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In some countries (including the USA), the banks have to carry the risks associated with new technology. Following a legal precedent, in which a bank customer's word that she had not made a withdrawal was found to outweigh the banks' experts' word that she must have done [JC], the US Federal Reserve passed regulations which require banks to refund all disputed transactions unless they can prove fraud by the customer [E]. This has led to some minor abuse - misrepresentations by customers are estimated to cost the average US bank about $15,000 a year [W2] - but it has helped promote the development of security technologies such as cryptology and video.

In Britain, the regulators and courts have not yet been so demanding, and despite a parliamentary commission of enquiry which found that the PIN system was insecure [J1], bankers simply deny that their systems are ever at fault. Customers who complain about debits on their accounts for which they were not responsible - so-called `phantom withdrawals' - are told that they are lying, or mistaken, or that they must have been defrauded by their friends or relatives.

The most visible result in the UK has been a string of court cases, both civil and criminal. The pattern which emerges leads us to suspect that there may have been a number of miscarriages of justice over the years.

ffl A teenage girl in Ashton under Lyme was convicted in 1985 of stealing $40 from her father. She pleaded guilty on the advice of her lawyers that she had no defence, and then disappeared; it later turned out that there had been never been a theft, but merely a clerical error by the bank [MBW]

ffl A Sheffield police sergeant was charged with theft in November 1988 and suspended for almost a year after a phantom withdrawal took place on a card he had confiscated from a suspect. He was lucky in that his colleagues tracked down the lady who had made the transaction after the disputed one; her eyewitness testimony cleared him

ffl Charges of theft against an elderly lady in Plymouth were dropped after our enquiries showed that the bank's computer security systems were a shambles

ffl In East Anglia alone, we are currently advising lawyers in two cases where people are awaiting trial for alleged thefts, and where the circumstances give reason to believe that `phantom withdrawals' were actually to blame.

Finally, in 1992, a large class action got underway in the High Court in London [MB], in which hundreds of plaintiffs seek to recover damages from various banks and building societies. We were retained by the plaintiffs to provide expert advice, and accordingly conducted some research during 1992 into the actual and possible failure modes of automatic teller machine systems. This involved interviewing former bank employees and criminals, analysing statements from plaintiffs and other victims of ATM fraud, and searching the literature. We were also able to draw on experience gained during the mid-80's on designing cryptographic equipment for the financial sector, and advising clients overseas on its use.

We shall now examine some of the ways in which ATM systems have actually been defrauded. We will then compare them with how the designers thought their products might in theory be vulnerable, and see what lessons can be drawn. Some material has had to be held back for legal reasons, and in particular we do not identify all the banks whose mistakes we discuss. This information should be provided by witnesses at trial, and its absence here should have no effect on the points we wish to make.

3 How ATM Fraud Takes Place

We will start with some simple examples which indicate the variety of frauds that can be carried out without any great technical sophistication, and the bank operating procedures which let them happen. For the time being, we may consider that the magnetic strip on the customer's card contains only his account number, and that his personal identification number (PIN) is derived by encrypting this account number and taking four digits from the result. Thus the ATM must be able to perform this encryption operation, or to check the PIN in some other way (such as by an online enquiry).

3.1 Some simple examples

1. Many frauds are carried out with some inside knowledge or access, and ATM fraud turns out to be no exception. Banks in the English speaking world dismiss about one percent of their staff every year for disciplinary reasons, and many of these sackings are for petty thefts in which ATMs can easily be involved. A bank with 50,000 staff, which issued cards and PINs through the branches rather than by post, might expect about two incidents per business day of staff stealing cards and PINs.

ffl In a recent case, a housewife from Hastings, England, had money stolen from her account by a bank clerk who issued an extra card for it. The bank's systems not only failed to prevent this, but also had the feature that whenever a cardholder got a statement from an ATM, the items on it would not subsequently appear on the full statements sent to the account address. This enabled the clerk to see to it that she did not get any statement showing the thefts he had made from her account.

This was one of the reasons he managed to make 43 withdrawals of $200 each; the other was that when she did at last complain, she was not believed. In fact she was subjected to harrassment by the bank, and the thief was only discovered because he suffered an attack of conscience and owned up [RM].

ffl Technical staff also steal clients' money, knowing that complaints will probably be ignored. At one bank in Scotland, a maintenance engineer fitted an ATM with a handheld computer, which recorded customers' PINs and account numbers. He then made up counterfeit cards and looted their accounts [C1] [C2]. Again, customers who complained were stonewalled; and the bank was