| <html> | |
| <title> - SMALL BUSINESS AND THE FEDERAL GOVERNMENT: HOW CYBER ATTACKS THREATEN BOTH</title> | |
| <body><pre> | |
| [House Hearing, 114 Congress] | |
| [From the U.S. Government Publishing Office] | |
| SMALL BUSINESS AND THE FEDERAL GOVERNMENT: HOW CYBER ATTACKS THREATEN | |
| BOTH | |
| ======================================================================= | |
| HEARING | |
| before the | |
| COMMITTEE ON SMALL BUSINESS | |
| UNITED STATES | |
| HOUSE OF REPRESENTATIVES | |
| ONE HUNDRED FOURTEENTH CONGRESS | |
| SECOND SESSION | |
| __________ | |
| HEARING HELD | |
| APRIL 20, 2016 | |
| __________ | |
| [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] | |
| Small Business Committee Document Number 114-057 | |
| Available via the GPO Website: www.fdsys.gov | |
| ______ | |
| U.S. GOVERNMENT PUBLISHING OFFICE | |
| 20-072 WASHINGTON : 2016 | |
| ----------------------------------------------------------------------- | |
| For sale by the Superintendent of Documents, U.S. Government Publishing | |
| Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; | |
| DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, | |
| Washington, DC 20402-0001 | |
| HOUSE COMMITTEE ON SMALL BUSINESS | |
| STEVE CHABOT, Ohio, Chairman | |
| STEVE KING, Iowa | |
| BLAINE LUETKEMEYER, Missouri | |
| RICHARD HANNA, New York | |
| TIM HUELSKAMP, Kansas | |
| CHRIS GIBSON, New York | |
| DAVE BRAT, Virginia | |
| AUMUA AMATA COLEMAN RADEWAGEN, American Samoa | |
| STEVE KNIGHT, California | |
| CARLOS CURBELO, Florida | |
| CRESENT HARDY, Nevada | |
| NYDIA VELAZQUEZ, New York, Ranking Member | |
| YVETTE CLARK, New York | |
| JUDY CHU, California | |
| JANICE HAHN, California | |
| DONALD PAYNE, JR., New Jersey | |
| GRACE MENG, New York | |
| BRENDA LAWRENCE, Michigan | |
| ALMA ADAMS, North Carolina | |
| SETH MOULTON, Massachusetts | |
| MARK TAKAI, Hawaii | |
| Kevin Fitzpatrick, Staff Director | |
| Emily Murphy, Deputy Staff Director for Policy | |
| Jan Oliver, Chief Counsel | |
| Michael Day, Minority Staff Director | |
| C O N T E N T S | |
| OPENING STATEMENTS | |
| Page | |
| Hon. Steve Chabot................................................ 1 | |
| Hon. Nydia Velazquez............................................. 2 | |
| WITNESSES | |
| Mr. Richard Snow, Owner, Maine Indoor Karting, Scarborough, ME... 4 | |
| Mr. Kevin Dunn, Technical Vice President, NCC Group, Austin, TX.. 6 | |
| Mr. Nicholas A. Oldham, Counsel, King & Spalding, LLP, | |
| Washington, DC................................................. 7 | |
| Mr. Stephen F. Mankowski, CPA, National Tax Chair, National | |
| Conference of CPA Practitioners (NCCPAP), National Secretary, | |
| NCCPAP, Partner at EP Caine & Associates CPA, LLC, Bryn Mawr, | |
| PA............................................................. 9 | |
| APPENDIX | |
| Prepared Statements: | |
| Mr. Richard Snow, Owner, Maine Indoor Karting, Scarborough, | |
| ME......................................................... 25 | |
| Mr. Kevin Dunn, Technical Vice President, NCC Group, Austin, | |
| TX......................................................... 36 | |
| Mr. Nicholas A. Oldham, Counsel, King & Spalding LLP, | |
| Washington, DC............................................. 42 | |
| Mr. Stephen F. Mankowski, CPA, National Tax Chair, National | |
| Conference of CPA Practitioners (NCCPAP), National | |
| Secretary, NCCPAP, Partner at EP Caine & Associates CPA, | |
| LLC, Bryn Mawr, PA......................................... 47 | |
| Questions for the Record: | |
| None. | |
| Answers for the Record: | |
| None. | |
| Additional Material for the Record: | |
| NAFCU - National Association of Federal Credit Unions........ 54 | |
| SMALL BUSINESS AND THE FEDERAL GOVERNMENT: HOW CYBER ATTACKS THREATEN | |
| BOTH | |
| ---------- | |
| WEDNESDAY, APRIL 20, 2016 | |
| House of Representatives, | |
| Committee on Small Business, | |
| Washington, DC. | |
| The Committee met, pursuant to call, at 11:00 a.m., in Room | |
| 2360, Rayburn House Office Building. Hon. Steve Chabot | |
| [chairman of the Committee] presiding. | |
| Present: Representatives Chabot, Luetkemeyer, Hanna, | |
| Gibson, Brat, Hardy, Kelly, Velazquez, Clarke, Payne, Meng, and | |
| Adams. | |
| Chairman CHABOT. Good morning. The Committee will come to | |
| order. I want to thank you, everyone, for being here today, and | |
| we want to especially thank all of our witnesses for coming | |
| here to share your insights and expertise with this Committee | |
| on a very timely and important subject. In April of last year, | |
| this Committee heard from a panel of industry experts about how | |
| small businesses across the country are being threatened by a | |
| growing number and variety of cyber attacks. Since then, the | |
| threat to small businesses has only grown. Unfortunately, in | |
| many ways, the Federal Government's efforts to guard against | |
| this threat have not kept pace. | |
| This morning, the Committee will look at the effects of | |
| cyberterrorism and cyber attacks on both small businesses and | |
| on the Federal Government. Small businesses face an increased | |
| risk because they lack the resources to protect themselves | |
| against sophisticated cyber attacks. We must make sure that the | |
| Federal Government is part of the solution and not adding to | |
| the problem. It is vital to both the economic and national | |
| security of this nation that the sensitive data held by Federal | |
| Government be safeguarded. The owners, employees, and customers | |
| of America's 28 million small businesses need to have | |
| confidence that their data is secure. | |
| I think it is fair to say that confidence has been shaken | |
| in recent years with the cyber attacks on the IRS, the State | |
| Department, OPM, and even the White House. Between foreign | |
| hackers from countries like China and Russia and domestic | |
| identity thieves, the Federal Government has a target on its | |
| back that seems to get larger by the day. | |
| This is why recent findings by the Government | |
| Accountability Office (GAO) on cybersecurity problems at | |
| agencies like the IRS and the SBA, are so troubling to me and | |
| many other members of this Committee. Just this month, the GAO | |
| reported that the IRS paid $3.1 billion in fraudulent identity | |
| theft, or IDT, tax returns. Three billion dollars for people | |
| filing tax forms, for example, that were not the person who | |
| actually should be getting the credit back. | |
| When the GAO testified before this Committee earlier this | |
| year, they told us that ``the SBA has not conducted regular | |
| reviews of its IT investments.'' In these scenarios, American | |
| small businesses and consumers were put at risk due to a lack | |
| of diligence by Federal agencies. Just last week, I asked IRS | |
| Commissioner Koskinen about the data breach at his agency last | |
| May, which compromised the data of approximately 700,000 | |
| accounts. The commissioner informed our Committee that there | |
| are 1 million cyber attacks at the IRS every day. Think about | |
| that. One million cyber attacks every day at the IRS, people | |
| trying to get into files for illicit, illegal purposes. | |
| With over 3 billion different mobile applications and $340 | |
| billion in online commercial sales last year, business | |
| transactions are moving away from the cash register and toward | |
| the smartphone. It is great to be able to order your coffee or | |
| pay your electric bill or reserve a car ride using your phone, | |
| but with this convenience comes increased exposure for both the | |
| customer and for businesses. In 2015, the average amount stolen | |
| from small business bank accounts after a cyber attack was over | |
| $32,000. | |
| The fast pace of changes in technology means that hackers | |
| are coming up with more sophisticated methods to go after | |
| intellectual property, accounts, Social Security numbers, and | |
| anything else that can be used for financial gain or a | |
| competitive edge. With all of the uncertainty facing small | |
| businesses in today's world of e-commerce, it will take | |
| vigilance by all Federal agencies, and the watchful eye of this | |
| Committee, to ensure the data of small businesses and | |
| individual Americans remain secure. We must also look for new | |
| and innovative ways to help small businesses protect their data | |
| for this great and growing threat. | |
| I look forward to hearing from our witnesses here this | |
| morning, and I will now yield to the Ranking Member for her | |
| opening statement. | |
| Ms. VELAZQUEZ. Thank you, Mr. Chairman. | |
| Technological innovations are vital to our modern economy, | |
| and even more essential to the nation's small firms. In fact, | |
| small businesses are some of the savviest users of technology | |
| by using the internet to access new markets to grow and | |
| diversify. Yet, for all the benefits technology brings to the | |
| equation, it also creates additional challenges for business | |
| owners, consumers, developers, and vendors. As more consumers | |
| and businesses participate in E-commerce, protecting our | |
| financial information from cyber attacks is critical. | |
| Unfortunately, recent data breaches at federal agencies, | |
| like the IRS and OPM, compromised financial data and personal | |
| information of millions of people. Attacks like this have made | |
| clear the weaknesses of the current cybersecurity landscape. | |
| Last year's attack on the IRS exposed over 700,000 taxpayers' | |
| accounts, and just last week we found out a former FDIC | |
| employee breached the information of 44,000 FDIC customers. | |
| These attacks strike close to home for many of us, | |
| including small business owners. Keeping software and networks | |
| up-to-date with the latest security is no longer enough. Cyber | |
| threats come in many forms, but they are devastating to both | |
| business owners and their customers. A single attack can wipe | |
| out a small business, which is why cybercrime poses severe | |
| problems for small businesses that are unprepared. | |
| Sadly, some small companies fail to recognize the value of | |
| cybersecurity as an investment until it is too late. On the | |
| other hand, small firms that do recognize the importance of | |
| such an investment often lack the resources to implement an | |
| effective security system. Just as we must strengthen private | |
| sector cybersecurity, we need to ensure Federal agencies take | |
| precautions. | |
| The testimony we will hear today will help us better | |
| protect the nation's small businesses from growing cyber | |
| threats. We will discuss the strengths and weaknesses of our | |
| federal initiatives and what more must be done for private and | |
| government data protection. In advance of the testimony, I want | |
| to thank all the witnesses for both your participation and | |
| insights to this very important topic. | |
| With that, Mr. Chairman, I yield back. | |
| Chairman CHABOT. Thank you very much. The gentlelady yields | |
| back. | |
| If Committee members have opening statements prepared, we | |
| ask that they be submitted for the record. | |
| I would like to take just a moment to explain our timing | |
| and lighting system here. It is pretty simple. You get 5 | |
| minutes. The green light will come on there and you can talk | |
| for 4 minutes. The yellow light will come on. That will let you | |
| know you have a minute to wrap up. Then the red light will come | |
| on after a total of 5 minutes, and if you could try and stay | |
| within that, we would greatly appreciate it. The members hold | |
| ourselves to the 5-minute rule, also, and we will ask you | |
| questions then. | |
| I would now like to introduce the panel. Our first witness | |
| is Richard Snow, owner of Maine Indoor Karting in Scarborough, | |
| Maine. Mr. Snow is here to provide his experience as a small | |
| business owner whose company was the victim of a cyber attack. | |
| Our second witness is Kevin Dunn, technical vice president | |
| of NCC Group in Austin, Texas. He has over 14 years of | |
| experience as a professional security consultant. | |
| And our third witness today is Nicholas Oldham, counsel at | |
| King and Spalding in Washington, D.C. In his current role, Mr. | |
| Oldham assists clients with cybersecurity and risk management, | |
| data privacy, incident response, and internal government | |
| investigations. We welcome you all here today. | |
| I would now like to yield to the Ranking Member to | |
| introduce the final witness. | |
| Ms. VELAZQUEZ. Thank you, Mr. Chairman. It is my pleasure | |
| to introduce Mr. Stephen Mankowski, the national tax chair and | |
| national secretary for the National Conference of CPA | |
| Practitioners. He is also a partner at EP Caine and Associates | |
| CPA, LLC, where he advises individuals and small businesses on | |
| issues related to accounting, taxation, business consulting, | |
| and litigation support services. Welcome. | |
| Chairman CHABOT. Thank you very much. I would now like to | |
| recognize Mr. Snow. You are recognized for 5 minutes, sir. | |
| Thank you. | |
| STATEMENTS OF RICHARD SNOW, OWNER, MAINE INDOOR KARTING; KEVIN | |
| DUNN, TECHNICAL VICE PRESIDENT, NCC GROUP; NICHOLAS OLDHAM, | |
| COUNSEL, KING AND SPALDING LLP; STEPHEN F. MANKOWSKI, CPA, | |
| NATIONAL TAX CHAIR, NATIONAL CONFERENCE OF CPA PRACTITIONERS, | |
| NATIONAL SECRETARY, NCCPAP, PARTNER AT EP CAINE AND ASSOCIATES | |
| CPA, LLC | |
| STATEMENT OF RICHARD SNOW | |
| Mr. SNOW. Good morning. Thank you, Chairman Chabot, Ranking | |
| Member Velazquez, and members of the House Small Business | |
| Committee for inviting me to testify today on the current state | |
| of cybersecurity for small companies and how phishing scams | |
| have impacted my own small business. | |
| My name is Rick Snow, and I am the owner of Maine Indoor | |
| Karting, located in Scarborough, Maine. We are an indoor | |
| entertainment venue with a go-kart track, mini golf course, | |
| arcade, and cafe. We have about 20 employees. | |
| I am pleased to be here representing the National Small | |
| Business Association, where I currently serve as a Board of | |
| Trustee member and Chair of the Environmental and Regulatory | |
| Affairs Committee. | |
| NSBA is the Nation's oldest small business advocacy | |
| organization with over 65,000 members representing every sector | |
| and industry of the U.S. economy. NSBA is a staunchly | |
| nonpartisan organization devoted solely to representing the | |
| interests of small businesses which provide almost half of all | |
| private sector jobs to the economy. | |
| Several data breaches within the Federal Government, | |
| including OPM, IRS, and DOD make it clear the government | |
| struggles to combat cyber attacks. If the government cannot | |
| protect its networks and data from cyber attacks with almost | |
| unlimited resources at its disposal, how can we expect | |
| America's small businesses to do so? Forty-two percent of NSBA | |
| members surveyed indicated that they have been the victim of | |
| cyber attack. In almost half of those attacks there was an | |
| interruption in service. | |
| I was the victim of a phishing attack, and I have also had | |
| my credit card stolen three times. When I was phished, I | |
| received an email from my bank that there had been a suspicious | |
| attempt to gain access to my account. The email urged me to | |
| immediately log in to my account and confirm that it was, in | |
| fact, an unauthorized attempt. The link provided in the email | |
| looked identical to the log-in page of my bank. Frantic that | |
| there had been a breach, I logged in, and as soon as I typed my | |
| password, I realized what had happened. I raced to the local | |
| branch of my bank to set up a new account which took several | |
| hours. It took about a week to get the new checks and debit | |
| cards for the new account to us. Since we used the cards and | |
| checks for all our bills and local purchases for our business, | |
| I had to either use our company line of credit or my own credit | |
| cards. This is not unusual as many small business owners often | |
| need to use their personal credit cards to support their | |
| business, especially during difficult times. | |
| The financial cost to my business paled in comparison to | |
| the delays and disruptions. My wife, who runs the day-to-day | |
| operations of our business, and her work were limited because | |
| she spent the week trying to update all of the vendors with the | |
| new account information. | |
| According to the NSBA 2015 Year-End Economic Report, in 10 | |
| percent of cyber attacks, a bank account was improperly | |
| assessed. I was one of those. Two weeks after the initial | |
| phishing attack, I logged into our new account late Friday | |
| evening, and to my horror, found that my balance was zero. It | |
| was payday and I was terrified that the paychecks that were | |
| issued that day would not clear. We are supporting a number of | |
| families, many of which live paycheck to paycheck and could not | |
| have made it without that particular payday. I quickly | |
| discovered that three wire transfers were made that night to | |
| three different bank accounts around the country totaling | |
| $15,000. | |
| This is an ongoing threat of internet age, and it will | |
| evolve as long as the internet continues to facilitate commerce | |
| in the global economy. It is unlikely that there will be one | |
| solution. | |
| I am sorry. I missed a page. So, excuse me. Sorry. | |
| After a night of no sleep, I had to be at the bank first | |
| thing Saturday morning. I was lucky and was able to stop the | |
| wire transfers. I had to then spend another day away from work | |
| opening another account and going through the process of | |
| getting all my new cards and ordering new checks. My poor wife | |
| had to spend another week updating vendors. She spent the | |
| better part of 2 weeks away from her normal duties because of | |
| this phishing incident. | |
| My bank told me that this was a standard phishing loss and | |
| that I was lucky that I discovered it before the 48 hours had | |
| lapsed so no money was actually stolen. My business accounts | |
| were not protected against theft the way that my personal | |
| accounts would be, so the losses would have been on my | |
| business. This attack could have ended my business if I had not | |
| been able to recover the money. Most small businesses do not | |
| have a significant cushion to absorb these type of losses, and | |
| we are no different. Losing thousands of dollars during a tough | |
| time in the economy can make a significant different for me, my | |
| business, and my employees. | |
| As small businesses become increasingly dependent on the | |
| internet, they become a larger target for cybercriminals. These | |
| threats are very real and immediate. In fact, 94 percent of | |
| small business owners indicate they are concerned about being | |
| targeted by cyber attacks. For many small businesses, a | |
| cybersecurity incident could lead to an entire network being | |
| down for many days until the full extent of the problem is | |
| known and then fixed. | |
| This is an ongoing threat of the internet age and it will | |
| evolve as long as the internet continues to facilitate commerce | |
| at the global economy. It is unlikely that there will be one | |
| solution to stop the attacks. In fact, slowing and preventing | |
| these attacks will most likely require an ongoing process to | |
| identify new threats, vulnerabilities, and ultimately, | |
| solutions. I urge Congress and this Committee to always bear in | |
| mind the unique challenges that small businesses face and | |
| continue to include the small business community in that | |
| process. | |
| Thank you for allowing me to testify before the Committee | |
| today, and I would be happy to answer any questions that you | |
| might have for me. | |
| Chairman CHABOT. Thank you, Mr. Snow, for your testimony | |
| today. What a scary situation. Thank you. | |
| Mr. Dunn, you are recognized for 5 minutes. | |
| STATEMENT OF KEVIN DUNN | |
| Mr. DUNN. Good morning, Mr. Chairman, Ranking Member | |
| Velazquez, and other esteemed members of the Committee. Thank | |
| you for the opportunity to testify today. | |
| My name is Kevin Dunn, Technical Vice President for NCC | |
| Group. For the last 15 years, I have dedicated my career to | |
| carrying out cybersecurity attacks against private companies | |
| and government organizations. I am not a criminal; I am a | |
| penetration tester. For our actions in this highly specialized | |
| field, my colleagues and I determine ways to break into | |
| organizations via cyber and physical means. Specifically, we | |
| are hired to identify vulnerabilities that allow a company's | |
| security to be compromised. This exercise subsequently allows | |
| us to provide customized advice to our clients, detailing the | |
| short- and long-term actions they should take to reduce their | |
| susceptibility to attack. | |
| My testimony today will focus on four areas: the strengths | |
| and weaknesses of cybersecurity training, increasing security | |
| when using cloud service providers, the potential impact of | |
| small business security on the government, and the benefits of | |
| a data-driven risk model. | |
| To evaluate the state of high level cybersecurity training | |
| designed for small businesses, I would like to explore two | |
| examples: training provided by the U.S. Small Business | |
| Administration and training provided by the Federal | |
| Communications Commission. Through these trainings, small | |
| businesses are able to gain awareness of important | |
| cybersecurity threats such as the dangers associated with | |
| phishing emails, malicious websites, malware, ransomware, and | |
| the typical motivations of attackers. This information provides | |
| an ample start for educating small businesses in a general | |
| awareness capacity and extends to providing cybersecurity tips | |
| for the major areas of concern. However, the training and | |
| guidelines are high level in nature and lack the depth of | |
| information needed to convert directly into hands-on actions. | |
| In the world of small business IT support where efforts are | |
| typically coordinated by owner-operators, this information may | |
| not be comprehensive enough to make a worthwhile difference | |
| beyond providing general education. | |
| Many small businesses use cloud service providers to | |
| implement important services like email, file storage, and data | |
| backup. This often unburdens the IT administration overhead | |
| from small business owner-operators or small businesses with a | |
| one- or two-person IT team. The use of third-party cloud | |
| service providers is typically a positive security move for | |
| small businesses. The attention to security from the major | |
| providers in this space affords a number of features that | |
| greatly increase the security of data for a small business. | |
| However, it should be noted that there are additional | |
| features that should be enabled to make attacks harder for | |
| adversaries. These features are often not enabled by default. | |
| Chief among these is the use of multifactor authentication. The | |
| majority of major online services now support the use of | |
| multifactor authentication using at least SMS messages to a | |
| cell phone as a means of out-of-band authentication. But | |
| despite this inexpensive option, it is often overlooked by | |
| organizations that use cloud services or internet services, | |
| relying instead on single factor authentication in the form of | |
| user names and passwords. | |
| The impact of a small business on the government should be | |
| considered in at least two key ways. The first concerns the | |
| direct and indirect connectivity between a small business and a | |
| government network. The second concerns small businesses in the | |
| government supply chain. A small business with a direct | |
| connection to a government network is likely a rare occurrence, | |
| but in such a scenario, if the small business is compromised | |
| sufficiently, an attacker's ability to traverse to a government | |
| network could be a simple task. However, examples of indirect | |
| connectivity are more common and are typically databased in | |
| nature. When government users consume the services of a small | |
| business, their user names, passwords, personal information, | |
| and other data could be used in a subsequent attack against | |
| government systems if extracted from a compromised small | |
| business system. Of course, the reverse is true as well. | |
| The second area to consider is when a small business is in | |
| some way part of the supply chain to a government department or | |
| agency. The most typical examples of this are where a small | |
| business develops software or hardware that is subsequently | |
| installed on government networks. | |
| Finally, a good way to think about security and a means to | |
| ensure that the approaches chosen to secure your organization | |
| are fit for purpose is to think first about the data you care | |
| about. Considering the data first is an excellent approach and | |
| one that is advised in the FCC's small business cyber plan at | |
| all. However, too few organizations actually consider their | |
| data or subsequently plan security around the value of | |
| different data types. Even fewer organizations consider what | |
| will happen when, not if, an attacker gains access to their | |
| data. Using a data-centric risk management model would allow | |
| small businesses to focus their security attention where they | |
| need it most. | |
| Thank you again for this opportunity to address this | |
| Committee. I will be happy to answer any questions. | |
| Chairman CHABOT. Thank you very much. | |
| Mr. Oldham, you are recognized for 5 minutes. | |
| STATEMENT OF NICHOLAS OLDHAM | |
| Mr. OLDHAM. Mr. Chairman, Ranking Member, and members of | |
| this Committee, thank you for allowing me the opportunity to | |
| appear before you today. | |
| I have been involved in cyber issues for many years as a | |
| former Federal prosecutor at the U.S. Department of Justice, | |
| and now as an attorney at King and Spalding. In my practice, I | |
| counsel clients, both large and small, on cybersecurity risk | |
| management. Our interconnectivity is growing at an astonishing | |
| rate. This interconnectivity, especially the internet of | |
| things, holds tremendous promise for consumers and companies. | |
| It also creates new challenges in terms of cybersecurity | |
| because anything connected to the internet can be hacked. | |
| Cyber attacks cost businesses billions of dollars every | |
| year as a result. Where do small businesses fit into this | |
| landscape? The interconnected world lets small businesses | |
| develop new products and services and compete across the globe, | |
| but with cybersecurity, small businesses often get burned at | |
| both ends. They are less likely to have the resources to | |
| prevent breaches, and also may have fewer resources to respond | |
| to those breaches. It can be difficult for small businesses to | |
| find the right information and training, and the cost of | |
| mitigation measures in response can significantly impact a | |
| small business' bottom line. | |
| As a lawyer, I do not manage corporate networks. I do not | |
| conduct vulnerability testing. Rather, I believe that | |
| cybersecurity is as much a people and a process issue as it is | |
| a technical issue. I focus on the people and process side of | |
| the equation, addressing the legal and business cybersecurity | |
| risks faced by companies. I also help manage companies comply | |
| with their legal obligations, interact with various regulators, | |
| and respond to regulatory enforcement actions and litigation. | |
| These legal and business costs, including compliance costs, | |
| drain on employee morale, and time and reputational damage can | |
| be significant. | |
| There are at least three ways the government can play a | |
| role in lowering these costs. First, by addressing the | |
| cybersecurity education gap. When weighing the costs and | |
| benefits of enhancing their cybersecurity, companies may find | |
| that it is far more expensive to not implement basic security | |
| measures. The problem here is that there is a cybersecurity | |
| education gap. Small businesses may not find the information | |
| they need to properly assess and mitigate these costs. | |
| Bridging this education gap can be difficult for small | |
| businesses, especially those that lack the resources to hire | |
| specialized employees or cybersecurity experts. Even when | |
| information is available online, it is often difficult to find, | |
| rarely updated, and often inadequate. | |
| In many ways, cyber threats have analogs to traditional | |
| crime. In the traditional crime scenarios, small businesses | |
| would likely call the local police department for best | |
| practices in preventing or responding to crime. In the digital | |
| crime scenarios, there is no one logical place to call. The | |
| government may have a role in bridging the cybersecurity | |
| education gap by encouraging the development of cybersecurity | |
| education resources and connecting them to those who need them | |
| in the private sector. | |
| Second, many of the cybersecurity initiatives receiving the | |
| most attention are not necessarily tailored to small | |
| businesses. For example, the NIST cybersecurity framework is | |
| emerging as a leader, which is a promising development. This | |
| could simplify the landscape for small and large businesses | |
| alike. The current iteration of the NIST framework, however, is | |
| not particularly geared towards small businesses. It can be | |
| difficult and expensive to understand and implement regardless | |
| of business size, and until it is better tailored to small | |
| businesses, for some of them it may just be one more program | |
| that they cannot afford to keep up with. | |
| Perhaps more importantly, a small business might become | |
| subject to a cybersecurity framework by virtue of its | |
| contractual relationships. In this case, the small business | |
| might inadvertently expose itself to significant liabilities | |
| and cyber risks. While good cyber hygiene is important, to | |
| improve the NIST framework and similar programs and policies, | |
| the government should make a serious effort to increase the | |
| involvement of small business owners in all phases of the | |
| legislative and rulemaking process. | |
| Third, the current regulatory regime for cybersecurity | |
| presents additional difficulties for small businesses who will | |
| inevitably struggle to determine both what cybersecurity | |
| measures they are required to meet, and when a breach or attack | |
| does occur, what procedures the law requires them to follow. | |
| There are currently 51 different State or territory data breach | |
| notification laws and many of them are inconsistent with each | |
| other. I have seen a growing number of Federal agencies also | |
| stepping into this space. | |
| In short, there is a need to clarify and simplify what | |
| companies must do. Because of the complicated and evolving | |
| landscape, the on-the-ground expertise of the private sector | |
| must necessarily play an important role in these efforts. | |
| Thank you for the opportunity to testify today, and I look | |
| forward to your questions. | |
| Chairman CHABOT. Thank you very much. | |
| Mr. Mankowski, you are recognized for 5 minutes. | |
| STATEMENT OF STEPHEN F. MANKOWSKI | |
| Mr. MANKOWSKI. Thank you. Mr. Chairman, Ranking Member | |
| Velazquez, and members of the Committee, thank you for inviting | |
| me to testify today. | |
| My name is Stephen Mankowski, a partner with EP Caine and | |
| Associates, the Executive Vice President of NCCPAP, the | |
| National Conference of CPA Practitioners, and a member of the | |
| AICPA. | |
| NCCPAP has been at the forefront of identity theft issues | |
| through our advocacy and testimony at prior hearings dealing | |
| with ID theft. NCCPAP members have helped guide numerous | |
| clients who have been victims of identity theft. | |
| ID theft has been growing exponentially for years. It seems | |
| that no matter what controls are put in place, criminals have | |
| better and more focused resources to circumvent these | |
| safeguards. | |
| The IRS reminds practitioners that they must be vigilant | |
| with their system integrity. Criminals are aware that the prize | |
| for breaching tax practitioner systems could yield not only | |
| names and Social Security numbers, but also several years of | |
| earnings, as well as bank information and dates of birth. Two | |
| Midwestern firms were compromised this tax season and had | |
| fraudulent returns submitted by utilizing their Electronic | |
| Filing Identification Number or EFIN. | |
| While firms are required to obtain an EFIN from the IRS to | |
| electronically file tax returns, paid preparers are required to | |
| use a Practitioner Tax Identification Number or PTIN. Firm | |
| information, including their Employer Identification Number, | |
| however, still appears on their tax return. Given the risk of | |
| firm ID theft, why has the IRS not adopted a firm PTIN, | |
| something that NCCPAP strongly recommends. | |
| Over the past year, as noted by the other panelists, the | |
| IRS has had multiple system breaches. First, the IRS online | |
| transcript program, Get Transcript, was compromised in May | |
| 2015. The number of accounts affected now exceeds 700,000. The | |
| second breach was related to the IP PIN retrieval tool that was | |
| contained on the IRS website and is more troubling. The | |
| taxpayers who have IP PINs have already been victims of tax | |
| refund fraud and obtained the six-digit IP PIN to prevent | |
| further unauthorized account access or tax filings. This tool | |
| had been used using the same interface as Get Transcript but | |
| had remained available to the public, and unfortunately, those | |
| less scrupulous. | |
| Social Security uses a banking prenote to verify the | |
| accuracy of the recipient's banking information prior to the | |
| initial payment. Unfortunately, the IRS refund system does not | |
| include prenote account verification. The implementation of a | |
| prenote system could result in a significant reduction of the | |
| annual $3.1 billion misappropriation of government funds. | |
| While it is easy to understand that taxpayers want to | |
| receive their refunds as quickly as possible, one must ask a | |
| simple question: Is paying a tax refund in 7 to 10 days | |
| prudent? A recent survey by Princeton Research Group noted that | |
| 22 percent of taxpayers surveyed would be willing to wait up to | |
| 6 to 8 weeks to receive their refund if they knew it would | |
| combat identity theft. | |
| Taxpayers are urged to protect their personal data, but | |
| with widespread internet usage, online shopping, and criminals | |
| just waiting to pounce on unsuspecting victims, ID theft | |
| continues to grow. Individuals and businesses remain the target | |
| of cyber attacks and must remain cautious when opening emails | |
| with attachments, visiting web pages, or simply paying for the | |
| family groceries. Taxpayers often do not realize they have been | |
| a victim of tax-related ID theft until their electronically | |
| filed tax return gets rejected. Once a taxpayer has been | |
| victimized, they expect to obtain an IP PIN from the IRS, and | |
| starting in January 2017, they automatically will. | |
| In conclusion, NCCPAP feels that using the prenote | |
| technology that already exists and is used throughout the | |
| financial industry would allow taxpayers to continue receiving | |
| their refunds promptly while reducing refund fraud. | |
| Further, NCCPAP urges Congress to pass legislation to | |
| provide the IRS the necessary authority to regulate all tax | |
| preparers and require paid preparers to meet minimum standards. | |
| Currently, only CPAs, EAs, and attorneys are subject to the | |
| requirements of IRC Circular 230. | |
| Finally, NCCPAP calls on Congress to provide the necessary | |
| funding for the IRS to continually modernize and upgrade their | |
| systems to minimize and eliminate data security breaches. The | |
| first step would be Congress reauthorizing streamline critical | |
| pay authority to allow the IRS to secure top IT talent without | |
| a 3- to 6-month waiting period. | |
| Thank you for the opportunity to present this testimony, | |
| and I welcome your questions. | |
| Chairman CHABOT. Thank you very much, and we appreciate the | |
| testimony of all the witnesses here this morning. It was | |
| excellent. | |
| Mr. Snow, first, let me apologize to you for having to | |
| return a call there before your testimony. I apologize for | |
| that, but I had your written statement ahead of time, so I am | |
| prepared. | |
| You experienced a worst-case scenario for a small business | |
| cyber theft. What advice would you give to others who are put | |
| in the same or a similar situation? | |
| Mr. SNOW. The first thing I would do is to ensure that when | |
| you look at the website at the top, web ID, that there is a | |
| https ID, and that would have prevented that from happening. I | |
| just learned that in that process. But it would be very | |
| difficult to stop someone from just accessing the way it was | |
| with me because it was an identical website to the bank | |
| website. The login looked identical. In fact, there was no | |
| difference. | |
| What was more disconcerting to me was the fact that they | |
| stole the new account number, and to this day, no one | |
| understands how that happened; how they were able to access a | |
| brand new account opened with all that information and move | |
| money out of the new account, not the old account. | |
| Chairman CHABOT. How long did it take you to straighten all | |
| this out? | |
| Mr. SNOW. The whole process was about a month because, the | |
| first time we had to rush everything because they have to print | |
| new checks and new credit cards and everything, so it was about | |
| a week and a half. Then when we discovered the loss, it was 2 | |
| weeks later. Then we had another week and a half or so of | |
| additional time to go through that whole process again. | |
| Chairman CHABOT. Mr. Dunn, in your testimony, you provided | |
| the example of using text message authentication as an | |
| inexpensive use of multifactor authentication. Are there other | |
| inexpensive steps the Federal Government or small businesses | |
| could make in order to verify accounts? | |
| Mr. DUNN. Yes. I think that you can use email. There are a | |
| number of channels that you can use. The situation really is | |
| that when you rely on just one thing, in perhaps this case as | |
| well, just a username and password, that that is a single point | |
| of failure. The point is to have more than one authenticating | |
| factor. A number of things could do that so long as it is out | |
| of band from the process. | |
| Chairman CHABOT. Thank you very much. | |
| Mr. Oldham, protecting the privacy and civil liberties of | |
| Americans is obviously an important component of cybersecurity | |
| discussions. What effort is the private sector making to | |
| protect consumers in this area? | |
| Mr. OLDHAM. One of the key goals is transparency, | |
| communicating to consumers what information is being collected | |
| and how is it being used. That has become even more important | |
| as the ecosystem is growing so that everything is connected, | |
| multiple third parties and the like, and the third party would | |
| include, for instance, sharing information with the government. | |
| I think the most critical step the private sector is taking is | |
| ensuring that there is this transparency. | |
| Chairman CHABOT. Thank you very much. | |
| Mr. Mankowski, in your testimony, you gave a firsthand | |
| account of how a tax preparer dealt with confusion and delays | |
| with the IRS in response to a data breach. What would you | |
| recommend to the IRS for future responses to a tax preparer | |
| once a breach has been confirmed? | |
| Mr. MANKOWSKI. That is a very good question, Mr. Chairman. | |
| What I would recommend, first of all, is that I have reached | |
| out to my contacts that I deal with through some of my | |
| committees at the IRS, and it is being addressed tomorrow at a | |
| monthly meeting. But in addition, I would advise practitioners | |
| to know who their local stakeholder liaisons are so they have | |
| an area that they could reach out to so that they can start the | |
| process of communicating with the IRS when they suspect there | |
| may be a breach, not once they actually confirm. Because during | |
| that period of time, if their EFIN was being used improperly, | |
| the IRS could have stepped in very quickly, disabled their | |
| EFIN, and could have potentially stopped fraudulent returns | |
| from being processed. | |
| Chairman CHABOT. Thank you. Let me give you another | |
| question. You mentioned a recent audit where 6 of 13 e-filing | |
| sites failed to take steps to protect consumers from fraudulent | |
| and malicious emails. What recommendations would you offer | |
| these sites in order to improve their cybersecurity? | |
| Mr. MANKOWSKI. That is also a very interesting question. I | |
| believe that is one that Mr. Dunn could probably help with as | |
| far as the cybersecurity aspect. But they would certainly need | |
| to ensure that as they are going through their systems that | |
| they are making sure that any incoming emails are being | |
| checked. There has been widespread spoofing of calls as well as | |
| emails coming in to companies that are purporting themselves to | |
| be high-level individuals within a company asking for data that | |
| they would normally be asking for, such as W-2s and such, that | |
| everything looks to be coming from that individual, everything | |
| looks the same, just the email address may be slightly or just | |
| something a little bit off. Companies really need to be | |
| vigilant as to looking at who emails are coming in from, and if | |
| they are not sure if it is legitimate or not, they should pick | |
| up the phone and call the person who they are actually getting | |
| this request from. Simply responding to that email, you are | |
| responding back to the criminal. Of course, they are going to | |
| say, oh, yeah, I am so-and-so, and I need to get this | |
| information to finalize a report for the board. They are | |
| further spoofing. They just need to be careful when they are | |
| responding, and as Mr. Snow had mentioned, making sure that any | |
| websites they go into do have the https that would mean that it | |
| is a secured website. | |
| Chairman CHABOT. Thank you very much. | |
| Mr. Dunn, I would follow Mr. Mankowski's advice, except | |
| that I am out of time, and I like to hold myself to the same | |
| rules I do everybody else. So I will yield back my time, and | |
| the gentlelady, the Ranking Member is recognized for 5 minutes. | |
| Ms. VELAZQUEZ. Thank you, Mr. Chairman. | |
| Mr. Mankowski, last week we had the Commissioner of the IRS | |
| here testify before our committee, and he talked about the | |
| Cybersecurity Summit between the IRS and tax practitioners. | |
| From the industry perspective, do you believe this partnership | |
| is effective at preventing tax fraud? | |
| Mr. MANKOWSKI. I think it is a very good first step, and | |
| they have already shown that it has been successful. They have | |
| met with, and they have included initially people from State | |
| associations, State government, as well as the banking and | |
| software community, to work on trying to prevent tax returns at | |
| the onset when they are being processed into the IRS system. | |
| They have gone further and expanded their focus now to starting | |
| including practitioners into their groups, and they are | |
| estimating that last year, with the first year of their summit, | |
| they prevented in excess of 3 million fraudulent returns from | |
| getting into the system. Now they just need to understand that | |
| returns are, unfortunately, getting through the filters, so now | |
| they need to keep working on filters during the processing and | |
| primarily protecting the refunds because that is taxpayer | |
| dollars, as well as government funds, that are being | |
| misappropriated. | |
| Ms. VELAZQUEZ. Thank you. | |
| Mr. Snow, I am concerned that typically, small business | |
| owners view an investment as a way to increase revenues, yet, | |
| with cybersecurity they are expected to make an investment in | |
| order to prevent revenue losses. So is it often hard to | |
| persuade small firms to spend money without seeing an immediate | |
| return? What needs to be done to bridge this gap? | |
| Mr. SNOW. I think the number one issue that we have as a | |
| small business is that every single thing leads to the bottom | |
| line. Every decision you make adds a cost. In our case we have | |
| added insurance, cybersecurity insurance, to our overall cost. | |
| The unfortunate part of that is that the deductible is very | |
| high. It is a $5,000 deductible. For me, I am out that | |
| immediately. That is the same as my burglary insurance as well. | |
| When we have someone break into our building, which happened a | |
| few months ago and they destroyed our security system, it cost | |
| us $5,000, which is also our deductible. We are out that money. | |
| That happened to be all the revenues that we had for that | |
| particular month. So it really eats into our bottom line. It is | |
| very expensive. | |
| Ms. VELAZQUEZ. Mr. Dunn, in your estimation, how much would | |
| it cost a company, a small company, one with fewer than 250 | |
| employees, to become cyber safe? | |
| Mr. DUNN. I think it is very hard to provide that | |
| estimation because it really depends on the data that they | |
| hold, the types of inputs and communication channels they have. | |
| We could be talking about a very simple setup or we could be | |
| talking about a very complicated setup. It is true that the | |
| cybersecurity industry has a certain price point that currently | |
| is very difficult for small business owners to take part in. | |
| Certainly, we are probably talking thousands of dollars in | |
| order to get consultative help. | |
| Ms. VELAZQUEZ. Thank you. | |
| Mr. Oldham, who do you think is best situated to handle | |
| cybersecurity threats, the federal government or private | |
| industry? Or do you think some sort of balanced public-private | |
| partnership is needed to properly address cybersecurity needs? | |
| Mr. OLDHAM. I think the balanced public-private partnership | |
| is the key. This industry is evolving so rapidly, and when the | |
| government gets involved, it becomes very static. I think it is | |
| important to make sure the private sector has a huge input, and | |
| that is why I think something like in this framework is a great | |
| start because it is voluntary. It attempts to coalesce the best | |
| standards that are out there, but it is also something that has | |
| a recognition that it needs to evolve over time. My worry is | |
| tipping the scale to one side or the other will cause the | |
| current industry to stagnate more. | |
| Ms. VELAZQUEZ. What type of recommendations would you offer | |
| for encouraging that type of partnership? | |
| Mr. OLDHAM. Number one, supporting NIST's efforts and what | |
| they are doing. Right now, NIST has put out a framework. It has | |
| had some widespread success but also quite a bit of criticism | |
| from industry. They held a workshop last month where they heard | |
| from several sectors of the industry, including small business, | |
| that it is not really approachable and useful. Just as a big | |
| picture, the NIST framework was designed for critical | |
| infrastructure, so it is not approachable for small businesses, | |
| ensuring that the NIST is putting the appropriate emphasis on | |
| adapting itself to particular market sizes and industries. | |
| Chairman CHABOT. The gentlelady's time has expired. | |
| Ms. VELAZQUEZ. Thank you. | |
| Chairman CHABOT. Thank you. | |
| Ms. VELAZQUEZ. Thank you, Mr. Chairman. | |
| Chairman CHABOT. The gentleman from New York, Mr. Gibson, | |
| is recognized for 5 minutes. | |
| Mr. GIBSON. Thanks, Mr. Chairman. I appreciate the | |
| opportunity here today to hear from the panelists' illuminating | |
| testimony provided. | |
| Mr. Snow, I want to begin with you, just a point of | |
| clarification. You, in telling us about what had happened to | |
| you, you had made the comment that, fortunately, within 48 | |
| hours you were able to take action. What was implied in your | |
| statement is we have a differentiation between business and | |
| personal liability or accounts. I am looking for clarification. | |
| Is there some dimension of FDIC that protects people? Why is it | |
| different? If you could just help me understand that, number | |
| one. | |
| Mr. SNOW. Number one, I do not know the exact | |
| ramifications. My understanding was because it was a wire | |
| transfer there is a 48-hour time that it runs. If you can stop | |
| it within that timeframe, the money does not actually transfer | |
| or they can call it back, the bank, with the interbank | |
| processes. | |
| Mr. GIBSON. Do any other panelists know the answer for | |
| that? Why is it that business does not seem to have the same | |
| protection as an individual? One of my constituents out there, | |
| if somebody was to do a phishing expedition on them and they | |
| would be under similar circumstances, I am curious if anybody | |
| knows the answer to that. | |
| Okay, for the Committee, I think that is something probably | |
| worth checking into. A concerning situation. I am glad it | |
| worked out okay for you there. | |
| Then Mr. Oldham--even though I know that it was Mr. Snow-- | |
| it was very burdensome and onerous on your bottom line based on | |
| you had to divert resources. Mr. Oldham, in one of your | |
| comments you talked about that the Federal Government might | |
| want to look at clarification or clarity in terms of what | |
| companies must do when these circumstances happen, reporting | |
| requirements and the like. What is your understanding of what | |
| the SBA requires now with regard to--or the United States | |
| Government--in terms of a protocol when a company faces an | |
| attack? | |
| Mr. OLDHAM. I am not aware of anything from the SBA, but | |
| the notification requirement at large are a hodge-podge. If it | |
| involves financial information, the Gramm-Leach-Bliley Act | |
| would require notification. If it is healthcare information, | |
| regulations under HIPAA would require notification. Each of the | |
| State data breach laws have different definitions, and I think | |
| one of the key concerns, especially if you are a small business | |
| and you may have information involving people from multiple | |
| jurisdictions or multiple types of information, there is an | |
| enormous cost of just figuring out what you have to do at the | |
| beginning. | |
| Mr. GIBSON. I appreciate that comment. In fact, it mirrors | |
| some of my experiences in the U.S. military. I think that is | |
| also worthwhile for the Committee to capture that. Maybe we | |
| should consider a clearinghouse requirement that really | |
| socializes, if you will, what companies must do under these | |
| circumstances. | |
| Finally, for the panel, I would love to hear your insights | |
| on this question, that with regard to science and technology, | |
| research and development, sort of blue sky, if you will, what | |
| do you think, based on your experiences, would be a worthwhile | |
| endeavor to address the issue of cyber attack at large--on | |
| businesses, on people, on government--on where you think we | |
| should put emphasis on for science and technology, research and | |
| development, to protect? | |
| Mr. DUNN. I think in most cases, every incident I have ever | |
| been involved with, the visibility of what is actually | |
| happening from a data and packet level is never where it needs | |
| to be. I would definitely like to see strides in that | |
| direction, some way of increasing the ability for us to | |
| understand from a network and data perspective what has | |
| happened in a given scenario. | |
| Mr. GIBSON. Thank you. | |
| Mr. SNOW. I think the most frustrating thing for me was to | |
| realize that someone at the receiving end of that money was | |
| going to show up and get that money, and that there was no | |
| action taken. On my private credit card thefts, purchases were | |
| actually made. The merchant was out of that merchandise. | |
| Obviously, they got the money for that merchandise, but we | |
| absorb it as all of the consumers in the overall doing | |
| business. There is no authority trying to stop these people, | |
| that I know of, trying not catch these people who are making | |
| these purchases with fraudulent credit cards or other things. | |
| That is the frustration that I have. I know that I can call my | |
| local police when they break into my building. If I walk into a | |
| bank and demand money, the FBI will be chasing me forever. But | |
| in this case, there is really no action that is done beyond | |
| what we had to do as individual business owners. | |
| Mr. GIBSON. Thank you. Mr. Chairman, I see my time has | |
| expired. I wonder if maybe science and technology, research and | |
| development into biometrics, is a possibility as a surety for | |
| any kind of transaction is worth our endeavors. But I thank the | |
| Chairman for the opportunity. | |
| Chairman CHABOT. Thank you very much. The gentleman's time | |
| is expired. | |
| The gentlewoman from North Carolina, Ms. Adams, who is the | |
| Ranking Member of the Investigations, Oversight, and | |
| Regulations Subcommittee is recognized for 5 minutes. | |
| Ms. ADAMS. Thank you, Mr. Chair. Thank you, Ranking Member | |
| Velazquez, for hosting this hearing. | |
| Some of you have mentioned the importance of education and | |
| training in cybersecurity. I am long-time educator and very | |
| interested in what we can do there. | |
| The Federal Government is involved in this in a number of | |
| ways. For example, last year, the Obama Administration | |
| announced the New Cybersecurity Consortium consisting of 13 | |
| Historically Black Colleges and Universities, HBCUs, two | |
| national labs, and a K-12 school district. The goal is to | |
| create a sustainable pipeline of students focused on | |
| cybersecurity. My question to any of you, is the Federal | |
| Government doing enough to provide the kinds of expertise that | |
| small businesses need to ensure their cybersecurity? If you | |
| could speak to maybe some relationships between educating | |
| students beyond this point. | |
| Mr. MANKOWSKI. Ms. Adams, I will start the discussion. I | |
| believe that from a tax standpoint, the amount of education | |
| really starts from the government, from the IRS. As | |
| practitioners, we are continually discussing this with our | |
| clients that the IRS, with the different phishing phone calls | |
| and the email scams, that the IRS currently is not phone | |
| calling or emailing people. If they get any of these calls, | |
| they should hang up. If they get a email that says it is from | |
| the IRS, that they have an extra refund, just delete it, | |
| because they are not going to be authentic. But every day | |
| during tax season, it seemed my office was getting a phone call | |
| from someone who received a phone call that they were getting | |
| ready to get arrested. My partner in my firm had gotten a | |
| similar phone call. We actually had a little bit of fun with | |
| the people. We kind of strung them along for a little bit. But | |
| as times are changing, with the rules that were passed recently | |
| with collections within the IRS, some of that, as the | |
| collections get outsourced, the companies that are going to be | |
| taking over will be calling and could potentially be emailing | |
| our clients. It is going to create an even greater disparity of | |
| the education because what we have been telling our clients for | |
| years, come whatever point that the IRS is able to implement | |
| that process, everything we have worked on and gained with our | |
| clients over the last few years will pretty much be thrown out | |
| if they start getting phone calls from a collection for old tax | |
| balances. Thank you. | |
| Ms. ADAMS. Mr. Oldham? | |
| Mr. OLDHAM. I think there are two separate issues; both are | |
| very important. One is educating students as they come up about | |
| cybersecurity. That is critical. Just like educating people how | |
| to balance their checkbook to keep good financial sense, | |
| teaching people good cyber hygiene is going to be imperative | |
| for minimizing the cyber threats in the future. | |
| Today, educating small businesses can be more challenging | |
| because they have not had the years of education, such as a | |
| secondary student. However, the biggest issue that I see is | |
| that there is not a lot of helpful information out there that | |
| is practical and granular for small businesses. In fact, in | |
| preparation for my testimony today, I searched around the | |
| internet looking for small business guides and was surprised | |
| that in many locations, including on government websites, the | |
| links were broken, the guides were out of date, or the guides | |
| were so high level that I do not know how an owner-operator | |
| without IT security background would be able to implement | |
| security measures based on those guides. | |
| Ms. ADAMS. Okay. Well, let me move on to another question. | |
| Online marketplaces, such as eBay, have given small businesses | |
| greater access to suppliers and customers abroad. A McKinsey | |
| Global Institute study found that 97 percent of U.S. small- to | |
| medium-size businesses on eBay engage on export to other | |
| countries. My question is, do these marketplaces and | |
| international transactions expose small businesses to greater | |
| cybersecurity risk? | |
| Mr. Dunn, if you want to answer that? | |
| Mr. DUNN. I think the websites themselves and the online | |
| marketplaces do have to be vetted, do have to be verified to | |
| understand if they have any security flaws because, having a | |
| security flaw in a marketplace like that will expose the vendor | |
| and the small business to potential attacks. Understanding if | |
| there are any flaws in that marketplace is really critical. | |
| Ms. ADAMS. Quickly, Mr. Dunn, you talked about the use of | |
| cloud computing. What is the best way that small businesses | |
| could benefit from using cloud providers to improve their | |
| security? | |
| Mr. DUNN. I think not doing conventional IT in-house is a | |
| good move. Using email and file storage from a cloud service | |
| provider will be beneficial because it is not on premises, and | |
| typically, the major providers of those services are doing a | |
| lot in security and more than a small business could do. | |
| Ms. ADAMS. Thank you. I am out of time, Mr. Chair. I yield | |
| back. | |
| Chairman CHABOT. Thank you very much. The gentlelady yields | |
| back. | |
| The gentleman from Mississippi, Mr. Kelly, is recognized | |
| for 5 minutes. | |
| Mr. KELLY. Thank you, Mr. Chairman. I thank each of you | |
| witnesses for your insight here today. | |
| First of all, I would like to echo what the gentleman from | |
| New York, Mr. Gibson said. I think it is important for us as a | |
| Committee to find out if there are different rules for persons | |
| and small businesses and then large corporations to make sure | |
| that we are protecting each of those in an appropriate manner. | |
| Second, Mr. Snow, it is a travesty what happened to you, | |
| but that story is repeated over and over again across this | |
| nation. As a former district attorney, I can tell you that | |
| there is a lot of room that we can improve in this. Do you have | |
| any specific areas that you think the Small Business Committee | |
| or the Small Business Administration can help to either educate | |
| or inform the general public and small business users that we | |
| can take forward? | |
| Mr. SNOW. Thank you. I believe that education is probably | |
| the key. Obviously, cost is another big concern for every small | |
| business. When you start a business, capital is usually at a | |
| premium, and when you sit down, in my case, I have close to | |
| 70,000 members who come in and race at my track throughout the | |
| time that we have been open. I have their data, and it is in a | |
| server that I have to protect. That is a concern. My software | |
| is provided by a Belgium-based software company, so I have to | |
| have access to them. They come in at night to update and | |
| upgrade the system on a regular basis. In an international | |
| marketplace that we are in, I think education is very important | |
| so that the small businesses understand. The other issue is the | |
| liability is significant, and a lot of small businesses do not | |
| understand that. When I sat down with my insurance agent to | |
| renew our insurance, that was one of the questions I asked, and | |
| I was amazed, number one, at the cost to get the coverage, but | |
| number two, how few businesses actually apply and get that | |
| coverage. It can be very expensive for a small business. | |
| Mr. KELLY. Mr. Oldham, going back, as I said, first of all, | |
| thank you for your service as a prosecutor. I think they are | |
| some of the most important people enforcing this law, and being | |
| a former one, I am obviously biased in that. But I thank you | |
| for your service. As a former district attorney, I was on the | |
| local level or I was on the State level, and you as a Federal | |
| prosecutor. Quite commonly what I saw is that, number one, when | |
| small businesses or individuals are victimized, they do not | |
| know who, how, what they need to report. | |
| The second thing that I saw is quite often the | |
| jurisdictions are not clear. It is not clear where it is coming | |
| from, and they do not inform other jurisdictions, so they do | |
| not know if it is Federal, they do not know if it is State, | |
| they do not know if it is county, they do not know if it is the | |
| next State over. It is outside the jurisdiction of this | |
| hearing, but I think it is important that we inform law | |
| enforcement on how to deal with this and small businesses on | |
| how to inform law enforcement so there is a database that we | |
| can use to stop this. Do you have any ideas in that area? | |
| Mr. OLDHAM. I would say generally the jurisdiction issue is | |
| a major issue in prosecuting cyber crime cases. The resources | |
| are not there at the local level and it is hard to chase | |
| criminal information that is as wide as the web and tracks lead | |
| everywhere in the world. | |
| I think, going back to the education point from earlier, | |
| training local enforcement who are going to get the calls from | |
| businesses that have been breached on who to report to, who is | |
| the right person in the Federal Government who can help, or | |
| where is this database, as you mentioned, would be incredibly | |
| helpful to make sure the information is not just coming in for | |
| prosecution, but also going out to help the small businesses | |
| around the country. | |
| Mr. KELLY. On that same line, quite often, these people who | |
| take advantage of small businesses or individuals move from | |
| jurisdiction to jurisdiction, and there is not any database | |
| that gets us ahead of the curve. Quite commonly, they use the | |
| same scheme. From Mississippi, they will move to Alabama, they | |
| will move to Tennessee, they will move to New York City, but | |
| they continue to do that. Are you aware of any Federal database | |
| which keeps up with ongoing scams, especially those that are | |
| quite frequently the same group or persons or organizations | |
| that are doing the scams? | |
| Mr. OLDHAM. I am not. In my role now in advising private | |
| companies, I know we call the local law enforcement, usually at | |
| the Federal level, to report information, and we rely on them | |
| to come back to us with whatever information. But not with a | |
| lot of visibility of what is going on behind the scenes. | |
| Mr. KELLY. Are you aware of any program, and this is for | |
| any of you, from the SBA or from anyone else that keeps people | |
| informed of what the current scams are and the current phishing | |
| expeditions and those things? Because quite frequently, people | |
| fall victim to something that has been used over and over. Is | |
| there anything that keeps people informed where they can go to | |
| one source and see that? | |
| Mr. MANKOWSKI. I know that the IRS does release what they | |
| consider to be their ``Dirty Dozen,'' which are the top tax | |
| frauds that they are suspecting or they are seeing in any given | |
| year. What I have seen, especially with a lot of the phishing | |
| and the phone calls, is that initially, some of the local news | |
| stations were not all that keen on picking up on it, I believe | |
| until they started to realize that even some of the people, the | |
| top people within the IRS were getting the same phone calls as | |
| you and I may be getting, saying that they are about ready to | |
| get arrested or your wife is getting arrested or the sheriff is | |
| coming to take your car. Now the news stations are broadcasting | |
| that the IRS does not make the phone calls. They are getting | |
| the word out, which is good, because by getting it out on the | |
| news on that end, they are not using any of the budget that is | |
| constrained within the IRS at this time. | |
| Chairman CHABOT. The gentleman's time is expired. Thank | |
| you. | |
| The gentleman from New Jersey, Mr. Payne, is recognized for | |
| 5 minutes. | |
| Mr. PAYNE. Thank you to the Chairman and to the Ranking | |
| Member. I appreciate the opportunity to be here, and to all the | |
| witnesses, thank you. | |
| I want to ask, would it make sense to coordinate | |
| cybersecurity efforts that are focused on small businesses | |
| through the SBA? My thought is that if business owners are more | |
| informed of computer security techniques and products to secure | |
| their networks, we may be able to help curtail some of these | |
| cyber attacks. Does that make sense? | |
| Mr. DUNN. Yes, I think so. I think having coordination and | |
| a place where really, truly, detailed information about threats | |
| and what to do about them is put at and made available to small | |
| businesses, would be excellent. | |
| Mr. MANKOWSKI. Just as a comment on that as well, one of | |
| the areas as far as coming out with too much specifics as to | |
| what you need to do, you are then laying out the playing field | |
| for what the criminals need to do to get around your system. | |
| That was evident, 2 years ago when the IRS released that no | |
| more than three refunds in a calendar year can go into a | |
| specific bank account. Through a lot of reverse engineering, | |
| they found out that if you start putting a zero before the | |
| account number and a second number and a third zero, it was | |
| tricking the IRS systems and the banks were disregarding it. It | |
| is nice to have the education, but they need to be aware that | |
| too much specifics as to what you are doing or what you need to | |
| do, you are laying out a simple playing field for the bad guys | |
| to just circumvent. | |
| Mr. OLDHAM. I think consolidating information in a place | |
| like the SBA would be very helpful. Mr. Dunn had mentioned the | |
| FCC planning tool earlier, which is a good start, but that is | |
| an agency that has jurisdiction over telecommunication | |
| companies. I do not think a small retailer or other companies | |
| of that nature would be going to the FCC's website. I think you | |
| want to be able to have those resources in a place that folks | |
| are willing to call or to search for. | |
| Mr. PAYNE. Sure. I think it would be a natural depository | |
| of information. They are already dealing with the agency, so | |
| that is something that might make sense. | |
| Unfortunately, even when consumers receive notification of | |
| a security breach, many of them do nothing about it or just do | |
| not know what to do and the next steps to remedy the breach. | |
| What should they do to protect themselves from increased risk | |
| of identity theft? | |
| Mr. SNOW. I have got a number of levels of security systems | |
| that I have put in place. Number one, I have an external server | |
| provider that has a junk mail box. So anything that does not | |
| look accurate or looks not quite right, it goes directly into | |
| the junk mail. I have an internal system within my network in | |
| the building that also looks at that, and that has a separate | |
| junk mail file. So if it gets through the first level of | |
| protection, it then goes to the second level, at which point | |
| the user would have to override that junk mail from both | |
| levels. That is one. | |
| Going back to your other question, I think for me as a | |
| small business owner, consistency is very important. As the | |
| other members mentioned, every state has a different | |
| jurisdiction, and for me as a small business owner, I have | |
| customers all over the world. If I were ever to be breached and | |
| that data was accessed, I would have a number of different | |
| jurisdictions to go after and figure out what I need to do. | |
| There is a tremendous cost in that. | |
| Mr. DUNN. I think to the point of defense in depth and not | |
| relying on any single point of failure, that is pretty key. The | |
| concept of having several things that ultimately would have to | |
| be bypassed is typically the best approach instead of just | |
| having one particular thing. | |
| Mr. OLDHAM. One thing that your question raises is the fact | |
| that many Americans are receiving these breach notification | |
| letters and they all give the same advice: monitor your | |
| accounts, sign up for credit monitoring. It seems like maybe a | |
| better way of getting at that is general consumer education as | |
| opposed to forcing companies to send out these notifications | |
| that many of us receive every week, every month, and doing it | |
| maybe a slightly different way that is more impactful for the | |
| consumers. | |
| Mr. MANKOWSKI. Finally, from a tax perspective, people, | |
| taxpayers, if they do receive one of these breach notifications | |
| and find out that they have been a victim of identity theft, | |
| they need to not only report it to the three credit agencies, | |
| they should also file a specific form with the IRS, which would | |
| put them on notice that they were a victim and that to be | |
| careful for a fraudulent tax return coming in from them. | |
| Mr. PAYNE. Thank you, Mr. Chair, I yield back. | |
| Chairman CHABOT. Thank you very much. The gentleman's time | |
| is expired. | |
| The gentleman from Missouri, Mr. Luetkemeyer, who is the | |
| Vice Chairman of this Committee, is recognized for 5 minutes. | |
| Mr. LUETKEMEYER. Thank you, Mr. Chairman. | |
| Mr. Oldham, quick question for you. We have seen that cyber | |
| attacks come in all shapes and sizes and go after businesses of | |
| all shapes and sizes, including government agencies, such as | |
| the NSA and Office of Personnel Management. While no one thinks | |
| that one size can fit all, should not every business and | |
| government agency that handles highly sensitive data have some | |
| reasonable, but also mandatory, policy and procedure in place | |
| for security data against loss and theft? | |
| Mr. OLDHAM. Absolutely there should be policies in place | |
| that is standard and mandatory at any government agency that | |
| handles sensitive data. | |
| Mr. LUETKEMEYER. It is interesting. Mr. Snow talked about | |
| an insurance policy in place. Can you elaborate just a bit, Mr. | |
| Snow, with regards to availability and cost and coverages of | |
| insurance policies that are out there for cyber attacks? Does | |
| it count for your monetary loss or losses to your customers? | |
| Does it also cover the liability exposure that you may have to | |
| other customers that do business with you? | |
| Mr. SNOW. My understanding is it covers the notification | |
| mandates that are required around the country. What would | |
| happen, from my perspective, is that I would notify the | |
| insurance company, and they would immediately come to my aid in | |
| terms of notifying all the customers that their data may have | |
| been breached, and also to provide that security to the | |
| individual that had the breach in terms of credit reporting and | |
| other things. That was my understanding. That was the least | |
| expensive of the policies that are out there. There is a whole | |
| gamut of different insurance policies that you can get, I am | |
| sure covering all the way up to the large liabilities. We have | |
| also, on top of that, an umbrella policy that we hope will | |
| cover what we feel--in our case we have a $2 million liability | |
| policy--we hope that we will not exceed that in any particular | |
| breach, but it is an uncertain area. | |
| Mr. LUETKEMEYER. Mr. Oldham, you advise people on the risks | |
| that they incur. I would assume you have a pretty good | |
| knowledge or extensive knowledge of the availability of these | |
| things and how far they go and the costs? | |
| Mr. OLDHAM. Insurance policies. I am not an insurance | |
| lawyer, but certainly that comes up in cases. There is a wide | |
| range. To the cost in general, it depends on the number of | |
| pieces of data, such as affected individuals. If I am advising | |
| a client who has to give notifications in 30 different States, | |
| that is 30 different statutes that have to be reviewed to do | |
| that. | |
| Mr. LUETKEMEYER. So it is basically a policy that is | |
| tailored to the individual risk? | |
| Mr. OLDHAM. Yes, again, I am not an insurance lawyer, but | |
| when these insurance policies do come up and we have to look at | |
| them, there is a great variation. I am not aware of a standard | |
| insurance policy, and I think Mr. Snow, that is probably what | |
| your experience was that you were talking about, the | |
| marketplace is so new at this point. | |
| Mr. LUETKEMEYER. It seems to me that that is a burgeoning | |
| area of need, obviously, and so we will see how it develops. | |
| Along that line, Mr. Dunn, you mentioned a while ago that | |
| for small businesses that do business with the government, is | |
| there a possibility of compromising government information with | |
| those businesses and, therefore, they are exposed for a | |
| liability situation? Is there something in the contract that | |
| protects them, or do they need to be covering a risk there? How | |
| does that work? | |
| Mr. DUNN. I do not know necessarily about a contractual | |
| obligation. I think from the perspective of interconnecting | |
| systems or share of data there is a liability in either | |
| direction. If an attacker was to gain access to a small | |
| business that services a government client, the assumption is | |
| either the value of the data or some direct connectivity to the | |
| government agency may exist. | |
| Mr. LUETKEMEYER. We have an exposure there you need to be | |
| careful of, right? As a business, you are going to have to have | |
| some sort of, I would think, an insurance policy or some bond | |
| of some kind that would protect you in case something went | |
| wrong. | |
| Mr. DUNN. I think the whole area of cybersecurity insurance | |
| is quite new and fairly immature. I do not know an awful lot | |
| about it, but I often wonder what do you have to do in order to | |
| be insurable and how do you stay insurable. That may have some | |
| kind of compliance or regulatory check. | |
| Mr. LUETKEMEYER. I have always thought that the insurance | |
| companies are going to drive this issue because at some point | |
| they are the ones that are going to have to insure the issue, | |
| and therefore, they are going to demand certain standards. When | |
| those standards are out there, they are going to be the ones | |
| driving how this is all done. | |
| Mr. Chairman, I yield back the balance of my time. | |
| Chairman CHABOT. Thank you. The gentleman yields back. | |
| The gentleman from New York, Mr. Hanna, who is the Chairman | |
| of the Subcommittee on Contracting and Workforce is recognized | |
| for 5 minutes. | |
| Mr. HANNA. Thank you. Thank you, Chairman. Thank you all | |
| for being here. | |
| I want to talk about a bill--Mr. Payne actually mentioned | |
| it inadvertently--I coauthored with Derek Kilmer from | |
| Washington. It is the Improving Small Business Cybersecurity | |
| Act of 2016. We have 900 small business development agencies | |
| around the country. This bill, which would cost, we estimate | |
| almost nothing, would authorize and change the Small Business | |
| Act and direct these SBDCs to offer cyber support services to | |
| small businesses, again, at no additional cost. We would simply | |
| be leveraging the SBDCs cyber support services, DHS, and | |
| Department of Homeland Security, and the Small Business | |
| Administration would simply be required to review current | |
| Federal programs and develop, along with the SBDC, a | |
| cybersecurity strategy to help in all communities throughout | |
| the country. I want to ask you a question, Mr. Dunn, and anyone | |
| who wants to weigh in, it sounds like this problem is, at the | |
| very least, a moving target, and it is not just a moving | |
| target; it is an intellectually moving target. It is a one- | |
| upmanship. It is a constant game, cat-and-mouse type of thing. | |
| You mentioned in your statement, Mr. Dunn, and I apologize | |
| for being late to this hearing, training needs to be offered | |
| but it tends to be too general. Is it a practical thing to talk | |
| to a small business person who may have one or two people and | |
| still have enormous impact potential against them. Is it | |
| practical in today's world to ask a person to be up to speed in | |
| the way they need to be, not just today but going forward. How | |
| do you manage that Mr. Oldham, anybody interested in answering | |
| that? | |
| Mr. DUNN. The concept is giving them-specific advice on the | |
| things that really matter to them. If the example is perhaps | |
| they want to offset their email services to a cloud provider, | |
| telling them specifically the settings that would be useful to | |
| turn on and the benefits is better than just telling them about | |
| general awareness concepts about the dangers of email, for | |
| example. | |
| Striving for this education around data as being the factor | |
| considered the most, you do not have to be up on all the | |
| security concepts that currently are happening, but you do have | |
| to understand what data you have, the value of it, and then | |
| what you should do based on the different value of the | |
| different data that you have. | |
| Mr. HANNA. In that sense, Mr. Oldham, anyone, so it is | |
| practical to do certain minimal things that help people broadly | |
| to limit the possibility of an attack? Mr. Oldham? | |
| Mr. OLDHAM. I think when you step back to the risk | |
| management aspect and not just to the zeros and ones, it is | |
| very important, as Mr. Dunn said, to focus on what the issue | |
| is, and it is usually driven by the types of data. Certain data | |
| is more sensitive than other data. Providing high-level | |
| guidance that says cybersecurity is important, you should have | |
| good cybersecurity, is not helpful to small businesses. It is | |
| helpful to provide targeted advice that is practical and | |
| granular to their specific situation. | |
| Mr. HANNA. The Small Business Development Centers around | |
| the country, the 900, would it be possible for them to | |
| establish a basic format that would help the majority of small | |
| businesses out there without making it too complicated, | |
| difficult, and would it be helpful? | |
| Mr. OLDHAM. I think it would be helpful as long as they | |
| have the right expertise going into that guidance. One of the | |
| issues that happens in this space is guidance gets put out but | |
| it does not evolve with the threat. That is one of the big top- | |
| level messages, this threat evolves rapidly, and so do the | |
| legal requirements. | |
| Mr. HANNA. If the Small Business Development Centers were | |
| able to do this updating, they could be a source in that | |
| community, rather than so many randomly small businesses trying | |
| to do it on their own and maybe not being entirely effective in | |
| that? | |
| Mr. OLDHAM. It sounds very promising. Yes. | |
| Mr. HANNA. Thank you. Chairman, I yield back. | |
| Chairman CHABOT. Thank you. The gentleman yields back. | |
| I want to thank our witnesses for being with us here today. | |
| They have helped to clarify just how vulnerable many small | |
| businesses and individuals are to cyber attacks. It is a | |
| growing and evolving problem, and you have helped shed some | |
| light on what should be done to combat it. For that we thank | |
| you very much. | |
| I ask unanimous consent that members have 5 legislative | |
| days to submit statements and supporting materials for the | |
| record. Without objection, so ordered. If there is no further | |
| business to come before the Committee, we are adjourned. Thank | |
| you very much. | |
| [Whereupon, at 12:15 p.m., the Committee was adjourned.] | |
| A P P E N D I X | |
| [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] | |
| Statement of | |
| Nicholas A. Oldham | |
| Counsel | |
| King & Spalding LLP | |
| before the | |
| U.S. House of Representatives | |
| Small Business Committee | |
| April 20, 2016 | |
| Chairman Chabot, Ranking Member Velazquez, and members of | |
| the Committee, thank you for the opportunity to appear before | |
| you today.\1\ | |
| --------------------------------------------------------------------------- | |
| \1\ The views and opinions expressed in this statement are mine and | |
| do not necessarily reflect the views or opinions of King & Spalding or | |
| any of its clients. | |
| I have been involved in cyber issues for many years--as a | |
| former federal prosecutor at the U.S. Department of Justice and | |
| now as an attorney with King & Spalding. In my practice, I | |
| counsel clients, both large and small, on the legal aspects of | |
| --------------------------------------------------------------------------- | |
| cybersecurity risk management. | |
| Today, I focus my testimony on the cybersecurity landscape | |
| for small businesses, and on three areas of particular | |
| concern--the cybersecurity education gap, the need for | |
| cybersecurity initiatives to be calibrated for small | |
| businesses, and the need to clarify and simplify the current | |
| regulatory environment. | |
| Background | |
| We are living in exciting times. Digital assets and | |
| connected systems have generated new products and services, | |
| redefining how business is conducted and services delivered. | |
| But the truth is that we are only at the beginning of the | |
| beginning when it comes to understanding the implications of | |
| our reliance on this interconnectivity and the dangers that | |
| cyber threats present. | |
| Our interconnectivity is growing at an astonishing rate, | |
| with some estimates that there will be as many as 50 billion | |
| devices connected to the Internet by 2020. As a result, we are | |
| marching toward an infinitely connected world: always online, | |
| our information moving from network to network and device to | |
| device. | |
| Partly as a result of this interconnectivity, businesses | |
| are gathering and utilizing an ever-growing amount of | |
| information to improve their business practices and better | |
| serve their customers. Today, every online communication, | |
| transaction, and anything else you can think of can be captured | |
| and stored, and then transmitted electronically anywhere and at | |
| anytime. This interconnectivity, especially including the | |
| Internet of Things, holds tremendous promise for consumers and | |
| companies. | |
| It also creates new challenges in terms of cybersecurity | |
| because anything connected to the Internet can be hacked. Cyber | |
| threats vary from the technologically sophisticated to the | |
| surprisingly low tech methods such as ``social engineering'' | |
| and spear phishing. A recent RAND Corporation study found that | |
| over a quarter of American consumers received a notice that | |
| their data was stolen within the past year alone. Forbes | |
| recently reported that cyber-attacks cost businesses an | |
| estimated $400-500 billion per year, and because many cyber- | |
| attacks are not reported, it is believed that the real number | |
| is significantly higher. These reports underscore the | |
| significant costs of preparing for, responding to, and | |
| recovering from cyber incidents. | |
| Where do small businesses fit in this landscape? The | |
| interconnected world enables small businesses to develop new | |
| products and services and compete across the globe. However, | |
| growing cyber threats presents greater challenges to the same | |
| small businesses, which can lack the tools needed to | |
| effectively cope with the growing danger. | |
| Small businesses are appealing targets. Small businesses | |
| often have more digital assets than individual consumers, but | |
| their resources may not allow for the same level of focus on | |
| cybersecurity as large companies. | |
| Businesses of all sizes need adequate cybersecurity | |
| education, but it can be difficult for small businesses to find | |
| the right information and training. | |
| Small businesses also often feel the impact of cyber | |
| threats differently than large companies. Establishing | |
| effective cybersecurity and incident response mechanisms is | |
| complicated and can be expensive. When any business implements | |
| mitigation measures or responds to a cyber incident, it can | |
| lost significant time and money. The costs can sink a small | |
| business. Small businesses get burned at both ends--they are | |
| less likely to have the resources to prevent breaches and they | |
| also may have fewer resources to respond to those breaches. | |
| From Cyber Threat Awareness to Cyber Risk Management | |
| In June 2011, various Committees in both the House and | |
| Senate held hearings regarding data breaches at Sony and | |
| Epsilon Data Management. In March 2012, then-FBI Director | |
| Mueller gave a now famous speech at the RSA Conference in San | |
| Francisco. His oft repeated quote is that ``there are only two | |
| types of companies: those that have been hacked and those that | |
| will be.'' These events were key, early moments that helped | |
| raise awareness of cyber threats. We have much farther to go in | |
| terms of awareness and, perhaps more importantly, companies | |
| need to move from awareness to expertise in managing the new | |
| normal of cyber threats. | |
| As a lawyer, I do not manage corporate networks or conduct | |
| vulnerability testing. Rather, I believe that cybersecurity is | |
| as much a people and process issue as it is a technical issue. | |
| I focus on the people and process side of the equation, | |
| addressing the legal and business cybersecurity risks faced by | |
| companies including cybersecurity risk governance, compliance, | |
| and incident response processes. I also help companies comply | |
| with breach notification obligations, interact with various | |
| regulators, and manage their responses to regulatory actions or | |
| litigation. The legal and business costs, including compliance | |
| costs, drain on employee time and morale, and reputational | |
| damage, can be significant. | |
| The Cybersecurity Education Gap | |
| Before spending precious resources on increasing | |
| cybersecurity measures, it is natural for small businesses to | |
| carefully weigh the cost of putting new measures into place | |
| versus the cost to the company of the inevitable cyber incident | |
| if it does not take action. Because of the enormous potential | |
| costs of a cyber incident, which is difficult to quantify, | |
| companies may find that it is far more expensive to not | |
| implement basic security measures. The problem here is that | |
| there is a cybersecurity education gap: small businesses may | |
| not be able to get the information they need to properly assess | |
| and mitigate these costs. | |
| Bridging this education gap can be difficult for small | |
| businesses, especially those that lack the resources to hire | |
| specialized employees or cybersecurity experts. Basic resources | |
| are available online, but even where they provide crucial | |
| information, they can be difficult to find, are rarely updated, | |
| or are inadequate. | |
| On the legal compliance front, the Federal Trade Commission | |
| recently released a new web-based tool for developers who make | |
| health-related apps. The tool asks developers a series of 10 | |
| high-level, yes or no questions related to their apps covering | |
| topics such as the apps' functions, data they collect, and the | |
| services they provide. Then, based on the answers to the high- | |
| level questions, the tool identifies four potentially | |
| applicable federal laws. While useful as a starting point for | |
| introducing and orienting developers and other healthcare | |
| industry players to the legal thicket affecting health apps, | |
| the tool provides high-level guidance on the basics of only a | |
| few relevant laws. | |
| The FTC's tool is one example of an approach geared toward | |
| educating the public on legal compliance. The tool is somewhat | |
| promising, but does not cover all relevant laws and does little | |
| more than point the developers to summaries of the relevant | |
| language. This approach, however, could go a long way toward | |
| helping small businesses stay informed on cybersecurity legal | |
| best practices, provided such tools are expanded to cover a | |
| broader set of laws and give more specific, timely information. | |
| In many ways, cyber threats have analogs to traditional | |
| crime. Ransomware is cyber extortion, spear phishing is nothing | |
| more than a con artist taking advantage of the ubiquity of e- | |
| mail. Hackers, moreover, are like burglars. They use their | |
| ``gloves,'' ``dark clothes,'' and ``tools'' to get inside a | |
| network, stealing digital loot along the way. In the | |
| traditional crime scenarios, small businesses would likely call | |
| the local police department for best practices in preventing | |
| these crimes or responding to them. In the digital crime | |
| scenarios, there is no one logical place to call. The | |
| government may have a role in bridging the cybersecurity | |
| education gap by encouraging the development of cybersecurity | |
| education resources and connecting them to those who need them | |
| in the private sector. | |
| Existing Programs Are Not Geared Toward Small Businesses | |
| Many of the cybersecurity initiatives receiving the most | |
| attention are not necessarily tailored to take into account the | |
| realities of small business owners. Standards seem to be | |
| coalescing around the NIST Cybersecurity Framework in some | |
| areas, for example, which is a promising development. This has | |
| the potential for simplifying the landscape for small and large | |
| businesses alike. | |
| The current iteration of the NIST Framework, however, is | |
| not particularly geared toward the needs of small businesses. | |
| The Framework itself can be difficult and expensive to | |
| understand and implement regardless of business size, and until | |
| it is better tailored to small businesses, for some of them it | |
| may just be one more program that they cannot afford to keep up | |
| with. Perhaps more importantly, a small business might become | |
| subject to a cybersecurity framework by virtue of its | |
| contractual relationship with a partner that passes its | |
| cybersecurity obligations through its supply chain. In this | |
| case, the small business might agree to obligations under the | |
| cybersecurity framework without the same level of vetting it | |
| might undertake if it were adopting the framework from scratch, | |
| and thereby inadvertently expose itself to significant | |
| liabilities and expose itself and its partners to significant | |
| cyber risks. | |
| While good cyber hygiene is important, to improve the NIST | |
| Framework, and similar programs and policies, the government | |
| should make a serious effort to increase the involvement of | |
| small business owners in all phases of the legislative and | |
| rule-making process. Until small business concerns are fully | |
| baked into these standards, they could face serious challenges | |
| of adoption. | |
| The Current Regulatory Regime Is Difficult to Navigate | |
| The current regulatory regime for cybersecurity presents | |
| additional difficulties for small businesses, who will | |
| inevitably struggle to determine both (1) what cybersecurity | |
| measures they are required to enact, and (2) when a breach or | |
| attack does occur, what procedure the law requires them to | |
| follow. | |
| There are currently 51 different state or territory laws | |
| that pertain to the notifications a company that has been the | |
| victim of a data breach provide to its customers. They are | |
| inconsistent with each other in a variety of ways. | |
| Additionally, several states have enacted laws requiring | |
| companies to put ``reasonable security measures'' in place. | |
| What ``reasonable'' means in this context is evolving and can | |
| differ by jurisdiction and industry. I have seen a growing | |
| number of federal regulatory agencies stepping into the same | |
| space. | |
| The cost of ensuring compliance with laws for any company | |
| is enormous even before taking into account the cost of | |
| litigation and reputation damage if a breach does occur. Small | |
| businesses in particular are vulnerable to these costs because | |
| they can consume a much larger proportion of their available | |
| funds. Small businesses would benefit from a public sector | |
| approach that lowers the cost of compliance and the cost of | |
| implementing best practices. | |
| In short, there is a need to clarify and simplify what | |
| companies must do. Because of the complicated and evolving | |
| landscape, the on-the-ground expertise of the private sector | |
| must necessarily play an important role in these efforts. | |
| Thank you for the opportunity to testify before you today. | |
| I look forward to your questions. | |
| NATIONAL CONFERENCE OF CPA PRACTITIONERS | |
| 22 Jericho Turnpike, Suite 110 T: 516-333-8282 | |
| Mineola, NY 11501 F: 516-333-4099 | |
| Chairman Chabot, Ranking Member Velazquez and members of | |
| the Committee, thank you for inviting me to testify today. My | |
| name is Stephen Mankowski. I am a Certified Public Accountant, | |
| Executive Vice President of the National Conference of CPA | |
| Practitioners, (NCCPAP - the countries' second largest CPA | |
| organization) and a member of the American Institute of CPAs | |
| (AICPA). NCCPAP is a professional organization that advocates | |
| on issues that affect Certified Public Accountants in public | |
| practice and their small business and individual clients | |
| located throughout the United States. NCCPAP members serve more | |
| than one million business and individual clients and are in | |
| continual communication with regulatory bodies to keep them | |
| apprised of the needs of the local CPA practitioner and its | |
| clients. Accompanying me is Mr. Sanford Zinman, National Tax | |
| Policy Chair of NCCPAP. | |
| My firm, E.P. Caine & Associates CPA, LLC, has been | |
| preparing tax returns for over 30 years. My firm annually | |
| prepares well over 2,000 small business and individual tax | |
| returns as well as sales tax returns, payroll tax returns, | |
| highway use tax returns and Forms W2 and Forms 1099 | |
| informational returns. We are in the trenches with clients | |
| discussing their tax, financial and personal issues, and the | |
| impact events and proposed tax law changes may have on them. | |
| Although our clients are mostly in the Pennsylvania, New York, | |
| New Jersey and Delaware areas, we serve clients in over 30 | |
| states and also provide services to clients in Canada and | |
| Europe. In this respect our practice is the same as many | |
| members of NCCPAP and other smaller CPA firms throughout the | |
| United States. | |
| NCCPAP has been at the forefront of identity theft issues | |
| through our advocacy and testimony at prior hearings dealing | |
| with ID theft in June 2012. The initial hearings focused on the | |
| refund scams that were prevalent at the time, such as Mo Money. | |
| NCCPAP has remained vigilant on the topic and has been | |
| discussing these issues annually when our members meet with | |
| Congress and their staff and with IRS representatives. Our | |
| members have helped guide numerous taxpayers who have been | |
| victims of ID theft to navigate through the IRS to minimize the | |
| risk of further consequences. | |
| ID theft has been growing exponentially for years. It seems | |
| that no matter what controls are put in place, criminals have | |
| better and more focused resources to circumvent these | |
| safeguards. All businesses are at risk, from the largest to the | |
| smallest. Weekly, we are hearing about the latest business to | |
| be a victim of some level of cybercrime or ID theft. Mr. | |
| Richard Snow, who is also on the panel of witnesses today, has | |
| been a victim. | |
| All businesses are at risk, but CPA firms and tax | |
| practitioners are at a greater risk. The IRS reminds tax | |
| preparers that they must be vigilant with their system | |
| integrity. The criminals are aware that the ``prize'' for | |
| breaching tax practitioner systems could yield them not only | |
| names and social security numbers, but also several years of | |
| earnings as well as bank information and dates of birth. Thus, | |
| the IRS recommends that tax preparers create a security plan. | |
| IRS Publication 4557, Safeguarding Taxpayer Data, provides | |
| suggestions and a checklist. My firm has reviewed the | |
| Publication, continually trains our staff and, along with our | |
| IT consultants, monitors our information and controls to ensure | |
| that our offices not only meet but exceed these suggestions. | |
| Our network logs usage form all users and is monitored to | |
| ensure no unauthorized access. This includes staff with remote | |
| access to our server. We also require a user id and passwords | |
| to gain access to all of our software packages. Not all firms | |
| have been as fortunate regarding cyber security. Two Midwestern | |
| firms were compromised this tax season and had fraudulent | |
| returns filed through their electronic filing identification | |
| number (EFIN). | |
| I was able to speak with a partner at one of the affected | |
| firms. They were under the impression that their systems were | |
| secure. However, the breach occurred after installing a new | |
| copier system that had not been properly secured within their | |
| network. Once they determined that they did in fact have a | |
| breach, they attempted to contact the IRS. Unfortunately, there | |
| is no easy means to identify the proper area within the IRS to | |
| contact. Ultimately, it took nearly one month for a response | |
| from the IRS. | |
| Ensuring the security of client data has been and remains | |
| the goal of my firm and we take that task very seriously. | |
| Although our software has the ability to auto-generate the PINs | |
| for electronic filing (EF PIN), we became aware that the EF PIN | |
| was using a portion of the taxpayer SSN. We have opted to not | |
| use this part of our software and have chosen to manually enter | |
| the EF PIN. Some tax software packages use a random five-digit | |
| number and we have suggested our software provider offers the | |
| same option. Taxpayers are also able to obtain their own | |
| specific EF PIN through the IRS website through the entry of | |
| select information. Currently, this system is too new to | |
| ascertain the true effectiveness of the program; however, | |
| concerns exist as to whether the return would reject if this | |
| number was not used or what would happen if the taxpayer lost | |
| this number. It is not clear if there is a mechanism to | |
| retrieve the number from the IRS. | |
| Practitioners are also reminded to protect their EFIN. The | |
| IRS suggests practitioners log into e-services on a regular | |
| basis and verify the number of returns processed for their | |
| EFIN. While the number probably will not be exact due to the | |
| timing of return processing and updating of this service, | |
| significant differences could be a cause for alarm. | |
| Practitioners should contact the IRS e-Help Desk immediately if | |
| the difference is excessive. At the beginning of this filing | |
| season, the tax software community requested that tax | |
| practitioners update their EFIN authorization letter before | |
| they start using their EFIN. This is just another step in | |
| preventing potential unauthorized access to a practitioner | |
| EFIN. While in many cases the timing of this request might not | |
| have occurred at the most opportune time, such as when the | |
| first returns were to be filed, it sent a signal to the | |
| practitioner community that the software vendors understood the | |
| issues and were working in conjunction with practitioners to | |
| address ID theft. | |
| While firms that electronically submit tax returns are | |
| required to obtain an EFIN from the IRS, paid preparers | |
| initially included their social security number on tax returns | |
| and in 1999 were first offered the ability to use a Preparer | |
| Tax Identification Number (PTIN). The requirement to include | |
| the preparer's firm information, which includes their employer | |
| identification number, began in 1978. Given the risks of firm | |
| ID theft, why has the IRS not adopted a firm PTIN? | |
| There are two primary reasons that criminals attempt to | |
| breach systems--the challenge and/or for the information | |
| contained in the systems, both reasons for IRS action. The IRS | |
| has been transitioning to modern technology within its network | |
| protocols to enhance safeguards. During this transition, the | |
| IRS has encountered many of the same compatibility concerns | |
| that affect most businesses. As a CPA, I became aware of this | |
| when the IRS announced the planned retirement of the Disclosure | |
| Authorization (DA) and Electronic Account Resolution (EAR) | |
| options on IRS e-services in August 2013. When the tax | |
| practitioner community complained that the elimination of these | |
| options would have a significant impact on their practices, we | |
| were told that the platform on which these services were | |
| designed was not compatible with the new system architecture | |
| and the initial costs to rewrite the programming was excessive. | |
| The IRS has looked at a relaunch of these services in the | |
| future, but the added authentications might make the systems | |
| overly burdensome. | |
| In March 2015, one tax software vendor had its electronic | |
| processing systems compromised to the extent that the state of | |
| Minnesota and subsequently all states temporarily ceased | |
| accepting electronically filed returns from that vendor. One | |
| positive result of this situation was the formation of the IRS | |
| Commissioner's Security Summit, which initially included | |
| representatives from state governments, banking and the | |
| software community. This group approach was a positive signal | |
| from the IRS that the issues of identity theft and data | |
| security required a multi-faceted approach to work at stemming | |
| the increases in data security and ID theft. Their initial | |
| focus was addressing and stopping suspected fraudulent returns | |
| through the implementation of protocols to address issues with | |
| tax returns before processing and during the initial | |
| processing. According to a recent General Accounting Office | |
| (GAO) report, it is estimated that during the 2014 filing | |
| season the IRS paid approximately $3.1 billion in fraudulent | |
| refunds while preventing $22.5 billion. This was before the | |
| creation of the Security Summit. | |
| In its initial year, the Summit estimates that it has | |
| prevented in excess of three million fraudulent returns from | |
| being processed and refunds issued during the 2015 filing | |
| season, but many fraudulent returns are still getting through. | |
| The Summit has not been expanded to include tax practitioners. | |
| The next level of focus needs to be on securing the refund | |
| process. According to Senator Wyden, the IT budget within the | |
| IRS is now operating at a level lower than it was six years ago | |
| due to budget cuts. The criminals, however, have ample cash and | |
| sophisticated systems. They continually attempt to reverse | |
| engineer the security measures implemented by the IRS. One | |
| recent instance occurred when the IRS announced that only three | |
| IRS refunds would be able to be direct deposited into a bank | |
| account in any calendar year. It was determined that adding | |
| zeros before the account number would trick the IRS systems to | |
| think it was a different account number and allow the refunds | |
| to be deposited. It satisfied the IRS systems while being | |
| disregarded by the financial institutions. This was a case that | |
| I believe the IRS learned a valuable lesson--while you can | |
| publicly address the solutions being implemented, you should | |
| not provide the specifics. The limitation of refunds was | |
| designed as a deterrent, but ultimately only served as a means | |
| of preventing tax preparers from illegally collecting the fees | |
| from a taxpayer refund. | |
| The timing of the receipt of data by the IRS often comes | |
| into question. Often fraudulent returns are submitted with | |
| refunds transmitted long before the data needed to verify the | |
| income and the tax withholding is received by the IRS. | |
| Businesses filing Forms W-2 on paper are required to submit the | |
| data by the end of February, while electronic filers had an | |
| additional 30 days. In addition, an automatic 30-day extension | |
| had been available. Because of the delay in submission of these | |
| information returns, the criminals have begun filing fraudulent | |
| W-2s. In an effort to counter this practice, Congress has | |
| removed the automatic extension for filing paper or electronic | |
| information returns. However, a time discrepancy still | |
| remained. The Protecting Americans from Tax Hikes Act of 2015 | |
| (PATH) clarified and simplified these dates. For tax years | |
| beginning in 2016, Forms W-2s will be required to be submitted | |
| to Social Security and Forms 1099-MISC will be required to be | |
| submitted to the IRS with the same due date as to the | |
| recipient. This accelerated timeframe should pose a significant | |
| hindrance for those who submit fraudulent returns. However, | |
| there is still the issue that the IRS will start processing tax | |
| returns during the month of January, usually on or about | |
| January 20, leaving a window for fraudulent tax returns to be | |
| submitted and processed before the IRS has the opportunity to | |
| match data. | |
| The IRS has estimated that it averages approximately one | |
| million breach attempts daily. However large that number might | |
| be, as a taxpayer I would expect that every attempt would be | |
| defeated. Unfortunately, over the past year, the IRS has had | |
| actual system breaches. First, the IRS online transcript | |
| program, ``Get Transcript'', was compromised in May 2015 and | |
| the number of accounts that the IRS admitted were affected has | |
| doubled several times. In February 2016 the IRS announced the | |
| affected accounts exceeded 700,000. The second breech that | |
| occurred recently related to the Identity Protection PIN (IP | |
| PIN) retrieval tool that is contained on the IRS website and is | |
| more troubling than the prior breach. The taxpayers who have IP | |
| PINs have already been victims of tax refund fraud and obtained | |
| the six digit IP PIN to prevent further unauthorized access or | |
| filings. This tool had been using the same interface as Get | |
| Transcript but had remained available to the public and, | |
| unfortunately, those less scrupulous. Finally, the IRS took | |
| this page offline in February 2016, nearly nine months after | |
| the initial Get Transcript breach. | |
| The March 2016 GAO report identified that the IRS has | |
| improved access controls, but noted that weaknesses still | |
| remain. One of the primary concerns addressed by the GAO | |
| surrounds the authentication of the user ID. The IRS has | |
| employed a multifactor approach using two or more factors to | |
| achieve authentication. This provides the basis for | |
| establishing accountability and for controlling access to the | |
| system. Their systems require that Homeland Security | |
| Presidential Directive 12-Compliant Authentication be | |
| implemented for IRS local and network access accounts. This | |
| involves password-based authentication with passwords that are | |
| not found in dictionaries and expire at a maximum of 90 days. | |
| This same protocol should be implemented for all user accounts, | |
| including e-services. | |
| The direct deposit of refunds is a fast, inexpensive and | |
| relatively secure means of issuing refunds. The IRS utilizes | |
| banking's ACH system, whereby a refund goes to a selected | |
| financial institution based upon their respective routing or | |
| ABA number. If an account number exists within the institution, | |
| the refund goes into the account. The IRS is mandated to | |
| process refunds within 21 days, unless additional processing | |
| time is required. Prior to the current Modernized e-File (MeF) | |
| system, the IRS had been operating on a ``accept by Thursday, | |
| refund following Friday'' schedule. Often under the MeF system, | |
| refunds have been processed even quicker. Taxpayers have grown | |
| accustomed to getting the quick refund and now wonder if there | |
| is a problem when it is taking longer than a week for their | |
| refund to appear in their account. | |
| Social Security Administration uses a banking ``pre-note'' | |
| to verify the accuracy of the recipient's banking information | |
| prior to the initial payment. The financial institution has | |
| five days to verify the information and notify SSA if there are | |
| errors or discrepancies. Failure to notify SSA could result in | |
| the institution being held liable for the funds if the funds | |
| are misdirected. Unfortunately, the IRS refund system does not | |
| include pre-note account verification. Funds are simply | |
| transmitted through the ACH network to the respective | |
| institution. Once deposited, there is no control on the usage | |
| of funds and often where there is fraud those deposits are | |
| moved immediately upon receipt. The implementation of a pre- | |
| note system could result in a significant reduction of the | |
| annual $3.1 billion misappropriation of government funds. | |
| As discussed, Congress has mandated 21 days for refunds to | |
| be processed. While it is easy to understand that taxpayers | |
| want their refunds processed as quickly as possible, one must | |
| ask a simple question. Is paying a tax refund in seven to ten | |
| days a prudent use of taxpayer dollars? A recent survey by | |
| Princeton Research Associates noted that 22% of taxpayers | |
| surveyed would wait up to six to eight weeks for their refunds | |
| if they knew it would combat identity theft. NCCPAP members | |
| feel that simply using the pre-note technology that already | |
| exists and is used throughout the financial industry would | |
| allow taxpayers to receive their refunds promptly while | |
| reducing fraud. | |
| Unfortunately, despite all of the efforts of the IRS and | |
| Congress to curb ID theft, often the cause is unscrupulous | |
| preparers that are often unregulated by any authority. NCCPAP | |
| urges Congress to pass legislation to provide the IRS the | |
| necessary authority to regulate all tax preparers and required | |
| paid preparer to meet minimum standards. Currently, only CPAs, | |
| EAs and attorneys are subject to the requirements of IRS | |
| Circular 230. | |
| In conclusion, ID theft is an issue that initially gained | |
| traction with Congress in 2012. Much has occurred since the | |
| initial hearings and, unfortunately, the criminals have taken | |
| more steps to obtain information than the IRS has been able to | |
| block. The IRS is not alone in this battle. It seems that not a | |
| week goes by where there is not news of a major corporation | |
| announcing that their systems had been hacked. Taxpayers have | |
| become victims of ID theft through these breaches and do not | |
| necessarily understand the importance of contacting the IRS. | |
| While knowing that the IRS successfully thwarts approximately | |
| one million breach attempts each day is comforting, we should | |
| keep in mind that even one successful breach could be | |
| catastrophic to not only the IRS but to the taxpayer. Often, | |
| taxpayers do not realize they have been a victim of ID theft | |
| until their electronically filed tax return gets rejected. Once | |
| a taxpayer has been victimized, they expect to obtain an IP PIN | |
| from the IRS and starting in January 2017 they will. In | |
| Florida, Georgia and Washington, DC where ID theft has been | |
| rampant, the IRS implemented a voluntary IP PIN program. | |
| Unfortunately, this program failed to achieve the number of | |
| participants to make the program successful. | |
| Taxpayers are urged to protect their personal data, but | |
| with widespread Internet usage, online shopping and criminals | |
| waiting to pounce on unsuspecting victims, ID theft continues | |
| to grow. Individual and businesses remain targets of | |
| cyberattacks and must remain cautious when opening emails and | |
| attachments, visiting web pages and simply paying for the | |
| family groceries. | |
| There are several electronic filing options available to | |
| taxpayers. Many taxpayers use Free File, thirteen IRS-approved | |
| free e-filing tax service sites. In a recent audit performed by | |
| the Online Trust Alliance (OTA), six of the thirteen websites | |
| failed due to poor site security and not taking steps to help | |
| protect consumers from fraudulent and malicious email. | |
| IRS Commissioner Koskinen had the foresight to convene the | |
| initial Security Summit in 2015, which has proven to be | |
| successful. Unfortunately, the criminals always seem to be | |
| pushing the envelope further and further. Their approach is | |
| more focused and better funded. The Security Summit has now | |
| expanded its focus to include additional user groups, including | |
| tax practitioners, to further address cyber security and | |
| develop a multi-tiered approach to combat it. The only way to | |
| truly combat ID theft is to incorporate input from various | |
| sectors of the marketplace. This is a problem impacting | |
| businesses and taxpayers worldwide and will require global | |
| efforts to minimize and hopefully resolve. NCCPAP calls on | |
| Congress to provide the necessary funding to continually | |
| monitor, modernize and upgrade IRS systems to minimize and | |
| eliminate data security breaches. The first step would be | |
| Congress reauthorizing Streamlined Critical Pay Authority to | |
| allow the IRS secure top IT talent without a three to six month | |
| waiting period. | |
| Thank you for the opportunity to present this testimony and | |
| I welcome your questions. | |
| Respectfully submitted, | |
| Stephen F. Mankowski, CPA | |
| Executive Vice President, NCCPAP | |
| [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] | |
| [all] | |
| </pre></body></html> | |