Banks Ready for Compliance Deadline

Dec. 31, 2006 will bring out an array of party hats, confetti, and noisemakers across the globe. But in the recesses of data centers in many banks and financial institutions, that date may give IT workers another reason to pop the champagne cork.

New Year's Eve is the final deadline for financial organizations to meet multifactor authentication requirements outlined by the Federal Financial Institutions Examinations Council (FFIEC), which helps to govern security requirements for banks and other organizations that handle consumer funds. The FFIEC guidelines, which were issued in October of last year, require financial institutions to deploy a second form of user authentication by Dec. 31 or face fines of $10,000 and up.

And it looks like most banks will beat the deadline, experts say. "I would say about 80 percent of the industry is in full compliance right now," says Marne Gordan, director of regulatory affairs at Cybertrust. "Even among the organizations that aren't in compliance, most of them are in position to be compliant before the auditors start doing their examinations."

The Aite Group LLC, a research firm that follows the financial services industry, confirms that the majority of banks will achieve FFIEC compliance by the Dec. 31 deadline, though its numbers are less optimistic. In a report issued at the beginning of last month, The Aite Group estimated that 66 percent of financial institutions will be in compliance by the end of the year, with the rest following in 2007.

"Even for the organizations that don't make it, there's still some time," Gordan observes. The FFIEC will begin making its examinations in February, she notes, and even then, "they will probably give some grace to organizations that have made a good-faith effort to achieve compliance, but may have overlooked something in the process," she predicts.

Unlike other compliance guidelines, such as Sarbanes-Oxley or HIPAA, the FFIEC guidelines are fairly straightforward. They state that banks and financial institutions that do business online must implement a second factor of authentication -- besides the simple password -- by the end of the year.

That second factor of authentication could be a "security question" that is difficult for a phisher or identity thief to discover, or it could be a token, smart card or biometric signature that a thief cannot replicate.

With phishing and identity fraud running rampant -- and scaring away many online customers -- most banks and financial institutions were moving in the direction of multifactor authentication anyway, experts say. The Anti-Phishing Working Group reported a 50 percent increase in phishing sites between September and October (See Report: Phish Jump), and some banks have completely stopped using email as a means of communicating with customers.

"It's out of control," says Gordan. "Two-factor authentication won't solve the problem, but at least it will put a stop to the simplest phishing techniques, where the phisher just sends out a lot of spam and hopes that users will give up their passwords. Now, the phisher will have to get two pieces of information, and those pieces of information will be different from bank to bank."

There are a few financial organizations -- mostly smaller credit unions -- that still haven't done anything with FFIEC compliance, but most of the organizations are up to speed, Gordan says.

"This is one area where compliance makes good business sense," Gordan says. "Identity theft is such a huge problem. Meeting the FFIEC deadlines will help."

— Tim Wilson, Site Editor, Dark Reading