Over two days in March 2010, nearly US$466,000 disappeared from the accounts of Village View Escrow, a small business in California that holds funds for real estate transactions.
The money was siphoned in 26 online wire transactions that scattered funds to a network of people under orders to wire the money to banks in Eastern Europe via Western Union.
This type of cybercrime fraud is all too common. The U.S. Federal Bureau of Investigation has warned for years of wire transfer fraud and said in 2009 that it had cost U.S. businesses and organizations as much as $100 million.
Village View Escrow sued its financial institution, Professional Business Bank, alleging that it misrepresented the security of its online banking systems -- which used single-factor authentication -- and was liable for the fraud.
On Monday, Village View Escrow's law firm announced that Professional Business Bank agreed to pay a $600,000 settlement, avoiding a trial that could have set a new legal precedent and made it easier for small businesses to take banks to court over fraud.
Professional Business Bank, now owned by Bank of Manhattan, could not be immediately reached for comment.
The case highlights the uphill battle small businesses face against the Uniform Commercial Code (UCC), a federal code adopted into most states' laws, including California. The UCC limits the financial damages related to wire transfer fraud only to the money stolen plus interest.
It does not allow claims of negligence, fraud, breach of contract or others, said Julie Bonnel-Rogers, a business litigator and trial attorney who represented Village View Escrow. It means a small business, which has already lost money in a fraud, would have to pay for a lawsuit that it could lose.
"Arguably, the UCC is written to protect financial institutions," Bonnel-Rogers said. "It virtually makes it impossible for a small business owner or a medium-size business owner to recover."
Village View Escrow sued anyway, contesting Professional Business Bank's assurance that a user ID and a password constituted a state-of-the-art online banking system. The lawsuit further alleged that Professional Business Bank didn't follow federal online banking security advice, including using multifactor authentication.
Single-factor authentication is a user ID and a password, while multifactor authentication is a user ID, a password plus something a user has, such as a one-time passcode token. Cybercriminals can easily obtain a user ID and a password by installing malicious software on a computer, but it is more difficult to breach multifactor authentication systems.
Small businesses are often less security conscious than larger businesses and are easier targets. Village View Escrow, run by owner Michelle Marsico, is just the type of business that cybercriminals favor due to the large sums in its accounts, said Kim O. Dincel, a trial attorney who also represented the company.
Amazingly, quick action by Marsico helped recover between $50,000 to $70,000 shortly after it had been stolen, Dincel said. The cybercriminals recruited so-called "money mules," or people who agreed to receive the stolen funds in their accounts. Once the money was transferred out of Village View Escrow's accounts, the fraudsters pressured the mules to quickly withdraw the money and send it to overseas bank accounts via Western Union.
Usually, once the money "goes out on that wire, it's gone," Dincel said.
But Marsico looked at her bank statements and saw the names of the money mules. Using Facebook and Google, she tracked down the people -- some of whom allegedly did not know the scope of the scam -- and convinced them to return money that hadn't been wired overseas yet, Dincel said.
On the legal side, Dincel and Bonnel-Rogers set about trying to overcome the hurdles set by the UCC. Dincel said its in financial institutions' interest to try to immediately define a case as a UCC claim, which more often concerns disputes over misdirected or delayed wire transfers.
There's not a lot of case law that exists dealing with wire transfers and theft related to cybercrime. "This is a new and emerging area of law," Bonnel-Rogers said. "To be quite frank, it was an opportunity to get very creative and to work alongside the courts in developing how the case should proceed."
Fraud and negligence have not been allowed as "causes of action" -- a legal term for a reason to sue -- in a UCC claim in other jurisdictions, Bonnel-Rogers said. But Village View Escrow's legal team managed to convince a judge to allow an allegation of fraud as a cause of action.
That opened the door for more damages. The case could have gone to a jury. Instead, Professional Business Bank settled for $600,000, about $200,000 more than what was stolen from Village View Escrow's account.
Dincel said banks and financial institutions are selective about the cases to take to trial. If a case will set a bad precedent from the banks' perspective, "they will try to settle," he said.
Village View Escrow's ordeal will not set a precedent in case law, however, because it was settled. It means that other businesses facing the same kind of disputes over fraud with their bank will still face a steep financial risk if they decide to go to court.
"One of the most important messages is that it is extremely difficult for small businesses to bankroll litigation and even more expensive to go through a trial," Bonnel-Rogers said.
She advises that businesses carefully scrutinize online banking contracts, which could be weighted in favor of the banks if there's a dispute. Insurance policies are also available that cover wire transfer fraud, she said. Dincel said businesses that have large sums in their accounts consider professional computer security consulting.
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