Identity-Theft Disclosure Laws
California was the first state to pass a law requiring companies that keep personal data to disclose when that data is lost or stolen. Since then, many states have followed suit. Now Congress is debating federal legislation that would do the same thing nationwide.
Except that it won't do the same thing: The federal bill has become so watered down that it won't be very effective. I would still be in favor of it -- a poor federal law is better than none -- if it didn't also pre-empt more-effective state laws, which makes it a net loss.
Identity theft is the fastest-growing area of crime. It's badly named -- your identity is the one thing that cannot be stolen -- and is better thought of as fraud by impersonation. A criminal collects enough personal information about you to be able to impersonate you to banks, credit card companies, brokerage houses, etc. Posing as you, he steals your money, or takes a destructive joyride on your good credit.
Many companies keep large databases of personal data that is useful to these fraudsters. But because the companies don't shoulder the cost of the fraud, they're not economically motivated to secure those databases very well. In fact, if your personal data is stolen from their databases, they would much rather not even tell you: Why deal with the bad publicity?
Disclosure laws force companies to make these security breaches public. This is a good idea for three reasons. One, it is good security practice to notify potential identity theft victims that their personal information has been lost or stolen. Two, statistics on actual data thefts are valuable for research purposes. And three, the potential cost of the notification and the associated bad publicity naturally leads companies to spend more money on protecting personal information -- or to refrain from collecting it in the first place.
Think of it as public shaming. Companies will spend money to avoid the PR costs of this shaming, and security will improve. In economic terms, the law reduces the externalities and forces companies to deal with the true costs of these data breaches.
This public shaming needs the cooperation of the press and, unfortunately, there's an attenuation effect going on. The first major breach after California passed its disclosure law -- SB1386 -- was in February 2005, when ChoicePoint sold personal data on 145,000 people to criminals. The event was all over the news, and ChoicePoint was shamed into improving its security.
Then LexisNexis exposed personal data on 300,000 individuals. And Citigroup lost data on 3.9 million individuals. SB1386 worked; the only reason we knew about these security breaches was because of the law. But the breaches came in increasing numbers, and in larger quantities. After a while, it was no longer news. And when the press stopped reporting, the "cost" of these breaches to the companies declined.
Today, the only real cost that remains is the cost of notifying customers and issuing replacement cards. It costs banks about $10 to issue a new card, and that's money they would much rather not have to spend. This is the agenda they brought to the federal bill, cleverly titled the Data Accountability and Trust Act, or DATA.
Lobbyists attacked the legislation in two ways. First, they went after the definition of personal information. Only the exposure of very specific information requires disclosure. For example, the theft of a database that contained people's first initial, middle name, last name, Social Security number, bank account number, address, phone number, date of birth, mother's maiden name and password would not have to be disclosed, because "personal information" is defined as "an individual's first and last name in combination with ..." certain other personal data.
Second, lobbyists went after the definition of "breach of security." The latest version of the bill reads: "The term 'breach of security' means the unauthorized acquisition of data in electronic form containing personal information that establishes a reasonable basis to conclude that there is a significant risk of identity theft to the individuals to whom the personal information relates."
Get that? If a company loses a backup tape containing millions of individuals' personal information, it doesn't have to disclose if it believes there is no "significant risk of identity theft." If it leaves a database exposed, and has absolutely no audit logs of who accessed that database, it could claim it has no "reasonable basis" to conclude there is a significant risk. Actually, the company could point to a study that showed the probability of fraud to someone who has been the victim of this kind of data loss to be less than 1 in 1,000 -- which is not a "significant risk" -- and then not disclose the data breach at all.
Even worse, this federal law pre-empts the 23 existing state laws -- and others being considered -- many of which contain stronger individual protections. So while DATA might look like a law protecting consumers nationwide, it is actually a law protecting companies with large databases from state laws protecting consumers.
So in its current form, this legislation would make things worse, not better.
Of course, things are in flux. They're always in flux. The language of the bill has changed regularly over the past year, as various committees got their hands on it. There's also another bill, HR3997, which is even worse. And even if something passes, it has to be reconciled with whatever the Senate passes, and then voted on again. So no one really knows what the final language will look like.
But the devil is in the details, and the only way to protect us from lobbyists tinkering with the details is to ensure that the federal bill does not pre-empt any state bills: that the federal law is a minimum, but that states can require more.
That said, disclosure is important, but it's not going to solve identity theft. As I've written previously, the reason theft of personal information is so common is that the data is so valuable. The way to mitigate the risk of fraud due to impersonation is not to make personal information harder to steal, it's to make it harder to use.
Disclosure laws only deal with the economic externality of data brokers protecting your personal information. What we really need are laws prohibiting credit card companies and other financial institutions from granting credit to someone using your name with only a minimum of authentication.
But until that happens, we can at least hope that Congress will refrain from passing bad bills that override good state laws -- and helping criminals in the process.
This essay originally appeared on Wired.com.
EDITED TO ADD (4/20): Here's a comparison of state disclosure laws.
Posted on April 20, 2006 at 8:11 AM • 34 Comments