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# **I. Introduction and Background**

On October 14<sup>th</sup> ,2004 New York Federal Reserve President Timothy Geithner<sup>2</sup> stated: "The increased risk of terrorist attacks and increased sophistication of cyber-attacks on electronic networks have added new dimensions to the traditional concerns of safety and soundness and operational resilience," he told a financial services conference in Atlanta. Geithner said the growing challenge of cyber-attacks will require a "major ongoing commitment of resources". “Beyond the direct financial losses from criminal activity, these threats pose a broader risk to confidence in the integrity of financial institutions, payments systems and, ultimately, the global payments network,” he said.

All financial institutions are facing this critical operational risk. Geithner’s statements echo the warnings made by law enforcement entities for the past 5 years. _Operation Uptick_<sup>_3_</sup> was the largest securities fraud under-cover operation to date. In a ten month investigation involving the US Attorney’s office, the FBI and the SEC, it culminated in the arrest of over 200 people, the involvement of brokerage firms and a network of six organized crime families, brokerage firms, brokers and over $50 million in illegal proceeds. Tracking a period of more than 5 years it exposed a criminal enterprise that was able to bribe brokers and pension officers, compromise every type of market and law enforcement professional, inflate stock prices, and sell shaky investments through a significantly corrupted brokerage system. Most disturbing, its prosecution showcased the changing business model and modus operandi for organized crime and foreshadows the havoc that organized crime can wreak undetected in the securities industry.

The technological shift to IP based technologies has had a direct impact in the financial industry, most obviously in the areas of e-banking and online securities trading. E-finance penetration is best observed in online securities trading and internet banking<sup>4</sup> E-finance use is increasing around the globe, including that of emerging markets. Despite the intrinsic weaknesses in the financial, legal, regulatory and technological infrastructures of emerging countries, some such as Korea, Brazil, and India have been early adopters of e-finance, using the new delivery channels to expand access, provide opportunities and effectively circumvent some of the constraints of traditional modes.

In the world’s securities markets<sup>5</sup> according to the World Bank’s financial sector research, by 2005, online brokerage could rise to 80 percent in industrial countries (which was around 28% at

> 2 Fed's Geithner warns of cyber-attack risk to banks. REUTERS. Thu Oct 14, 2004 02:52 PM ET. By Victoria Thieberger.

> 3 <u>http://www.sec.gov/news/press/2000-81.txt</u>

> 4 Goldfinger, UNCTAD (2001)

> 5 E-finance in securities markets include not only online brokerage but also electronic issuance and distribution of securities such as the Treasury Direct in the United States, where treasury securities are sold directly to the retail investors. Similar systems have been created in the Philippines, Brazil, Mexico etc. where e-distribution of securities is changing the landscape of primary markets for government securities. (Glaessner, Kantur, 2004)