Final Countdown to Red Flag Rules?

October 18, 2009

Unless the Federal Trade Commission (“FTC”) postpones the effective date for its so-called Red Flag Rules, as it has done three times before, these new rules aimed at minimizing the risk of identity theft are scheduled to be applicable to many businesses as of November 1, 2009.  These Rules require financial institutions and other “creditors” to develop and implement a written identity theft prevention program to provide for the identification, detection and response to patterns, practices or activities that constitute warning signs or “red flags” of identity theft.

Scope of the Rules

The FTC, along with the major federal banking regulatory agencies, adopted these rules in late 2007 under the Fair and Accurate Credit Transactions Act of 2003 to require an additional layer of protection around sensitive information that might be used to perpetrate identity theft.  Originally scheduled to come into effect on November 1, 2008, the FTC delayed their implementation principally to allow smaller businesses to prepare for compliance.  The Rules are applicable to financial institutions and any entity that is considered to be a “creditor”, and require adoption of a written identity theft protection with respect to “covered accounts”.

 A “creditor” is any entity that regularly extends, renews or continues credit or arranges the same.  Virtually every business that does not get paid at the tie it renders services or sells goods is considered to be a creditor for purposes of the Rules.  A “covered account” is an account used primarily for personal, family or household purposes, and that involves multiple payments or transactions, as well as any other account for which there is a reasonably foreseeable risk to customers of identity theft.

Program Requirements

The written plan must be approved by an organization’s Board of Directors (or its equivalent) and must include procedures for the identification, detection and response of suspected red flag activity.  Such activity could include notices or alerts from credit reporting agencies, an unusual pattern of account transactions or inquiries, use of improper account documents, returned mail, suspicious changes of contact information or other account data or signs of unauthorized account access.  The plan must also be reviewed and updated periodically.

Because of the wide variety and size of businesses that are covered creditor entities a one size fits all approach will not work to ensure compliance.  Accordingly, the FTC specifies that each creditor must adopt and implement an identity theft prevention program that fits its particular business.  Thus, a business that has a limited number of covered accounts or does not permit routine online access to such accounts might be able to have a much simpler plan than a business typified by numerous primarily online accounts.  To assist creditors in developing and maintaining a red flag compliance program, a set of guidelines, which includes an extensive illustrative list of potential red flags, accompanies the Rules 

Failure to Comply

While there is no private right of action for failure by a creditor entity to implement an identity theft prevention program, the FTC (and the applicable bank regulatory agency, in the case of a covered financial institution) has authority to seek civil and monetary penalties for each violation of the Rules

Link to Final Red Flag Rules:  http://ftc.gov/os/fedreg/2007/november/071109redflags.pdf