PCI DSS and Cyber Risk – Beware What Lurks Below The Surface.

 

24 March, 2017

 

The increasing frequency and sophistication of security breaches expose organisations to wide ranging external and internal risks and key among these is the liability that can be imposed under the Payment Card Industry Data Security Standard (PCI DSS). In this article, we explore the PCI DSS and its requirements in order to achieve compliance, as well as the consequences of breaching it.

 

Historically companies outside of the USA and Canada have faced limited exposure for breaching the PCI DSS. This is likely to change in the near future as financial institutions continue to incur significant losses to remediate customer fraud resulting from data breaches.

 

While the PCI DSS is not part of any law or regulation in Australia, all businesses that accept or process credit card payments are contractually required to comply and the PCI DSS regime is used internationally to impose significant penalties and costs on organisations.

 

Summary

 

The PCI DSS is a self-regulatory scheme created by major Payment Card Brands (i.e. Visa, MasterCard, Amex and Discover). The PCI DSS requires organisations to comply with 12 general data security requirements, and over 250 sub-requirements. 

 

When assessing their cyber risk exposure, companies should be aware that: 

 

1. Once a data breach occurs, the PCI DSS regime can be used by Payment Card Brands to require the appointment of an independent PCI Forensic Investigator that will assess the cause of a suspected breach and any instances of non-compliance. The investigator’s report is used to assess what PCI DSS fines will be imposed against the company, and can become a critical document in future regulatory and legal disputes;
2. The PCI DSS framework imposes financial penalties where a company has been non-compliant with the security standard, and provides for the imposition of assessments that companies must pay to meet the estimated losses incurred by issuing banks to remediate consumer fraud arising from the company’s failure to protect payment card information. These PCI DSS assessments will often exceed USD1 million and have been reported as being as high as USD12 million; and
3. Under the PCI DSS regime companies must also provide ongoing information to their acquiring bank and the company can be forced to demonstrate their ability to prevent future security breaches and retain their PCI DSS accreditation. Failure to take these steps can result in the company losing their ability to process payment card information.

 

PCI DSS impose substantive costs on companies and must be managed as part of a company’s data breach incident response. 

 

What is the PCI DSS?  

 

Transactions in the Payment Card Industry are regulated by a series of contracts that exist between Cardholders (customers), Issuing Bank (the Cardholders’ Bank), Merchants (retailers), Acquiring Bank (the Merchants’ Bank) and Payment Card Brands.

 

Established in 2004 by a coalition of leading Payment Card Brands the PCI DSS is a unified set of security requirements aimed at keeping cardholder data secure from data breaches and financial fraud. All businesses wishing to accept or process credit card payments are contractually required under agreements with their Acquiring Bank to comply. Businesses that use third party service providers to process, store or transmit card information also have obligations to ensure their systems and services comply with the PCI DSS. The PCI DSS regime is used by Payment Card Brands to impose self-regulatory fines and penalties where customer financial data is compromised by a data breach.   

 

PCI DSS Requirements

 

The PCI DSS consists of the following 12 technical and operational requirements which businesses must meet in order to achieve compliance:  

 

• Install and maintain a firewall configuration to protect cardholder data
• Do not use vendor-supplied defaults for system passwords and other security parameters
• Protect stored cardholder data
• Encrypt transmission of cardholder data and sensitive information across open public networks
• Use and regularly update anti-virus software
• Develop and maintain secure systems and applications
• Restrict access to cardholder data by business need to know
• Assign a unique ID to each person with computer access
• Restrict physical access to cardholder data
• Track and monitor all access to network resources and cardholder data
• Regularly test security systems and processes
• Maintain a policy that addresses information security for all personnel.

 

These requirements for compliance apply to all Merchants, regardless of their size or volume of transactions. Each of the 12 general principles is supported by a series of detailed sub-requirements.  

 

How companies demonstrate or validate compliance will vary according to the number of transactions that a Merchant processes annually. Large Merchants that handle over six million card transactions per year are required to hire a Qualified Service Assessor to conduct an annual onsite assessment. smaller Merchants, on the other hand, have the less onerous requirement of completing a self-assessment questionnaire to report their security status. All Merchants, both large and small, are required to have network scans undertaken on a quarterly basis by a certified third party vendor.

 

Consequences of breaching PCI DSS

 

Maintaining PCI DSS compliance obliges merchants to regularly invest in data security, and where data breaches occur the PCI DSS regime can result in companies being subject to the following financial exposures:

 

• Investigative costs: When a significant data breach occurs or is suspected, a company’s Merchant services agreement can be used to require the breached company to retain an independent PCI Forensic Investigator (PFI). The PFI investigates the cause of the incidents and reports on the how the security breach (if any) occurred, the extent of the compromise and whether there were any violations of the PCI DSS by the Merchant. In our experience, where a data breach has occurred, it is highly likely that the PFI will find at least one PCI DSS violation. As organisations typically cannot assert privilege over a PFI report, careful consideration must be given to how the PFI is briefed and what other steps can be taken to protect confidential investigative records.
• Non-compliance fines: Several of the major Payment Card Brands such as Visa, MasterCard and Amex have implemented a schedule of fines which apply to Merchants that are found to be non-compliant with the PCI DSS. The fine amount can range from USD5,000 to USD100,000 per month and depends on factors such as the company’s transaction volume, the number of PCI DSS requirements that have been violated, whether it is their first or subsequent PCI violation and the period of time of noncompliance. Multiple noncompliance fines can also be issued by the various Payment Card Brands to the same company. It is important to note fines can be imposed even where a breach has not yet occurred.
• PCI assessments and Merchant obligations for ADC events: Payment Card Brands have also developed a regime that can result in assessments to Merchants in amounts that represent the costs Issuing Banks incur to remediate Cardholders losses due to an account data compromise event (ADC fines). ADC assessments are generally made up of operational reimbursement costs including Issuing Banks' costs of reissuing cards, conducting a counterfeit fraud recovery assessment and remediating Cardholder fraud. The amount that is assessed will depend on the number of accounts that were compromised however ADC assessments in excess of USD12 million have been reported. Each Payment Card Brand operates their own recovery program and has their own method for calculating assessments and qualification criteria. ADC assessments will be issued by multiple Payment Card Brands for significant breaches. For both Visa and MasterCard, assessments will not be made unless the number of cards that have been affected or are at-risk exceeds 30,000. Once the assessment has been finalised contractual mechanism are used to require the Merchant to pay the assessment amount.
• Hardening and demonstration costs: Merchant Services Agreements impose obligations that companies report to and engage with their Acquiring Banks once a breach occurs and provide information to verify their ability to prevent future security breaches and maintain PCI DSS accreditation. To satisfy these requirements companies must often retain separate computer security experts to assess how the company has responded to the breach and the adequacy of their overall security framework.

 

PCI DSS liability in practice

 

When a data breach compromises Cardholder data, PCI DSS fines and assessments are imposed using contractual obligations that exist between the company that sustained the breach and its Acquiring Bank.

 

In many instances, an account data compromise will first be detected by Issuing Banks, who identify that the Cardholders experienced fraud after using their cards at the same Merchant, and that the Merchant is a potential common point of purchase. The common point of purchase information is then reported to the Payment Card Brands, who notify the Merchant and the Merchant’s Acquiring Bank. 

 

The Payment Card Brands impose PCI DSS fines and assessments on the Merchant’s Acquiring Bank by relying on the Acquiring Bank’s contract obligation to ensure their Merchants maintain PCI DSS compliance. Once the Acquiring Bank pays the fine to a Payment Card Brand, the Acquiring Bank can rely on contractual indemnities in its Merchant Service Agreement to recover the entire amount from the Merchant which sustained the data breach that compromised Cardholder information. The Merchant will be under pressure to reimburse their Acquiring Bank promptly as the bank can rely on clauses in the Merchant Services Agreement to suspend or terminate a Merchant’s card-processing capability, which can have devastating impact on a business.

To limit potential liability imposed under the regime, all organisations which handle significant Cardholder information should be aware of their obligations under PCI DSS and comply with the regime when a company investigates and responds to security breaches.