FTC Red Flags Rule ➲ Does your business need to design an identity theft prevention program for the US?


Privacy + CyberSecurity Law

FTC Red Flags Rule ➲ Does your business need to design an identity theft prevention program for the US?

This blog article helps you understand whether your business is legally required to design an identity theft prevention program for the US to comply with the Fair Credit Reporting Act: Identity Theft Rules (a.k.a. FTC Red Flag Rules).

James D. Ford Esq.

Founder & [iC]℠ a.k.a Outside General Counsel


2024 Identity Theft ➲ Facts & Statistics

Overview of the FTC Red Flags Rule ➲ A Proactive Approach

Identity Theft Prevention Program (ITPP) ➲ Administration

Who must comply?

Spotting Red Flags

Responding to Red Flags

Updating Your Program

2024 Identity Theft ➲ Facts & Statistics

Identity theft issues have been a common concern for several years and its frequency has sky-rocketed in the past few years. So much so that the market for identity theft protection services is expected to reach $28 billion by 2029.
As we begin the year 2024, the current identity theft statistics appear to show another year of ever-increasing cybersecurity related issues.
Why is identity theft a growing problem in the United States?

The Fast Facts

  • The FTC received 5.7 million total fraud and identity theft reports, 1.4 million of which were identity theft cases;
  • Government Documents or Benefits Fraud tops the list of identity theft types with 395,948 reported cases;
  • Georgia reported the most identity theft cases;
  • The median loss of fraud cases for victims is about $500;
  • According to the FBI, Total losses are estimated to be $10.2 billion;
  • The number of identity theft scenarios in the U.S. is nearly 3 times higher than in other countries;
  • Experts believe that these cases occur so often that there is a new victim every 22 seconds; and
  • Reports indicate that nearly 33% of Americans have faced some kind of identity theft attempt in their lives.

Total Fraud and Identity Theft Cases Have Nearly Tripled Over the Last Decade

Identity theft and fraud cases have been steadily increasing (now nearly triple the levels of over a decade ago).

5.7 Million Cases of Fraud and Identity Theft Were Reported to the FTC

The FTC received 5.7 million reports of identity theft and fraud, up from 4.7 million the previous year.



https://identity theft.gov

Related Research and Statistics

2024 Data Sources

Overview of the FTC Red Flags Rule ➲ A Proactive Approach

As can be seen from the above statistics, identity theft is a serious and growing concern globally, but especially for Americans who are impacted at nearly 3 times the rate in other countries.

Identity theft leads to real world crimes, draining bank accounts, damaging credit, and disrupting lives.

The cost to business can be staggering too, left holding the bag on unpaid bills racked up by fraudsters.

The FTC Red Flags Rule established by the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) which is regulated by the Federal Trade Commission, together with several other agencies, takes a proactive approach by requiring many businesses in the US to implement a written Identity Theft Prevention Program (ITPP) to help spot the warning signs – or “red flags” – of identity theft and take steps to prevent and mitigate the crime.

Australia's ➲ Reactive Approach

By way of contrast, Australia has taken a reactive approach.

The register of stolen credentials (officially called the Credential Protection Register) was created by the Australian Department of Home Affairs in October 2022 in an attempt to protect the public from cybercrime using stolen identities after the 2022 Optus data breach.

It was reported in April 2024, that the register has blocked more than 300,000 attempts of identity fraud.

On the back of this success, last week the Australian government has announced the commitment of funding to migrate the register to a mobile app and website that will allow the public to "protect identity credentials from cyber crooks".

The Australian Bureau of Statistics has reported a "sizable increase" in credit card fraud to losses of $2.2 billion in 2023.

In my opinion, the Australian public would benefit from a more proactive approach (starting with something like the FTC Red Flag Rule which was first legislated in the US in 2003), and the US public would benefit from more reactive measures like the Credential Protection Register.

Identity theft is a growing problem globally. It is not going away and the level and frequency of data breaches have only increased over the last few years leaving the public more exposed than ever before to cybercrime.

Source: Australian Bureau of Statistics 2023

Identity Theft Prevention Program

An Identity Theft Prevention Program MUST include four basic elements that create a framework to deal with the threat of identity theft.
1️⃣ A program must include reasonable policies and procedures to identify the red flags of identity theft that may occur in your day-to-day operations.
Red Flags are suspicious patterns or practices, or specific activities that indicate the possibility of identity theft.
For example, if a customer has to provide some form of identification to open an account with your company, an ID that doesn’t look genuine is a “red flag” for your business.
2️⃣ A program must be designed to detect the red flags you’ve identified.
If you have identified fake IDs as a red flag, for example, you must have procedures to detect possible fake, forged, or altered identification.
3️⃣ A program must spell out appropriate actions you’ll take take when you detect red flags.
4️⃣ A program must detail how you’ll keep it current to reflect new threats.

Identity Theft Prevention Program (ITPP) ➲ Administration

To administer your ITPP, your business MUST:

1️⃣ Get approval of the initial written ITPP from the firm’s board of directors, an appropriate committee of it, or, if there is no board, a designated member of senior management;
2️⃣ Involve the board, committee or the designated member of senior management in the oversight, development, implementation and administration of the ITPP;
3️⃣ Train staff to implement the ITPP including reporting to the firm's board of directors, etc.; and
4️⃣ Oversee service provider arrangements.

Rules: 16 C.F.R. §681.1(e)

Template: FTC FACT Act Red Flags Rule Template [Optional Guide for business to assist them in fulfilling their requirements under the Federal Trade Commissions' (FTC) Red Flags Rule].

Important: If you choose to use this template as a guide, you MUST adapt it to reflect your individual business.

Without the analysis and modification required to fit your business' situation, your Identity Theft Prevention Program (ITPP) will not comply with regulatory requirements.

Who Must Comply?

Whether the FTC Red Flags Rule applies depends on whether a US business has “Covered Accounts.”

The 'Covered Accounts" determination hinges on whether:

1️⃣ You are a “creditor” or “financial institution” as defined under the FTC Red Flags Rule; and whether

“Creditors” that will generally be determined based on their "conduct" to have covered accounts include any business that does any of the following, regularly in the ordinary course of their business:
⚖️ Lenders;
⚖️ Creditors who regularly defer payment for goods or services or bills by extending credit (which involves dealing with credit reporting agencies & offering payment plans) or advancing funds; and
⚖️ Companies that frequently pull credit reports from or provide information to credit reporting agencies, to grant or arrange credit or participate in the decision to extend, renew or set the terms of credit.
⚖️ “Financial institutions” like a state or national bank, a state or federal savings and loan association, a mutual savings bank, a state or federal credit union, or a person that, directly or indirectly, holds a transaction account belonging to a consumer are deemed to have "Covered Accounts".

2️⃣ Your accounts are vulnerable to identity theft.

⚖️ Consumer Accounts designed to allow multiple payments or transactions are ALWAYS deemed to be "Covered"; whereas
⚖️ Small business accounts, sole proprietorship accounts, or single transaction consumer accounts are only "Covered" if it is reasonable foreseeable that may be vulnerable to identity theft.

If you conclude that your business has "Covered Accounts", you MUST have a written Identity Theft Prevention Program to periodically identify patterns, practices, or activities that signal possible identity theft – the “red flags” – and detail how you’ll detect and respond to them.

Spotting Red Flags

Red flags often differ by industry and account type.

Warning signs may include suspicious documents, unusual account activity, and alerts from credit bureaus.

For example:

❌ A forged ID or document;

❌ Inconsistent information supplied (compared with what you know from existing or other records);

❌ Sudden requests for new credit cards; or

❌ Non-payment from a formerly reliable customer could indicate identity theft.

II. Identifying Relevant Red Flags

The following has been extracted from the text of Appendix A to the Red Flag Rule:

Risk Factors.

A financial institution or creditor should consider the following factors in identifying relevant Red Flags for covered accounts, as appropriate:
(1) The types of covered accounts it offers or maintains;
(2) The methods it provides to open its covered accounts;
(3) The methods it provides to access its covered accounts; and
(4) Its previous experiences with identity theft.

Sources of Red Flags.

Financial institutions and creditors should incorporate relevant Red Flags from sources such as:
(1) Incidents of identity theft that the financial institution or creditor has experienced;
(2) Methods of identity theft that the financial institution or creditor has identified that reflect changes in identity theft risks; and
(3) Applicable supervisory guidance.

Categories of Red Flags.

The Program should include relevant Red Flags from the following categories, as appropriate.
Examples of Red Flags from each of these categories are appended as supplement A to this appendix A.
(1) Alerts, notifications, or other warnings received from consumer reporting agencies or service providers, such as fraud detection services;
(2) The presentation of suspicious documents;
(3) The presentation of suspicious personal identifying information, such as a suspicious address change;
(4) The unusual use of, or other suspicious activity related to, a covered account; and
(5) Notice from customers, victims of identity theft, law enforcement authorities, or other persons regarding possible identity theft in connection with covered accounts held by the financial institution or creditor.

Supplement A

Alerts, Notifications or Warnings from a Consumer Reporting Agency
1. A fraud or active duty alert is included with a consumer report.
2. A consumer reporting agency provides a notice of credit freeze in response to a request for a consumer report.
3. A consumer reporting agency provides a notice of address discrepancy, as defined in § 641.1(b) of this part.
4. A consumer report indicates a pattern of activity that is inconsistent with the history and usual pattern of activity of an applicant or customer, such as:
❌ A recent and significant increase in the volume of inquiries;
❌ An unusual number of recently established credit relationships;
❌ A material change in the use of credit, especially with respect to recently established credit relationships; or
❌ An account that was closed for cause or identified for abuse of account privileges by a financial institution or creditor.
Suspicious Documents
5. Documents provided for identification appear to have been altered or forged.
6. The photograph or physical description on the identification is not consistent with the appearance of the applicant or customer presenting the identification.
7. Other information on the identification is not consistent with information provided by the person opening a new covered account or customer presenting the identification.
8. Other information on the identification is not consistent with readily accessible information that is on file with the financial institution or creditor, such as a signature card or a recent check.
9. An application appears to have been altered or forged, or gives the appearance of having been destroyed and reassembled.
Suspicious Personal Identifying Information
10. Personal identifying information provided is inconsistent when compared against external information sources used by the financial institution or creditor.
For example:
❌ The address does not match any address in the consumer report; or
❌ The Social Security Number (SSN) has not been issued, or is listed on the Social Security Administration's Death Master File.
11. Personal identifying information provided by the customer is not consistent with other personal identifying information provided by the customer. For example, there is a lack of correlation between the SSN range and date of birth.
12. Personal identifying information provided is associated with known fraudulent activity as indicated by internal or third-party sources used by the financial institution or creditor.
For example:
❌ The address on an application is the same as the address provided on a fraudulent application; or
❌ The phone number on an application is the same as the number provided on a fraudulent application.
13. Personal identifying information provided is of a type commonly associated with fraudulent activity as indicated by internal or third-party sources used by the financial institution or creditor.
For example:
❌ The address on an application is fictitious, a mail drop, or a prison; or
❌ The phone number is invalid, or is associated with a pager or answering service.
14. The SSN provided is the same as that submitted by other persons opening an account or other customers.
15. The address or telephone number provided is the same as or similar to the address or telephone number submitted by an unusually large number of other persons opening accounts or by other customers.
16. The person opening the covered account or the customer fails to provide all required personal identifying information on an application or in response to notification that the application is incomplete.
17. Personal identifying information provided is not consistent with personal identifying information that is on file with the financial institution or creditor.
18. For financial institutions and creditors that use challenge questions, the person opening the covered account or the customer cannot provide authenticating information beyond that which generally would be available from a wallet or consumer report.
Unusual Use of, or Suspicious Activity Related to, the Covered Account
19. Shortly following the notice of a change of address for a covered account, the institution or creditor receives a request for a new, additional, or replacement card or a cell phone, or for the addition of authorized users on the account.
20. A new revolving credit account is used in a manner commonly associated with known patterns of fraud.
For example:
❌ The majority of available credit is used for cash advances or merchandise that is easily convertible to cash (e.g., electronics equipment or jewelry); or
❌ The customer fails to make the first payment or makes an initial payment but no subsequent payments.
21. A covered account is used in a manner that is not consistent with established patterns of activity on the account.
There is, for example:
❌ Nonpayment when there is no history of late or missed payments;
❌ A material increase in the use of available credit;
❌ A material change in purchasing or spending patterns;
❌ A material change in electronic fund transfer patterns in connection with a deposit account; or
❌ A material change in telephone call patterns in connection with a cellular phone account.
22. A covered account that has been inactive for a reasonably lengthy period of time is used (taking into consideration the type of account, the expected pattern of usage and other relevant factors).
23. Mail sent to the customer is returned repeatedly as undeliverable although transactions continue to be conducted in connection with the customer's covered account.
24. The financial institution or creditor is notified that the customer is not receiving paper account statements.
25. The financial institution or creditor is notified of unauthorized charges or transactions in connection with a customer's covered account.
Notice from Customers, Victims of Identity Theft, Law Enforcement Authorities, or Other Persons Regarding Possible Identity Theft in Connection With Covered Accounts Held by the Financial Institution or Creditor
26. The financial institution or creditor is notified by a customer, a victim of identity theft, a law enforcement authority, or any other person that it has opened a fraudulent account for a person engaged in identity theft.

III. Detecting Red Flags

The Program's policies and procedures should address the detection of Red Flags in connection with the opening of covered accounts and existing covered accounts, such as by:

✅ Obtaining identifying information about, and verifying the identity of, a person opening a covered account, for example, using the policies and procedures regarding identification and verification set forth in the Customer Identification Program rules implementing 31 U.S.C. 5318(l) (31 CFR 103.121); and

✅ Authenticating customers, monitoring transactions, and verifying the validity of change of address requests, in the case of existing covered accounts.

Responding to Red Flags

When you detect red flags, an appropriate response is key, like monitoring an account for fraud, notifying the customer, or closing an account.

If identity theft risks are high, a more aggressive response like contacting law enforcement may be warranted.

The response you choose depends on the degree of risk.

Updating Your Program

Identity thieves constantly develop new tactics, so your Identity Theft Prevention Program must stay current.

Regularly factor in any incidents of identity theft you encounter, changes in methods to detect and prevent it, new types of accounts you offer, and updates to your business model.

The FTC Red Flags Rule aims to limit damage from identity theft by ensuring businesses can recognize the signs of this costly crime.

A tailored program makes vigilance part of everyday operations.

With identity thieves finding ever-more sophisticated ways to exploit consumer information, it pays to keep your program current, your staff trained, and your eyes open.

Compliance: Send questions about complying with the Red Flags Rule to RedFlags@ftc.gov

Further reading: Fighting Identity Theft with the Red Flags Rule: A How-To Guide for Business [May 2013]

Social Sharing Image: Courtesy of Tim Mossholder on Unsplash

Credits: This blog article was seeded from an initially summary "op-ed" of the FTC article Fighting Identity Theft with the Red Flags Rule: A How-To Guide for Business [May 2013] supplied to Titan Lawyer [Private AI], which was supplemented with 2024 Identity Theft statistics from this url [https://identitytheft.org/statitics], then reviewed & improved by James D. Ford Esq., GAICD CIPP/US CC | Attorney-at-Law, Blue Ocean Law Group℠.

Important Notice:

This blog article is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.