Australia: Regulators' Expectations For Managing Cyber Risks - What You Need To Know

Last Updated: 23 October 2015
Article by Matthew Pokarier, Ben Di Marco and Anthony Ralston

How organisations are expected to manage cyber-risk is a constantly evolving area of discussion with no easy or clear answers. Corporate regulators both in Australia and internationally have identified cyber resilience as one of the critical issues impacting investors' trust and confidence in global economies.

Courts are also increasingly being asked to assess the reputational damage and commercial harm caused by cyber incidents and to allocate responsibility where companies and management fail to protect their stakeholders and manage IT assets. Together with regulator, industry and judicial commentary, the fallout from recent incidents is slowly beginning to point towards the need for at least some minimum standards and procedures organisations should be aware of and adopt when managing cyber-risks. These issues are explained below.

What to keep in mind when considering cyber-risk management

Organisations should focus on the following key issues:

  • There is no 'one size fits all' approach to managing cyber-risk.
  • In each situation, independent critical thinking is needed to ensure that the cyber security strategy is tailored to the risk faced by the organisation, its critical assets, and the third-party vendors that are relied upon.
  • Strategies must go beyond a simple 'check box' exercise to a living and breathing strategy that covers the necessary technical aspects as well as providing for ongoing HR education.
  • Disaster planning and intrusion detection systems should be in place and continually monitored.
  • Cyber-risk should be managed on an organisational level with input from stakeholders across all business units and supervised by the board and senior management.
  • Consideration should be given to specialist cyber insurance policies to help mitigate the financial, legal and reputational risks of cyber incidents.

Each of these issues is considered in detail below.

Clearly identifying assets at risk

As with all exercises in risk management, management must identify what critical assets and data are at risk to ensure that there are no blind spots in the organisation's security strategy. It is important to remember that the assets at risk include not only obvious IT assets such as servers but also assets that are controlled by networked computers. For example, in 2014, attackers caused massive damage to a blast furnace when they disrupted the industrial control systems used by a German steel mill.

Third-party vendors - management and due diligence

In a number of recent high profile cyber incidents, (such as the Target case in the United States) attackers have exploited weaknesses in the systems of third-party vendors used by their primary target to gain access to their primary target's network. There are likely to be more such incidents as third-party vendors with inadequate defences will often be an attacker's path of least resistance.

Regulators have expressed concerns about organisations relying on third-party vendors without performing proper due diligence when selecting the vendor and on conducting due diligence on an ongoing basis once the vendor has been engaged. An organisation's cyber-risk management policies should address these due diligence issues, the extent to which third parties are given access to critical data, and response strategies in the event of a third-party incident. Vendor contracts should also include clauses to effectively manage risks and specify the procedures to be adopted where an incident occurs. These provisions should also ensure that the third-party vendor can facilitate organisations meeting their legal requirements when dealing with affected customers, law enforcement, and insurers under writing cyber-risk.

Due diligence is also necessary when companies consider outsourcing IT functions or adopting cloud based payroll, data and management services.

Staff training and business practices

Evidence is increasingly pointing towards employees being the most common cause of cyber incidents. This can include both innocent mistakes by employees or more malicious acts intended to cause damage to the organisation.

In addition to ensuring staff are well informed of their responsibilities regarding the use of IT assets and data security, organisations training and policies need to encourage staff to be aware of and engage in cyber-risk management. This should include educating staff about best password practices, handling of confidential information, how to recognise risks, when to escalate problems to management and how to recognise scams and phishing. When employees are properly trained they can become the organisation's best defence to cyber incidents.

Organisations should also consider restricting staff access only to the features, applications and network areas they require to perform their role. There have been a number of instances where attackers have gained access to an organisation's entire network using simple attacks to compromise the accounts of low-level employees.

Board and management engagement

Effective cyber-risk mitigation requires communication and cooperation between business units and senior management, including the boards of directors. US regulators are increasingly demanding that board minutes and briefing materials demonstrate consideration of cyber security, incident response planning, reporting on actual incidents, and any risks arising from vendors.

The potential liability for directors following cyber incidents is also an emerging area of law in Australia as it is in the United States. A number of shareholder derivative suits have been brought following cyber-attacks against large organisations, including against the boards of Target and Wyndham Worldwide.

Defence-in-depth

The protections put in place should be proportionate to the loss the organisation would face in the event its critical assets, information or data are compromised. Organisations should employ multiple independent layers and/or types of controls to provide a redundancy or failsafe in the event that any control fails.

Breach and system monitoring

Many cyber incidents have also been attributed to failures by organisations to maintain internal controls such as regularly updated virus software and patches. Patch management practices should provide for the prompt installation of critical patches and the documentation of such actions.

Intrusion detection software can also be useful as it provides timely detection and reporting of security incidents. This is critical as the earlier security incidents are identified, the earlier they can be addressed and any loss or damage minimised. The Target data breach in December 2013 demonstrates the importance of continually monitoring this software as the first alerts were triggered when the attackers' malware finished installing on the retailer's point-of-sale (POS) system and Target did not become aware of the breach until 12 days later when it was contacted by the Department of Justice as it did not regularly monitor these alerts.

Disaster planning and revisiting

Traditional disaster recovery and business continuity plans should be flexible enough to address cyber-risks as well as the traditional physical risks an organisation faces. The plans should facilitate communication between information security team and risk teams responsible for disaster recovery and contingency planning.

Cyber liability insurance

Insurance also provides an important management tool for companies to recover loss and damage that may be caused by a cyber-incident. There are a number of underwriters offering cyber-risk policies, however there are differences in the terms and coverage as the market is still developing. Generally these policies provide coverage for both first party loss (i.e. the damage that is caused directly to the organisation by a cyber-incident) and third party loss (i.e. the damage and loss an organisation may incur due to liability it owes to its stakeholders, third parties and regulators).

Policy wordings should be closely scrutinised with a broker to ensure they adequately meet the needs of the organisation and that sufficient amounts are available under the policy to cover the type of cyber incident that organisation may be exposed to. Assessing the appropriate level of cover is difficult as estimates made in a recent Verizon 2015 report suggest a data breach of 1000 records can result in an organisation experiencing losses of up to US $87,000, whereas a breach of 10,000,000 records can result in an organisation sustaining total losses in excess of US $5.2 M.

In conclusion, it is important to remember that every day cyber-attacks are committed against organisations of all sizes. Due to the prevalence of attacks, government bodies in both Australia and internationally are demanding organisations prioritise cyber reliance to protect their systems and stakeholders. There are no easy answers as cyber-risks are constantly evolving, however organisations who follow the guidelines discussed above will be in a strong position to manage their exposure and respond to growing regulatory challenges.

Clyde & Co thanks Dr Bradley Schatz of Schatz Forensic for his contribution to this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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