IT Lessons from a City That Lost $3.6 Million in Preventable Fraud

March 29, 2017

Ryan Warrick, Network Infrastructure Consultant

This article is posted with permission from Sophicity’s CitySmart blog and shares non-technical, municipal-relevant insights about critical technology issues, focusing on how technology reduces costs, helps better serve citizens, and lessens cybersecurity risks. Sophicity is solely responsible for the article’s content.
In recent posts, we’ve talked about disasters at cities that result in permanent data loss, incredible damage to city operations, and city department heads wondering if their job is now at risk—all sadly because of preventable risk. The stories we use to illustrate these disasters—and the lessons learned—are based on a combination of many, many scenarios we’ve witnessed at cities throughout the years.

However, we recently saw a story that’s quite specific to one city and a very public, front page news illustration of some important IT-related lessons. Let’s look at what happened to the City of Miami Beach, Florida in December 2016.

Third Parties Steal $3.6 Million—and No One Notices for Six Months

In a nutshell, unknown third parties stole the account and routing numbers from the city’s banking account. According to the Miami Herald, the criminals “[rerouted] automatic payments intended to pay vendors and other government bills.” The criminals did it for six months and stole $3.6 million before staff in the finance department noticed.

We carefully reviewed the Miami Herald article and the city manager’s report. While this crime is a form of cybersecurity, the situation also includes lessons about IT-related processes and controls that are incredibly important to cities. A few bad practices stick out from our analysis of the report that cities need to avoid.

1. Completely ignoring basic, elementary best practices.

The city of Miami Beach was offered free fraud control tools when they set up the account in 2012—the same kind of fraud control tools that many individual banking customers enjoy. Did the city take advantage of these tools? No. Maybe they had a reason at the time such as wanting to implement their own fraud controls. If so, that never happened.

Cities need to stay aware of and implement important best practices that help mitigate information security risks. In this case, both finance and IT staff needed to say “yes” to such an obvious best practice back in 2012.

2. Using easy-to-steal information as authentication for financial transactions.

Think about how many people in a city can take a quick peek at a check. If third parties could steal city money through only this information, then the city had a security vulnerability that was wide open for people to exploit.

We find that cities also have similar weaknesses in areas such as passwords, unencrypted wireless devices, and website hosting that makes it easy for hackers to exploit security vulnerabilities.

3. Apparent lack of financial data oversight.

In a recent post about data processing, we said, “Experienced IT professionals should monitor everything related to your data processing such as transactions and processing, errors and incorrect information, overrides, unauthorized use of the application (especially when it appears that someone is altering data or ignoring/tampering with processes), reconciliations, and application performance (such as after a power outage or server failure).”

Obviously, finance department staff have an even more important role in monitoring this information too. While online banking is great, it’s unwise for even an individual consumer to not regularly review banking transactions. Great risk was introduced by not reviewing for six months and hoping that everything was okay. Cities need to become more proactive at monitoring and reviewing important aspects of their operations where data changes constantly—from accounts payable to information technology.

4. Lack of modernization.

Many cities often hear the word “modernize” and think of it as “unnecessarily wasting money or time on something new and fancy that we don’t need.” Sure, some solutions might fit that definition. But technology modernization is important especially when your old technologies and processes lead to security vulnerabilities, inefficient operations, and significant liability.

In the case of Miami Beach, the city manager’s report includes many “sudden” modernizations in one fell swoop such as ACH fraud controls and using UPIC (Universal Promotional Identification Code) to avoid sharing confidential banking information. The city manager even notes in the report that “the ACH Fraud Control program already prevented an unauthorized ACH transfer.”

I know we beat this drum a lot. But why do cities wait? Why do cities put off modernizing their technology and processes until a massive crisis hits? We see this “putting off” logic holds true at many cities for data backup, disaster recovery, website hosting, records and document management, email, and aging hardware. In all of these cases, lack of modernization increases the risk of a significant city incident or disaster.
Learn from cities like Miami Beach. Are you sure that fraudsters aren’t currently stealing money from you? Is your technology modernized in such a way that you aren’t headed for a major disaster like permanent data loss?

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