Cyber Crime: Think of A Number and Double It

Businesses would benefit from reliable information on cyber crime’s costs.
Economist StaffJanuary 20, 2015
Cyber Crime: Think of A Number and Double It

Chick-fil-A, a fast-food chain, and Morgan Stanley, a bank, have in recent days joined a long list of big American companies to admit that their systems have been hacked into, putting customers’ financial information at risk. But how many businesses suffer from cyber crime, and how much it ultimately costs them, are huge unknowns. In part this is because much hacking goes undetected, and partly it is because businesses sometimes try to cover up breaches of data security, to avoid embarrassment.

On January 12 President Obama launched a new drive to improve data security and privacy, to include a new Personal Data Notification and Protection Act. This would require companies to tell customers within 30 days of discovering that their information has been hacked into.

At the moment, Obama noted, there is a patchwork of state-level laws that offer consumers scant protection. In the absence of a strong and well-enforced federal disclosure law, the losses businesses suffer from hacking are anyone’s guess. Most of the numbers bandied about are from internet-security firms, and come accompanied by “a lot of hype,” says Troels Oerting of the European Cyber-crime Centre, part of Europol, the European Union’s policing agency. As a result, some businesses either overspend or misdirect their spending on data protection, he says, paying perhaps $100 for every $50 of losses prevented.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

If there were more disclosure, and thus more information on the amount, types and costs of cyber crime, companies would know better how to spend their information-security budgets. It would also be easier to work out what sort of insurance cover to buy. American firms’ spending on cyber-liability cover jumped from $1.3 billion in 2013 to roughly $2 billion in 2014, says Andreas Schlayer, a senior underwriter at Munich Re of Germany.

Most American states have laws requiring some sort of disclosure of hacking attacks. But “a good portion” of firms still do not announce them for fear of damage to their brands, notes Mark Greisiger of NetDiligence, a Pennsylvanian cyber-security firm. European countries generally do not require disclosure, so even fewer firms there bother, says Costin Raiu of Kaspersky Lab, a Russian internet-security firm.

Firms that do acknowledge losses struggle to quantify them. In a survey last year of 4,881 security practitioners in 15 countries by the Ponemon Institute in Michigan, 35% of organizations subject to a successful intrusion were unsure of exactly which records the thieves had copied.

Even if it is known what information has been taken, calculating the cost is still hard. If a shipyard has details of a big contract negotiation stolen at the behest of a rival, how can it be sure it would not have lost the deal anyway? How will Sony Pictures measure the damage from having executives’ e-mails, containing disparaging comments about its stars, released on the internet? A comprehensive and robust methodology for estimating such costs does not exist yet, says Roberto Baldoni, who heads a cyber-intelligence center at La Sapienza University in Rome.

Dmitri Alperovitch, a founder of CrowdStrike, a Californian security firm, says that cyber-attacks appear to be picking up significantly but attempting to estimate the damage is futile. Most figures will be “wack,” he says, “so we’d rather not play that game.” Plenty of other outfits, however, do publish estimates.

Consider one from a 2014 study by the Center for Strategic and International Studies, a think-tank in Washington, D.C. Cyber-crime, it concluded, bleeds between $300 billion and $1 trillion from businesses worldwide each year. One of the study team says that good data were so scarce, they had joked about publishing the findings along with an online random-number generator that readers could click on until it produced an estimate to their liking. “That was a little depressing,” he says.

The study was sponsored by McAfee, a large American seller of antivirus software. Its own 2009 calculation of the global cost to businesses produced the figure of more than $1 trillion. This was roundly derided as bloated, even by researchers who had provided McAfee with data from which the estimate was extrapolated. One of them, Eugene Spafford, a Purdue University computer scientist, said he was “really kind of appalled” by the exaggeration. McAfee republished the number in 2011. It still circulates.

Every Crime’s a Cyber Crime

The weakness of many estimates is partly due to bogus definitions, says Ross Anderson, a security-engineering expert at the University of Cambridge in Britain. Tax returns and claims for insurance, welfare benefits and reimbursement for company travel are increasingly filed online. This has emboldened many to lump tax, insurance, benefit and expenses fiddles together with genuine cyber-crime and, “hey, ching!” produce enormous numbers, he says.

Surveying 1,000 voters about their preferences can often be a good predictor of an election outcome. Most cyber-crime estimates are based on surveys, too, but there is a big difference. Respondents are asked to provide speculative numbers rather than report preferences. This often leads to huge errors. Say that companies cumulatively producing a quarter of a percent of gross domestic product reply to a cyber-crime survey. A single firm’s exaggeration by $1 million adds a bogus $400 million to the tally when scaled up to reflect the entire national economy.

Firms which have suffered a loss, or suspect they have, are likely to be more willing to fill out a cyber-crime questionnaire than those with no such worries. So there is bound to be an inbuilt bias towards overestimating losses. A research paper from Microsoft, “Sex, Lies and Cyber-crime Surveys,” concludes that “no faith” should be placed in numerical estimates derived by means of this multiplication trick.

Glimmers of hope for better estimates are on the horizon. Like the American administration, the European Union is also drafting legislation to force firms to provide full and prompt information about hacking attacks. The effort put into quantifying the harm done will grow as insurance claims and lawsuits multiply. (Home Depot, an American hardware retailer, faces at least 21 suits over customer data it lost last year.) The losses that hackers cause to businesses may sometimes be exaggerated, but they are significant—and almost certainly growing.

© The Economist Newspaper Limited, London (January 17, 2015)

Featured image: Thinkstock