Monday, February 1, 2010

Cyber Security Threat Management in Outsourcing: The Coming National Security Regulation of ITO, BPO and KPO

Imminent national regulation of Internet-based services will impact all companies that use the Internet for project management, collaboration, and remote transaction processing. Google and China have precipitated a showdown that may cause the extension of a web (!) of national of Internet regulations, with many consequences on the freedom and costs of running a global business or servicing customers remotely. The showdown highlights the fact that cybersecurity threats come from many sources, including foreign nation states, domestic criminals and hackers and disgruntled employees.

On January 12, 2010, Google Inc. announced by blog that it had been the target of concerted attacks from Chinese hackers, that its intellectual property had been compromised and that the attacks targeted the identities of its subscribers. See press release, . Google’s blog revealed that “at least twenty other large companies from a wide range of businesses—including the Internet, finance, technology, media and chemical sectors” were affected. The Wall Street Journal reported that 34 U.S. companies were targets, including Adobe Systems Inc. and Juniper Networks Inc. Other companies such as Symantec acknowledged they are under constant siege of cyberattacks. Cyber warfare attacks have been reportedly used in Iran to ferret out political dissidents and in Georgia to overload telecommunications during military exercises. China filters Internet content through registration and regulation of Internet services.

Cybersecurity is a critical foundation for any country’s national security and economic security and, indirectly, global trade in IT-enabled services and in the global supply chain. Information networks support financial services, energy, telecommunications, transportation, health care, and emergency response systems, as well as ordinary commerce, employment, education, civil liberties and social and family cohesion. The security of private information networks, such as Google, Yahoo, Symantec and Juniper Networks and the underlying software such as Adobe Systems and Microsoft, are the foundation for today’s global economy.

In global sourcing, cyber security is an essential commitment by anyone business seeking to acquire and be a trusted custodian of personally identifiable information (“PII”). If enterprises (“data controllers” under the European Union Data Protection Directive) are going to gather PII and contract with service providers (“data processors”) to process it, the risk of cyber attacks frames the debate on risk allocation, roles, responsibilities, pricing and process integration.

For all participants in the outsourcing industry, it’s time to fresh look at legal structures and financial implications of cybersecurity.

Existing General U.S. Cybersecurity Laws. Current U.S. legislation and regulations already require cybersecurity compliance, audit, certification and compliance generally. Special cybersecurity mandates arise under the Health Insurance Portability and Accountability Act (“HIPAA”) of 1996, the Sarbanes-Oxley Act of 2002 (“Sox”), state security breach notification legislation and credit card rules applicable to banking transactions (the “PCI rules”). The Computer Fraud and Abuse Act, 18 USC 1030, protects against unauthorized disclosure of most computer data. In addition to securities regulations on insider trading, common law also imposes cybersecurity mandates on lawyers and others receiving confidential financial information. Other cybersecurity rules exist in other legislation:

(1) the Privacy Protection Act of 1980 (42 U.S.C. 2000aa);
(2) the Electronic Communications Privacy Act of 1986 (18 U.S.C. 2510 note);
(3) the Computer Security Act of 1987 (15 U.S.C. 271 et seq.; 40 U.S.C. 759);
(4) the Federal Information Security Management Act of 2002 (44 U.S.C. 3531 et seq.);
(5) the E-Government Act of 2002 (44 U.S.C. 9501 et seq.);
(6) the Defense Production Act of 1950 (50 U.S.C. App. 2061 et seq.);
(7) any other Federal law bearing upon cyber-related activities; and
(8) any applicable Executive Order or agency rule, regulation, guideline.

But there are no laws mandating that small business or individuals adopt cybersecurity standards (other than general rules).

Public and Private Assets: “Critical Infrastructure” and “Protected Systems.” Already, the cybersecurity jurisdiction of the Department of Homeland Security applies to both “critical infrastructure” and “protected systems.” The concept of “protected system” would extend the more restrictive concept of “critical infrastructure” to virtually any private computer network. A “protected system” would mean “any service, physical or computer-based system, process, or procedure that directly or indirectly affects the viability of a facility of critical infrastructure.” It would include “any physical or computer-based system, including a computer, computer system, computer or communications network, or any component hardware or element thereof, software program, processing instructions, or information or data in transmission or storage therein, irrespective of the medium of transmission or storage.” Homeland Security Act, Sec. 212. In short, national security and economic security mean that public and private assets will be managed as one suite of assets at risk.

Special Purpose Legislation: Electrical Grids. According to legislation proposed in April 2009, “According to current and former national security officials, cyber spies from China, Russia, and other countries have penetrated the United States electrical system in order to map the system, and have left behind software programs that could be used to disrupt and disable the system.” Proposed “Critical Electric Infrastructure Protection Act,” H.R. 2195, An Act to amend the Federal Power Act to provide additional authorities to adequately protect the critical electric infrastructure against cyber attack, and for other purposes, 111th Cong, 1st Sess. The proposed law would require the Secretary of Homeland Security, working with other national security and intelligence agencies, to “conduct research and determine if the security of federally owned programmable electronic devices and communication networks (including hardware, software, and data) essential to the reliable operation of critical electric infrastructure have been compromised,” including “the extent of compromise, identification of attackers, the method of penetration, ramifications of the compromise on future operations of critical electric infrastructure, secondary ramifications of the compromise on other critical infrastructure sectors and the functioning of civil society, ramifications of compromise on national security, including war fighting capability, and recommended mitigation activities.” Preamble. In short, the new law (if enacted) would amend the Homeland Security Act of 2002 (6 U.S.C. 133(i)) to require special studies to “ensure the security and resilience of electronic devices and communication networks essential to each of the critical infrastructure sectors.”

Pending General Cybersecurity Legislation: Cybersecurity Act of 2009. In April 2009, Sen. Jay Rockefeller (D., W. Va.) introduced a draft Cybersecurity Act of 2009, S 773, 111th Cong., 1st Sess. The bill’s long-form name is “An Act To ensure the continued free flow of commerce within the United States and with its global trading partners through secure cyber communications, to provide for the continued development and exploitation of the Internet and intranet communications for such purposes, to provide for the development of a cadre of information technology specialists to improve and maintain effective cyber security defenses against disruption, and for other purposes.” The draft focuses on the commercial impact of cyber espionage: “Since intellectual property is now often stored in digital form, industrial espionage that exploits weak cybersecurity dilutes our investment in innovation while subsidizing the research and development efforts of foreign competitors. In the new global competition, where economic strength and technological leadership are vital components of national power, failing to secure cyberspace puts us at a disadvantage.” S. 773, Sec. 2 (2). The drafters warned that the nation is unprepared for “a massive cyber disruption [that] could have a cascading, long-term impact without adequate co-ordination between government and the private sector.” S. 773, Sec. 2 (6).

Cybersecurity Advisory Panel. The draft law contemplates the appointment of a panel of advisors to include “representatives of industry, academic, non-profit organizations, interest groups and advocacy organizations, and State and local governments who are qualified to provide advice and information on cybersecurity research, development, demonstrations, education, technology transfer, commercial application, or societal and civil liberty concerns.” S. 773, Sec. 3(b)(i).

Cybersecurity Dashboard. The bill would also “implement a system to provide dynamic, comprehensive, real-time cybersecurity status and vulnerability information of all Federal Government information systems and networks managed by the Department of Commerce.” S. 773, Sec. 4.

Cybersecurity Institute. Under the bill, the Secretary of Commerce would provide assistance for the creation and support of “Regional Cybersecurity Centers” for the promotion and implementation of cybersecurity standards. Each Center would be affiliated with a United States-based nonprofit institution or organization, or consortium thereof, that applies for and is awarded financial assistance. Such centers would seek to enhance the cybersecurity of small and medium sized businesses and industrial firms in United States through the dissemination and transfer of cybersecurity standards, processes, technology, and techniques developed at the National Institute of Standards and Technology (“NIST”). S. 773, Sec. 5(a). This approach reflects other draft legislation, such as the Cybersecurity Enhancement Act of 2009, HR 4061, 111th Cong., 1st Sess., for cybersecurity research, development, education and technical standards for identity management technologies, authentication and security protocols, expanding on the existing Cyber Security Research and Development Act (15 U.S.C. 7401).

Licensing of Cybersecurity Professionals. The draft law would require a national licensing, certification, and periodic recertification program, under the aegis of the Department of Commerce, for cybersecurity professionals (defined as “providers of cybersecurity services”). Such licensing would effectively submit all outsourcing service providers to U.S. federal jurisdiction and enforcement of cybersecurity compliance standards. S. 773, Sec. 7.

Federal Standards. Within a year after enactment, the NIST would be required to “establish measurable and auditable cybersecurity standards for all Federal Government, government contractor, or grantee critical infrastructure information systems and networks.” These would include standards for

(1) security controls that are known to block or mitigate known attacks;
(2) the software security, including a separate set of such standards for measuring security
in embedded software such as that found in industrial control systems;
(3) standard computer-readable language for completely specifying the configuration of
software on computer systems widely used in the Federal Government, by government
contractors and grantees, and in private sector owned critical infrastructure information
systems and networks;
(4) standard configurations for security settings for operating system software and software
utilities widely used in the Federal Government, by government contractors and grantees,
and in private sector owned critical infrastructure information systems and networks; and
(5) sniffer standards to identify vulnerabilities in software to enable software vendors to
communicate vulnerability data to software users in real time.

The NIST would establish a standard testing and accreditation protocol for all software built by or for the Federal Government, its contractors, and grantees, and privately owned critical infrastructure information systems and networks. The testing would occur during the software development process and on acceptance prior to deployment of software.

International Standards. The draft Cybersecurity Act of 2009 would require the U.S. to participate in setting international standards for cybersecurity. But it stops short of any hope for an international law on cybersecurity. It does not call for a convention on cybersecurity. Certainly any negotiations for such a convention could lead to a “least common denominator” of weak standards and political excuses. In light of the impact on trade in services, certainly cybersecurity would be a subject that might fall under the mission of the World Trade Organization,, or the Organization for Economic Development, As it is, the International Standards Organization,, would be the probable forum for any such discussions. Also, the bill would require the President to “work with representatives of foreign governments” to develop norms, organizations, and other cooperative activities for international engagement to improve cybersecurity and to encourage international cooperation in improving cybersecurity on a global basis. S. 773, Sec. 21.

Further Legislation. The United States already has several laws governing cyber security. The draft Cybersecurity Act of 2009 would require the President to review and propose changes in existing cybersecurity laws.

“Pulling the Plug” on Impaired Cyber Infrastructure. The Cybersecurity Act would set up a framework for national regulation of the Internet, which currently is controlled by ICANN, a California-incorporated non-profit organization. One of the most controversial provisions in the bill would allow the President to shut down the Internet during a time of crisis. The President would be authorized to declare a cybersecurity emergency and order the limitation or shutdown of Internet traffic to and from any compromised Federal Government or United States critical infrastructure information system or network. S. 773, Sec. 18(2). The President “may order the disconnection of any Federal Government or United States critical infrastructure information systems or networks in the interest of national security.” S. 773, Sec. 18(6). This police power would be generally without judicial review.
Insurance and Risk Disclosure and Mitigation. The bill invites Presidential reports to Congress on ways to manage commercial risks of cyber attacks. Such reports would seek to identify the feasibility of:

(1) creating a market for cybersecurity risk management, including the creation of a system
of civil liability and insurance (including government reinsurance); and

(2) requiring cybersecurity to be a factor in all bond ratings. Sec. 15.

Identity Management; Identity Theft; Civil Liberties. The bill requires the President to present a report on the “feasibility of an identity management and authentication program, with the appropriate civil liberties and privacy protections, for government and critical infrastructure information systems and networks.” This provision creates a balance between national security and civil liberties guaranteed by the Constitution.

Investment in Security. The current appropriations bill for the Department of Homeland Security, for the fiscal year ending September 30, 2010, contemplates a small budget for infrastructure security on the scale contemplated in the draft Cybersecurity Act. See, Pub. L. 111-83, H.R.2892, Department Of Homeland Security Appropriations Act, 2010, 111th Cong., 1st Sess. (Oct. 28, 2009).

Implications for Outsourcing.

New Opportunities for Outsourcing of Cybersecurity. As cybersecurity becomes more complex, new opportunities will emerge for service providers that deliver protected processes complying with new regulatory standards.

Industry Sectors; “Verticals.” Outsourcing services (including shared service centers and captive processing centers) manage many “critical infrastructures” that are essential to national security and economic security. Certain sectors are generally included in the definition of “critical infrastructures”: banking, financial services and insurance (“BFSI”), public utilities (water, telecommunications, transportation, oil and gas and electricity supply), emergency services and government. See John Motoff and Paul Parfomak, “Critical Infrastructure and Key Assets: Definition and Identification,” Cong. Research Service (Oct. 1, 2004), The current statutory definition (established in the USA PATRIOT Act of 2001, Sec. 1016(e) and referenced in the Homeland Security Act of 2002) states:
Systems and assets, whether physical or virtual, so vital to the United States that the
incapacity or destruction of such systems and assets would have a debilitating effect on the
security, national economic security, national public health or safety, or any combination of
those matters.

Under this sweeping definition, virtually all of outsourcing and the economic supply chain of goods and services could be seen as a “critical infrastructure” for regulation, protection and ultimately potential control by the federal government for purposes of security of the government, economy, health and safety.

Covered ITO and BPO Service Providers. The Cybersecurity Act of 2009 would apply new standards to government contractors and grantees and private sector “critical infrastructure systems and networks.” However, in due course, such standards could be applied to all “protected computers” and private computers as well.

Vendor Selection. By adopting national cybersecurity standards, any new federal legislation would impact the selection of competing outsourcing vendors, based on compliance and risk assessments. Smaller vendors, that might comply today with ISO 27000 but not the PCI credit card security standards or any new federal cybersecurity standards, might not be competitive. Their market value might decline, and their selling prices in an acquisition might be lower on the basis of earnings multiples or other valuation metrics.

National Regulation of Cybersecurity. In short, all business and personal computers would be “protected systems” subject to national security protections, including registrations, licensing, compliance and verification. It is clear that the draft law would superimpose itself on all outsourcing contracts that involve the use of any computers. In short, it would apply to all sourcing contracts.

Allocation of Risk for Compliance with Applicable Law. Generally, outsourcing contracts require service providers (including software developers and IT infrastructure support providers) to comply with applicable U.S. law. The draft Cybersecurity Act of 2009 would be implicit in all applications development and maintenance contracts. It would apply to software developed outside the United States.

Extraterritorial Application of National Laws. Currently, the United States and other countries have laws intended to regulate conduct of persons outside their borders that have an impact inside their borders. Such extraterritorial laws include the Foreign Corrupt Practices Act, the Export Administration Act and the International Trade in Arms Regulations. Outsourcing service providers already are expected to comply with such legislation. Service providers should anticipate the extension of national cybersecurity regulation to their operations outside the United States (and other countries where outsourcing customers receive the services). Further, the U.S. Homeland Security department might conduct inspections on foreign territory, subject to local governmental authorization, similar to historical inspections conducted by the Federal Aviation Administration for maintenance and repairs done abroad to U.S. registered aircraft.

Reciprocity between Governments. Protecting outsourcing as an economic process will require governments to collaborate on cybersecurity management. One can easily foresee a new dialogue between the U.S. government and the Government of India, a key source of talent for software development, ITO and BPO, for the mutual adoption of cybersecurity standards, registration, licensing and compliance procedures. A similar dialogue may eventually arise with China, which hopes to promote its technology centers and “software technology parks” as centers of excellence and sources of employment for engineers servicing non-Chinese global enterprises. Similarly, cybersecurity “best practices” are likely to evolve under the aegis of the OECD for economic regulation and NATO for military use.

For related topics:

Privacy, Data Protection and Outsourcing in the United States

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