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Tax season is miserable for many because it means having to cut a check to the IRS.  But it’s not just Uncle Sam who’s interested in your money.  Scammers are also looking to get paid, and they’ll do it by stealing personal information.  Employees tasked with preparing tax forms, like human resources (HR) professionals, are prime targets of scams.  Using various forms of subterfuge, scammers convince HR to hand over private information about an employee, which they’ll then use to file false tax refund claims.  The surge in tax scams has prompted the IRS to issue multiple alerts and host National Tax Security Awareness Week last December to educate the public about tax-related cybercriminal activity.

What’s the scam?

Scammers impersonate people whom the victim is likely to trust, like a well-known service provider (e.g., FedEx) or a person with a legitimate need for access to sensitive information (e.g., an IRS agent).  This is known as “spoofing.”  Sometimes a “spoofed” email tries to get the recipient to open an attachment containing a virus or click on a link to a malicious site (which might look legitimate).  A specific type of spoofing attack known as “phishing” aims to convince the victim to divulge personal or financial information.  For example, a phisher posing as an employee might email the HR department for a copy of his W-2 form.  Even more targeted is a “spear phishing” attack aimed at a specific individual.  The IRS has warned of spear phishing schemes involving emails to an HR professional sent from the spoofed email address of a C-suite executive.  The email will ask the HR professional to send a tax form or to provide information about an employee supposedly for a tax filing. Once the scammer has the information, he or she will file a tax refund under the employee’s name.

Protective measures

The best way to avoid being a victim of a phishing attack is to raise awareness.  Employees should be regularly trained to practice the following defensive measures:

  • Be suspicious of all email requests for confidential information, even if they come from high-level personnel within the company. Tell-tale signs are spelling or grammatical errors or language that the sender doesn’t typically use.
  • Confirm requests for confidential information by calling the requester.
  • Avoid sending confidential information electronically. Hand deliver the information or send it by mail to a verified address.
  • If confidential information has to be transmitted electronically, encrypt it before sending.
  • Never send confidential information by hitting the “reply” button. If an email is spoofed, the reply email will go to the imposter.  Instead, compose a new email and manually type in the email addresses of the recipient.
  • Apply extreme caution when opening attachments. Never open an attachment with the .exe extension.  Note that an attachment might be altered to look like an ordinary word processing document, spreadsheet, or PDF.  When in doubt, send your IT department a screenshot of the email and consult with them on what to do next.

Responding to a security breach

In the unfortunate event that a company falls victim to a phishing attack, it should immediately gather facts about the incident including the number of employees involved, where the affected employees are located, what information was stolen, and whether the stolen information has been put to use.  Consult with a lawyer to determine next steps.  In Hawaii (as in many states), a business is legally obligated to provide notice to victims of a security breach.  Experienced counsel can navigate the company through data breach notification laws and advise on liability and remedial measures to take.

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The National Labor Relations Board (NLRB) recently took the unprecedented position that an employer violated federal law by failing to engage its employees’ union in collective bargaining regarding its response to a data breach. The U.S. Postal Service (USPS) was the target of a 2014 data breach affecting over 800,000 of its current and former employees. The NLRB filed complaints against the USPS claiming that it executed its response to the breach without engaging in collective bargaining with the union. That’s a violation of National Labor Relations Act (NLRA) provisions mandating collective bargaining for any issue that relates to the “wages, hours, and other terms and conditions of employment,” the NLRA alleged.

The NLRB complaints specifically allege that the USPS violated the NLRA by failing to collectively bargain with the union about the impact of the breach on union members. The USPS also allegedly violated the NLRA by unilaterally providing a remedy for the breach (one year of credit monitoring services and fraud insurance at no cost to employees) without giving prior notice to the union and providing it with an opportunity to negotiate the remedy. The NLRB complaints arose from charges filed by the American Postal Workers Union and the National Rural Letter Carriers’ Association regarding the manner in which the USPS handled the breach.

This marks the first time the NLRB has suggested that data breach response and notification measures affecting employees relate “to the wages, hours, and other terms and conditions of employment” under the NLRA. If the NLRB’s position is found to have merit, that potentially makes the breach response process more complicated and costly for unionized organizations. Union negotiations would need to be conducted at the same time the organization is dealing with fallout from the data breach, such as repairing damage to internal systems, investigating the breach, and complying with breach notification laws. Union negotiations could put tremendous pressure on organizations trying to comply with data breach laws that require notification within a short time period after discovery of the breach. There is also a heightened risk of leaks to the press if organizations must notify unions before giving formal notification as required by law.

The NLRB’s complaints against the USPS reinforce the urgency of developing well-crafted breach response plans. Union organizations might wish to add items to their response plans that engage employee unions in the response process. Another precautionary measure is to solicit the input of the union in developing acceptable breach response protocols before a breach occurs rather than in the midst of a crisis situation.

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Target. Home Depot. Neiman Marcus. This isn’t a list of places to shop. These companies were hit with some of the biggest data breach incidents of 2014. And, as the recent hack on Sony Pictures Entertainment demonstrates, it’s not just the customer information that gets compromised in cyberattacks—employees can also be the victims.

In November, hackers broke into Sony’s computer systems and stole personal information of over 47,000 current and former employees, celebrities, and freelancers. The information included personal emails, budgets, salary information, human resource records, and other private (and embarrassing) documents. Some of the stolen information was leaked online, including a spreadsheet containing names, birth dates, and Social Security numbers of over 3,000 employees. Buzzfeed reports that the 40 gb data dump contains email exchanges between Sony and its employees regarding very sensitive matters, such as their medical treatments, disciplinary action, and inter-office romance.

The ease with which the hackers did their dirty work is eye-opening. The attack was carried out with widely available malware. It didn’t help that Sony’s security measures were shockingly subpar. Sony had failed to encrypt the leaked files. One of the stolen files containing login credentials to Sony computers and servers and other online accounts was quite obviously named “Passwords.”

Sony apparently made a conscious decision not to beef up its security. In 2007, Sony’s then-executive director information security, Jason Spaltro, said in an interview that it was a “valid business decision to accept the risk” of a security breach, and that he would not invest $10 million to avoid a possible $1 million in loss. A team of just 11 employees was responsible for maintaining the security systems for Sony’s 7,000 employees. A September 2014 security audit report showed gaps in Sony’s security procedures, such as failure to monitor one firewall and more than 100 other devices.

In the aftermath of the attack, Sony is facing four lawsuits. Three of the lawsuits allege that Sony failed to take adequate precautions to guard against known weaknesses in the security of its computer systems. Another lawsuit accuses Sony of waiting too long to notify employees that their personal data had been stolen.

What should companies do to protect themselves against a data breach like Sony’s? Be sure to develop administrative, physical, and technical safeguards over personal information handled by your company. At minimum, use encryption technology. If a third party handles personal information of your employees or customers, contractually require them to exercise reasonable care and to report security breaches immediately. Another precautionary measure is to conduct periodic security audits and risk analyses of information systems.

If a data breach involves a business located in Hawaii or one that does business in Hawai‘i and maintains or possesses personal information of Hawaii residents, Hawaii law requires the business to notify persons affected by the breach. If notice is provided to 1,000 persons or more at once, the State Office of Consumer Protection and credit reporting agencies must also be notified. Companies should prepare data breach procedures in advance so that a clearly charted process for complying with applicable notification laws is available in the chaos ensuing after a data breach incident.

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LinkedIn announced on June 6 that it experienced a data breach compromising the passwords of some of its members.   Ten days later, LinkedIn got hit with a class action lawsuit.  The lawsuit was filed in a California federal district court.  You can read the complaint here.

A few key points about the lawsuit:

  • The plaintiffs consist of two classes — (1) anyone in the U.S. who had a LinkedIn account on or before June 6, 2012, and (2) anyone in class #1 who paid for a premium account.
  • The lawsuit alleges that LinkedIn did not comply with industry standard encryption protocols, contrary to its Privacy Policy.  Specifically, the plaintiffs contend that LinkedIn stored member passwords in “unsalted SHA1 hashed format.”
    • In simple terms, adding “salt” to a password means assigning random values to a password to make it more difficult to decipher.  For example, if the password were “JohnDoe,” you could salt it by adding the characters “5a6b7c,” giving you “JohnDoe5a6b7c.”
    • Hashing refers to the process of running a password into a cryptographic function to convert it into an unreadable and encrypted format.  The plaintiffs say that LinkedIn used an outdated hashing function that was first published by the NSA in 1995.
    • The plaintiffs say that LinkedIn should have at least salted the passwords before running them through the hash function.  Better yet, LinkedIn should have salted the passwords, input them into the hash function, salt the resulting hash value, and then run the hash value through a hash function.   Then, LinkedIn should have stored the fully encrypted password on a separate and secure server apart from all other user information.
  • The lawsuit brings claims based on California’s unfair competition law, California’s Consumers Legal Remedies Act, breach of contract, breach of implied covenant of good faith and fair dealing, breach of implied contract, and negligence.
  • The plaintiffs in the first class (all LinkedIn users) say they were in the form of loss of value in their personal information.  (Whether the court will accept that damage theory is questionable.)  Those in the second class (premium members who paid fees) say they were injured in the form of the fees they paid to LinkedIn for premium membership.