry errors, accounting errors, failed mandatory reporting, negligent loss of client assets

Cynthia Cooper has written a new book "Extraordinary Circumstances: The Journey of a Corporate Whistleblower" about her honorable quest to find the truth at Worldcom. Her quote in the March/April issue of Fraud Magazine says it all:

"Listen to your instinct. If people are acting out of character or appear to be working to head you in another direction, step back and ask yourself why. Continue to ask for support and dig until you're satisfied that you've gotten it right."

Beyond Cynthia's first person account to give the reader her emotional perspectives, Operational Risk Management professionals realize that their role and the job they have been trained to do is not always a "Pleasant" experience. This is why all of the training and education is so important and the rehearsals are absolutely imperative. Testing, evaluating and testing some more is the norm. Understanding what "Normal" looks like, takes time and persistence. Yet without it, our horizon for positive change could be in jeopardy.

With many of the "Lessons Learned" books now published from the last economic dip, who will be next to blow the whistle or expose the real risks that some companies are hiding from the Board of Directors and the shareholders. The class action lawyers are even gathering their evidence on the possibility of cashing in on predatory lending practices:

A federal appeals court is nearing a decision on a battle between Chevy Chase Bank and a Wisconsin couple that could for the first time enable homeowners across the country to band together in class-action lawsuits against mortgage firms and get their loans canceled.

The case is alarming Wall Street 's biggest banks, which could bear the hefty cost of reimbursing all mortgage interest, closing costs and broker fees to groups of homeowners who uncover even minor mistakes in their loan documents. After a federal judge in Milwaukee ruled last year that the Wisconsin couple had been deceived and other borrowers could join their suit, Chevy Chase Bank appealed to the circuit court in Chicago.

So what we have are markets that are volatile. Bankers who are raising the stakes for borrowers. And naive consumers who are facing higher prices across the board. The time for increased vigilance is in front of us all. From the Board Room to the Court Room it's time that we spend more time looking at the interdependencies and realize that risk is more than a prediction.

During these times, it's worth revisiting this post on Fear: The Elements of Prediction.

Business Survival: Anticipating Breakpoints...

"The final plunge of the most powerful and dreaded firm on Wall Street in the roaring eighties came with astonishing speed. Like the abrupt fall of the Berlin Wall thousands of miles away, the collapse suddenly confirmed what everyone in the financial world could already feel in the wind: A new era had arrived."
Business Week cover story on 2.26.90

Many excellent companies have fallen from grace, not because they ignored their customers or lacked superior management skills, but because business conditions shifted beneath them. In an environment of fluctuating markets, proliferating technologies, and changing political frontiers, the management challenge is no longer to manage only growth. Now managers must cope with breakpoints, or sudden shifts in the rules of the game.

So has this deja vu moment reminded us that the Drexel Burnham Lambert implosion could be replaced with a new corporate name in the year 2008. Junk bonds were a financial instrument that were utilized for leveraged buy out financing. Then a "Breakpoint" occurred. Paul Strebel in his 1992 book entitled "Breakpoints: How Managers Exploit Radical Business Change" explains:

"Breakpoints, or sudden radical shifts in the rules of the business game, may shape the course of an industry, or of a company, but they need not be as dramatic as the junk bond story."

If you are the Chief Risk Officer (CRO) at a major institution facing sleepless nights these days then you are not alone. Just make sure that you "Tivo" the moment so that you can replay it in another decade, around the year 2015. If the last major breakpoint took 18 years then the next one should occur in about half the time. Do you have your finger on the pulse of change and potential breakpoints in your organization? Can you anticipate the next one in time to have the correct actions and plans to mitigate the impact on your enterprise?

Certainly there will always be those incidents and crises that are unknown and sudden. And how you recover during these times could save your reputation:

ZURICH (Reuters) - Credit Suisse (CSGN.VX: Quote, Profile, Research) trimmed full-year subprime writedowns to 2.0 billion Swiss francs (932 million pounds) but its stock fell as investors took fright at the bank's remaining exposure to the credit crisis.

The bank also reported a 49 percent fall in fourth-quarter profit from continuing operations to 1.33 billion francs, slightly below analysts' expectations, as losses in its huge asset management business eroded results.

Subprime writedowns in the fourth quarter were 1.26 billion francs, Credit Suisse said, though hedging earlier in the year had helped it lower its full-year charges for bad credits from an estimate of 2.2 billion francs made earlier.

The Blackberry mobile e-mail service has returned to normal after a breakdown on Monday afternoon wiped out the service across the US and Canada.

The Blackberry device, owned by Canadian firm Research in Motion, is popular among business people who rely on it to keep in touch with the office.

The service began to fail at about 1530 EST (2030 GMT) and users struggled to retrieve information for three hours.

The firm said no messages were lost and apologised for the problems.

Whether the CRO encounters the wrath of financial instruments at a breakpoint in the martetplace or hours of downtime on the corporate lifeblood of information exchange does not matter. Operational Risk is pervasive and creates discontinuity that impacts employees, customers and shareholders. The only answer is a resilient framework for anticipating and addressing "Change" or in other words, incidents.

Having a taxonomy for change in your organization is imperative to gaining insight on potential incidents whether they be [high frequency-low consequence] or [low frequency high consequence] events. So what is the potential aftermath without this taxonomy:

• Companies have myopia in viewing the actual breakpoint in front of them
• The company fails to capture the opportunity and exploit the breakpoint
• A rare company actually creates a competitive breakpoint

The analysis with your organization begins with the understanding of what your adversaries are utilizing as tools, to exploit your vulnerabilities. Your future Business Survival depends on it.

Red Flags: The Oracle of Omaha...

What do you do when you see a "Red Flag"? This was the question posed to Directors in a recent poll by Corporate Board Member Magazine in the November/December 2007 issue. C. Warren Neel the Executive Director of the Corporate Governance Center, at the University of Tennessee could not have answered this any better:

I don't want to see it; I want to "hear" the red flag before I see it. I want to hear about it before it happens. And I don't want to just know it happened, I want a diagnostic as to why it happened. I want a postmortem. What led us down that track? How did it start? Was it personnel-based? Process-based? Because of a malfunctioning system? Did we have the wrong strategy? Or what?

Welcome to the world of Operational Risk Management Mr. Neel. These are the scenarios that are played out on a continuous basis in the midst of the daily humming of business throughout the organization. These Ops Risk professionals are testing, exercising, stressing, and "Thinking of the Unthinkable" everyday so you do hear it before it happens. It may not be weeks, or even days. It could be hours or minutes. And then what will the Board of Directors do next?

This is perhaps one of the largest worries these professionals have. They don't know you, the Board or the steps you might or may not take once you get the warning, the news or the prediction. As the Board of Directors it's imperative that you learn all you can about who the Operational Risk experts are in the enterprise and to know them personally. Otherwise, how are you ever going to have an early warning system that you can trust and gets you the answers sooner than later?

What you need is an extension to the "Whistleblower" mechanism that tracks potential ethics violations and other wrong doing of corporate policy. It's a risk management method integrated with your current fraud management systems and combined with the ongoing behavioral analysis of "High" risk employees. Without this early warning process and supporting system in place the Board is forever doomed to be on the "reactive" end of the spectrum, continuously wondering how to respond to an incident that has already occurred.

How did Warren Buffet get the "Red Flag" on Freddie Mac even years before their implosion with senior management?

The charges against Brendsel were filed three years ago by the Office of Federal Housing Enterprise Oversight, which regulates Freddie Mac and its larger government-sponsored sibling Fannie Mae. OFHEO, which blames the accounting scandal on management misconduct is seeking damages and penalties against Brendsel totaling nearly $1 billion, including $24 million in severance benefits and stock awards.

Buffett said he was uncomfortable, among other things, about an investment by Freddie Mac that was unrelated to its business as the nation's second-largest financer of home mortgages.

"I follow the old dictum: There's never just one cockroach in the kitchen," Buffett said.

Details of his testimony were reported in Wednesday's editions of The Washington Post. They were confirmed by people familiar with the proceeding, speaking on condition of anonymity because they weren't authorized to speak about the case publicly.

Regardless of the outcome of this proceeding, the point could be made that the board had a huge "Red Flag" that Warren was selling his stake in the company. Predictions are based upon a number of factors and there must have been many pieces of information that added up to "somethings not right" at Freddie Mac. Today, there are ten positions open at Freddie Mac for operational risk related jobs and here is what they are seeking:

Position is part of a team supporting Operations as an operational risk management partner. Significant time will be spent as the face of the Audit Liaison function. Engages with the business areas to fully understand the operational process in order to coach and support the group in identifying and assessing operational risk and designing appropriate controls to mitigate the risk. Provides subject matter expertise on operational risk management systems and Freddie Mac operational processes.

Ensures all operational risk deliverables are completed within established timeframes with a high level of quality especially the mitigation of outstanding major/critical issues and monitoring of status on all outstanding issues. Deliverables include Operational Breakdown and Loss Event Reporting, Risk and Control Self-Assessments, SOX Assessments, Internal and External Audit Responses. Also supports Quality Assurance testing of SOX Key Controls and Root Cause Analysis.

• Skills/Knowledge needed:
• Indepth knowledge of operational risk management and controls with minimum 2 years experience.
• Knowledge of key principals of auditing.
• Knowledge of key principals of mortgage operations.
• Knowledge of financial industry operations and/or accounting is preferred.
• Ability to work independently with strong organizational skills to meet frequent deadlines.
• Strong interpersonal skills with ability to build working relationships.
• Flexibility and ability to multitask.
• Strong analytical skills.

One might wonder why they are looking for someone with in depth knowledge of operational risk management (ORM) with only two years of experience. Sadly, this is because the organization relied for too many years on their financial auditors and their armies of freshly minted MBA's from some of the best business schools in the nation. However, the main reason is that the science of ORM is new compared to other disciplines in the accounting profession.

As organizations evolve their ORM departments and combine the attributes of fraud management, systems testing, continuity of operations, records management and employee behavioral analysis the Board of Directors will have a better opportunity to predict "Red Flags". They will ultimately become more preemptive in their actions and follow through to protect the shareholders assets. Until that happens, keep your eyes and ears on the "Oracle of Omaha"...