Breach disclosure laws have 'no effect' on identity theft

Breach disclosure laws have 'no effect' on identity theft
Breach disclosure laws have 'no effect' on identity theft 

By John Leyden
Channel Register
5 Jun 2008

Widespread information security breach laws in the US have failed to do 
much to reduce identity theft. The finding, by researchers at Carnegie 
Mellon University, comes as calls are growing in Europe to enact laws 
that would oblige organisations to notify customers in cases where their 
personal details become exposed.

The researchers based their findings on a state-by-state analysis of 
data from the US Federal Trade Commission (FTC). They looked at identity 
theft complaints made to the FTC in the four years between 2002 and 
2006, hunting for changes after states introduced data breach disclosure 
laws. Over recent years, 43 states have followed the lead of California 
and introduced breach disclosure regulations.

The FTC has invited people to submit complaints about identity theft 
through its website since 1999. Only a minority of victims make such 
reports, which are used by law enforcement agencies to look for crime 
trends. In 2006, for example, 246,035 identity theft reports were 
submitted to the FTC out of an estimated total of 8.9 million incidents 
where fraudsters had secured loans, goods or lines of credit under false 

The Carnegie Mellon team used freedom of information requests to obtain 
a state-by-state breakdown on these reports.

The researchers found that factors such as changes in average income and 
population in a state, as well as overall levels of fraud had a much 
greater effect on fraud rates, as explained in an abstract to the paper 

    We find no statistically significant effect that laws reduce 
    identity theft, even after considering income, urbanisation, 
    strictness of law and interstate commerce. If the probability of 
    becoming a victim conditional on a data breach is very small, then 
    the law's maximum effectiveness is inherently limited. Quality of 
    data and the possibility of reporting bias also make proper 
    identification difficult. However, we appreciate that these laws may 
    have other benefits such as reducing a victim's average losses and 
    improving a firm's security and operational practices.

"There doesn't seem to be any evidence that the laws actually reduce 
identity theft," Sasha Romanosky, a PhD student at Carnegie Mellon and 
one of three authors of the study, told Computerworld.

Romanosky, who worked in computer security at eBay and Morgan Stanley 
before deciding to pursue his doctorate, acknowledged that the data 
sample the Carnegie Mellon analysed is incomplete and based on a 
self-selecting sample of people prepared to report that they'd become a 
victim of fraud. Nonetheless he suggested that the methodology of the 
study is strong enough, and its findings are clear enough, to raise 
doubts about the conventional wisdom that breach disclosure laws provide 
a useful means to alert customers that their data has been compromised. 
The idea is that, once notified, consumers will be more on their guard 
about possible incidents of fraud.

Disclosure laws are also designed to encourage firms to improve their 
security policies or else risk the threat that any information security 
breach would force a public disclosure that might tarnish their brand.

Although the researchers found little benefit in breach laws, at least 
in terms of reducing identity theft, the Carnegie Mellon team advocate 
the adoption of federal breach disclosure laws featuring standard 
notification requirements. Federal laws in the area make compliance 

The Carnegie Mellon team's research is due to be presented at a 
conference on the economics of information security to be held at 
Dartmouth College later this month. The paper, entitled Do Data Breach 
Disclosure Laws Reduce Identity Theft?, can be found here (PDF) [1].

Economists and security watchers are split over whether or not corporate 
data breaches fuel identity theft. Some reckon dumpster diving and 
phishing scams are a more significant contributory factor to ID theft.

Javelin Strategy & Research, reckons that 30 per cent of known identity 
thefts in 2005 came as a result of corporate data breaches. Collectively 
losses from identity theft came to $56bn in 2005, it reckons.

However other research cited by the Carnegie team found that the chances 
of becoming a victim of identity theft as a result of a data breach is 
small, around only two per cent.

Separately a survey by UK-based net security firm ClearSwift found that 
a large majority (87 per cent) of UK-based IT decision-makers don't 
think the general public ought to be informed if a data breach happens. 
Over half (61 per cent) of the 400 senior techies surveyed also reckon 
that it's preferable not to let the police know of breaches either.

Half those quizzed (49 per cent) reckon that data breach notification 
legislation would push up IT spending by at least 5 per cent.


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