The ChoicePoint fiasco has been news for over a week now, and there are only a few things I can add. For those who haven't been following along, ChoicePoint mistakenly sold personal credit reports for about 145,000 Americans to criminals.
This story would have never been made public if it were not for SB 1386, a California law requiring companies to notify California residents if any of a specific set of personal information is leaked.
ChoicePoint's behavior is a textbook example of how to be a bad corporate citizen. The information leakage occurred in October, and it didn't tell any victims until February. First, ChoicePoint notified 30,000 Californians and said that it would not notify anyone who lived outside California (since the law didn't require it). Finally, after public outcry, it announced that it would notify everyone affected.
The clear moral here is that first, SB 1386 needs to be a national law, since without it ChoicePoint would have covered up their mistakes forever. And second, the national law needs to force companies to disclose these sorts of privacy breaches immediately, and not allow them to hide for four months behind the "ongoing FBI investigation" shield.
More is required. Compare the difference in ChoicePoint's public marketing slogans with its private reality.
From "Identity Theft Puts Pressure on Data Sellers," by Evan Perez, in the 18 Feb 2005 Wall Street Journal:
The current investigation involving ChoicePoint began in October when the company found the 50 accounts it said were fraudulent. According to the company and police, criminals opened the accounts, posing as businesses seeking information on potential employees and customers. They paid fees of $100 to $200, and provided fake documentation, gaining access to a trove of personal data including addresses, phone numbers, and social security numbers.
From ChoicePoint Chairman and CEO Derek V. Smith:
ChoicePoint's core competency is verifying and authenticating individuals and their credentials.
The reason there is a difference is purely economic. Identity theft is the fastest-growing crime in the U.S., and an enormous problem elsewhere in the world. It's expensive -- both in money and time -- to the victims. And there's not much people can do to stop it, as much of their personal identifying information is not under their control: it's in the computers of companies like ChoicePoint.
ChoicePoint protects its data, but only to the extent that it values it. The hundreds of millions of people in ChoicePoint's databases are not ChoicePoint's customers. They have no power to switch credit agencies. They have no economic pressure that they can bring to bear on the problem. Maybe they should rename the company "NoChoicePoint."
The upshot of this is that ChoicePoint doesn't bear the costs of identity theft, so ChoicePoint doesn't take those costs into account when figuring out how much money to spend on data security. In economic terms, it's an "externality."
The point of regulation is to make externalities internal. SB 1386 did that to some extent, since ChoicePoint now must figure the cost of public humiliation when they decide how much money to spend on security. But the actual cost of ChoicePoint's security failure is much, much greater.
Until ChoicePoint feels those costs -- whether through regulation or liability -- it has no economic incentive to reduce them. Capitalism works, not through corporate charity, but through the free market. I see no other way of solving the problem.
Posted on February 23, 2005 at 3:19 PM • 36 Comments