Insurers’ recalcitrance to providing coverage for the “Business E-mail Compromise” (BEC) scam is a topic we’ve frequently discussed. On Monday, the Ninth Circuit heard oral argument in a BEC coverage action, Taylor & Lieberman v. Federal Insurance Company.
The fraudster in that case sent spoofed e-mails in 2012 to an accounting firm purporting to be from one of the firm’s clients. At the “client’s” request, the accounting firm executed two wire transfers from the client’s bank account, over which the firm had power of attorney, in amounts just under $100,000 each to banks in Malaysia and Singapore. The firm finally detected the scheme when it called the client for confirmation after receiving a third e-mail requesting another transfer of $128,000 to Malaysia. The accounting firm was able to recover most of the first wire transfer but nothing from the second, resulting in a $100,000 loss to the client’s account, which the firm restored.
The coverage landscape for “Business E-mail Compromise” (BEC) scams remains somewhat tenuous, as organizations and carriers continue to battle in court over the extent of coverage. Although recent positive, policyholder-friendly trends in the Eighth Circuit (hacker who took over a bank’s computer system) and federal district court in Georgia (scheme based on spoofing a CEO’s e-mail) found insurance coverage for fraudulently transferred funds, a recent unpublished Fifth Circuit opinion moves in the other direction. Unfortunately, this new ruling—and the uncertainty it creates—may embolden insurers in fighting coverage for these scams under crime insurance policies.
“Business E-mail Compromise” (BEC) scams are becoming an increasing concern. The FBI’s most recent report in June 2016 identified a 1,300% increase in reported incidents, reaching 22,000 victims targeted for $3.1 billion. Policyholders victimized by BEC scams should cheer the most recent decision addressing coverage for such scams. In Principle Solutions Group v. Ironshore Indemnity, a federal district court in Georgia ruled on summary judgment that a commercial crime policy covered a BEC scam in which a fraudster deceived a Principle Solutions employee into wiring $1.72 million to an account in China. The court rejected the insurer’s argument that the wire transfer was not directly caused by the BEC scam.
Principle Solutions suffered a hallmark BEC scam. The fraudster sent a spoofed email, purportedly from Principle Solutions’ CEO, to the company’s controller. The spoofed email instructed the controller to work with a specified attorney to wire funds that day for a highly confidential company acquisition. The controller then received an email from the named “attorney” with the wiring instructions. The “attorney” called the controller, representing that the CEO had approved execution of the wire and emphasizing the urgency of the funds transfer.
The controller initiated the necessary steps to execute the transfer that day. She logged into the company’s online account at its financial institution to enable the transfer approval, instructed another employee to create the wire instructions, and approved the wire transfer. The financial institution’s fraud prevention unit flagged the transaction and requested verification of the wire. The controller called the “attorney” to verify how he had received the wire instructions. The “attorney” told her he had received the instructions verbally from the CEO. The controller relayed this information to the financial institution, which then allowed the transaction to proceed.
The company discovered the fraud the next day when the controller told the CEO she had completed the wire transfer. The company immediately reported the fraud but unfortunately could not recover the funds.
Your company’s controller receives an email instruction from your CEO to wire funds to complete a time-sensitive and confidential deal–seems like a clear directive to execute, but it’s not. It’s an increasingly common scam known as the “Business E-mail Compromise” (BEC).
Cyber criminals posing as company executives have successfully made off with millions from company coffers by tricking company employees into sending them the cash. Insurers are increasingly taking the position that this type of fraud is not covered under cybercrime policies.