Reg E Reform: 'It's a Political Issue'

The biggest story in banking - the clash over who bears responsibility for fraud losses as a result of corporate account takeover - is still flying under the radar for most citizens and politicians.

But Jim Woodhill, Chairman of Authentify, says we're frighteningly close to banking disaster. "We're one viral story - one Susan Boyle -- away from a run on the banks."

In an exclusive interview, Woodhill explains his lobbying effort to amend Reg E to protect businesses, discussing:

  • What he's done so far in Washington, D.C.;
  • How his message has been received;
  • Why he believes legislation is necessary in the fight against corporate account takeover.
  • Woodhill is founder and chairman of Authentify, Inc., and is listed as the inventor on all of Authentify's patents. He has worked in "enterprise" computing for over 40 years, first for customer organizations, then for software vendor companies, and now as a venture investor.

    He sits on the board of Chicago-based Authentify, Inc. and also serves on the Advisory board of San Francisco-based Resilient Networks, Inc. Woodhill holds private equity positions in Secorix, RiskWatch, Datacert, Inc., and Courion Corporation. He was the first professional investor in AnswerLogic (purchased by Primus Knowledge Solutions) and in Securant Technologies, Inc. (purchased by RSA Security). He was on the board of Colorado Springs-based Configuresoft, Inc. from its founding to its acquisition by EMC Corporation in May of 2009.

    TOM FIELD: What is the latest in the fight against ACH fraud, or corporate account takeover? Hi, this is Tom Field, Editorial Director with Information Security Media Group. I am talking today with Jim Woodhill, who has got a unique interest in this case and these incidents. Jim, it's a pleasure to talk with you today.

    JIM WOODHILL: Pleasure to talk to you.

    FIELD: Jim, just for background for our audience, why don't you introduce yourself and tell us a little bit about yourself and your unique interest now in ACH fraud and the damages that are being done.

    WOODHILL: Well, I am the lobbyist for the victims. I am Founder and Chairman of Authentify, Inc., one of the 100 companies that have a product or service that would have stopped every one of these attacks, and the company has been in existence for 10 years because these kinds of attacks were easily anticipated. I don't think we can stop ACH fraud, but we can stop the victims from being stuck with the losses from ACH fraud.

    FIELD: Well, Jim, last week we had the announcement of the PlainsCapital Bank v. Hillary Machinery settlement. How does that impact your efforts in particular to spark new legislation to amend Reg E or just to devise new legislation?

    WOODHILL: Well, the banks of Texas have been kind enough to provide us with three new victims, at least, to take the place of Hillary Machinery, Inc., which has to drop out of the fight, at least with respect to their specific case; so really, no effect at all.

    FIELD: Jim, give us an update on what you have done so far to promote your initiative.

    WOODHILL: Well, it is a very early in a lobbyist effort. We have been to D.C. a number of time and met with members of the House Committee on Financial Services, Subcommittee on Financial Institutions Consumer Credit, and the Senate Banking Committee, Subcommittee on Financial Services, and in just about every case it is a complete surprise and they don't believe you have the story right. It sounds impossible that banks would allow this to happen to their commercial customers. So you have to show them written materials. You have to show them the Fox business news video before they believe they just have the story straight. Once they do, they are shocked and also dismayed that they have not heard of it already, or the staffers have not heard of it already.

    FIELD: So Jim how would you typify they reaction you have received from legislators and their staff as you have told the story?

    WOODHILL: One member of the Subcommittee on Financial Institutions Consumer Credit upon watching the Fox News video said, "I would sue these bastards if it were my campaign fund."

    FIELD: Give us a sense of what needs to be done now. I know you are in Washington now; you are talking to people, what has to be done?

    WOODHILL: Well, that is one of the things that is going to be a major focus of this effort. You know, the people who are opposed to extending Regulation E to commercial accounts, it is not like they have no points at all to make that are valid; it is just that they articulate them very poorly.

    So we have to find out, you know, legislating is a very weighty thing to do and there are always unintended consequences, and we have to make sure that we draw the right balance between the various interests and one that can endure. In that respect, we certainly welcome the participation of the American Bankers Association in finding a way to protect the victims without damaging the financial services institutions, especially the very small ones.

    FIELD: Now, Jim, I spoke with Doug Johnson of the American Bankers Association earlier, and I know you have as well. What you most frequently hear from the banking associations and from financial institutions is the phrase "shared responsibility" when it comes to fraud losses. How do you respond to that?

    WOODHILL: Well I respond to that: Whether it is a shared responsibility or solely the responsibility of the financial services institutions, I don't see a lot of shared in the victims' cases. They get stuck with 100 percent of the losses. That is fundamentally the root political issue, and it is a political issue. It is not a matter for lawyers and judges working off of account agreements and underlying law, UCC 4(a), that were drafted before this crime emerged. This is something the Zeus attacks are something fundamentally new and what to do about crime is always and everywhere a political issue.

    FIELD: Jim, give us a sense of what is truly at stake here for the banks, for the businesses, and for your personally? You are investing lots of time and energy in this now.

    WOODHILL: Well, for the lobbyist effort, all we are trying to do is accelerate the process. At the FDIC Symposium a couple of weeks ago today, they talked about this crime growing five X in just 12 months. They talked about FBI tracking 250 cases; that means it is up from 50 cases 12 months ago. So it isn't a question of what will happen, it is a question of when it will happen. All we are trying to do as lobbyists is accelerate the process of the political branches stepping in and getting the burden of these losses off of the victims sooner rather than later. When the victim count is lower rather than higher, because no one has proposed, including ABA, has proposed any way of addressing the problem that sounds like, or even probably vaguely will bend the curve so to speak on the rate of assent of this crime.

    So it is not an if it is a when, and also market capitalism solves this kind of problem eventually and while the banks don't promote their improved security and the fact that they protect their customers and reimburse them for the losses with their own fraud controls, there are banks that do that, and the way market capitalism works business moves from the less competent providers to the more competent.

    And what I fear is what your colleague Linda McGlasson wrote about and attributed to me, but it is really one of the victims, Karen McCarthy. She is a marketing person, she is enraged at what happened to her, she is putting up a website and going to do a viral campaign against this scourge. And so what I would like to say is that America's only one Susan Boyle, viral phenomena away from a run on the banks. We don't want that to happen.

    FIELD: Well, that is well said. Jim, give us a sense of what next steps are. I know we are in an election year; banking reform is being discussed now, is this something that you can get into the conversation?

    WOODHILL: That will depend on finding champions in the House and Senate side. I ran into Pete Sessions, a Congressman from the Dallas area, just today, and hi, how are you and shaking hands at a social function, a lunch for the Boy Scouts, and I mentioned a few words about the story, and he looked at me and said 'My aide is going to give you his business card, but I want to be in this briefing personally on this crime; this is a Homeland Security issue and not just a financial services issue.'

    So there is a very sharp strong reaction from the people we talk to on the Hill. And so the Congress is just wrapping up an epic, you know biggest in 20 years, financial reform act, so we are going to have to wait for the dust to settle on that Bill before we can circle around and try to work for hearings. It is in the hearings that people like PlainsCapital Bank ... will have to explain themselves to the elected representatives of the people ...

    FIELD: Jim, it is going to be an interesting conversation.

    WOODHILL: It will be. This is why we elect people to office to make these decisions, and I don't see any politically legitimate way of deciding this matter about shared responsibility/not shared responsibility other than holding hearings, introducing a Bill and bringing it to a vote.

    FIELD: Well, Jim, thank you for taking time to talk with us today and to explain your position on this.

    WOODHILL: Thank you for the opportunity.

    FIELD: We have been talking with Jim Woodhill; the topic has been ACH fraud. For Information Security Media Group I'm Tom Field. Thank you very much.

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