While fraud protection has become a common expectation from consumers in regards to their bank accounts and credit accounts, treatment of commercial clients including small businesses in the face of a cyber attack or fraud is more opaque.
Smaller companies are more vulnerable to cyber threats than their larger counterparts due to the lack of resources to protect against cyber threats. The proportion of cyber attacks specifically targeting small businesses has risen at a faster rate compared to the number of attacks on organizations as a whole.
When a small business suffers a cyber breach they are often stuck with absorbing the losses. However, several recent cases have shown small businesses having success in litigating such a claim against their bank.
In a recent 1st Circuit case, Patco v. People’s United Bank, Patco’s bank account at People’s Bank was hacked and the cyber thieves stole hundreds of thousands of dollars by directing the funds through online transfers to bank accounts the thieves controlled.
The Bank had security protocols in place to protect account holders including only allowing Patco employees who were authorized to access the account and a $1,000 threshold on ACH credit transfers. Thus the bank argued it had adequate security in place.
In its complaint, Patco alleged a hacker obtained one of the employee’s ID and passwords and initiated numerous withdrawals to accounts to which Patco had never before wired funds. These transactions did not trigger any suspicious activity alert at the bank despite the fact that the transfers were the largest ACH credit transfers ever initiated on the account, the transfer request originated from an IP address never before used on the account and the funds were sent to accounts to which no transfers had ever before been sent.
After a 1st Circuit Court of Appeals ruling that People’s Bank lacked reasonable safeguards against the hackers, the bank settled and agreed to reimburse Patco $345,000.
Generally, if a bank has taken commercially reasonable steps to prevent cyber attacks they will not be liable for funds stolen by a hacker. However, as these recent decisions show, what is commercially reasonable can depend on the specific circumstances of each case. If you or your business has been the victim of a cyber attack you should contact an attorney with experience to evaluate your potential remedies and liability.