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California business scores settlement in thorny cybercrime case

But the victory doesn't make it easier for other businesses disputing fraudulent online transactions with their bank

By Jeremy Kirk, IDG News Service
June 26, 2012 07:40 AM ET

IDG News Service - Over two days in March 2010, nearly $466,000 disappeared from the accounts of Village View Escrow, a small business in California that holds funds for real estate transactions.

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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.

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