How NY Fed fumbled over BB fund heist

Jupiter. That single word, by a stroke of luck, helped stop the Federal Reserve Bank of New York from paying nearly $1 billion to the cyber-criminals behind a notorious bank heist earlier this year, according to sources familiar with the incident.

When hackers broke into the computers of Bangladesh's central bank in February and sent fake payment orders, the Fed was tricked into paying out $101 million.

But the losses could have been much higher had the name Jupiter not formed part of the address of a Philippines bank where the hackers sought to send hundreds of millions of dollars more.

By chance, Jupiter was also the name of an oil tanker and a shipping company under United States' sanctions against Iran. That sanctions listing triggered concerns at the New York Fed and spurred it to scrutinise the fake payment orders more closely, a Reuters examination of the incident has found.

The Reuters examination has also found that the payment orders sent by the hackers were exceptional in several ways. They were incorrectly formatted at first; they were mainly to individuals; and they were very different from the usual run of payment requests from Bangladesh Bank. Yet it was the word Jupiter that set the loudest alarm bells ringing at the New York Fed. Even then it appeared to react slowly.

By the time the fraud was discovered, the New York branch of the US central bank had approved five of the payments. It took $101 million from Bangladesh Bank and paid it to accounts in Sri Lanka and the Philippines -- including $81 million to four accounts in the names of individuals. Most of that $81 million remains lost.

It was among the most audacious cyber-heists ever to emerge – shining a light on worrying weaknesses in the global financial system and into a little-known corner of the US Federal Reserve: its Central Bank and International Account Services unit (CBIAS), which one former employee described as a “bank within a bank.”

Interviews with investigators, lawyers and current and former central bank officials in several countries, as well as a Reuters review of payment messages, emails and other documents, show disarray and bungling at all the financial institutions involved. But the most striking is the inertia and clumsiness at the New York Fed, the most powerful of the US central bank's 12 regional units and a mainstay of global finance.

The heist revealed that the New York Fed lacked a system for spotting potential fraud in real time -- even though such systems are used elsewhere -- instead relying at times on checking payments after they were made, usually for problems such as violating US sanctions.

Months of bitter finger-pointing over who is to blame for the fiasco have damaged the sensitive diplomacy of correspondent banking, where big Western institutions are entrusted with safeguarding the treasures of smaller economies. Bangladesh Bank is now preparing a legal case to seek compensation for what it says were failures by the Fed, according to a source close to the Asian bank. It also claims that errors by SWIFT, a messaging system used to make international bank transfers, made the bank vulnerable to hackers.

Bangladesh Bank spokesman Subhankar Saha said the institutions were working together to try to recover the missing money. He declined to comment further.

The New York Fed has denied making missteps and repeatedly said its systems were not compromised. In response to a series of questions from Reuters about its actions during the heist and in the days that followed, it declined to comment, citing a criminal investigation by the US Department of Justice and the Federal Bureau of Investigation.

SWIFT (Society for Worldwide Interbank Financial Telecommunication), a cooperative used by over 11,000 financial institutions around the world, has denied responsibility for any weaknesses in the way Bank Bangladesh operated and installed the SWIFT system. A spokesman said: “We continue to support the bank and cooperate with the investigations. We look forward to receiving a full account of the security incident.”

Officials are still investigating the heist. But the Reuters examination has uncovered new details about how the New York Fed was slow to react to warning signs and how communications broke down between it and Bangladesh Bank. The Fed relied almost entirely on the SWIFT messaging system with, in this case, little backup for emergencies. Miscommunications and clunky payment processes meant that most of the stolen money disappeared without trace before it could be recovered.

“I couldn't believe that that much money could be lost in the SWIFT system, and in the whole federal system for central banks,” Carolyn Maloney, a Democratic congresswoman from New York, told Reuters.  Maloney, who was the first US lawmaker to publicly raise questions about the incident, added: “It's a wake-up call and it has to be corrected. To me, I see it as a threat to the confidence people could have in the central banking system.”

Last month, the New York Fed said it took steps to “help strengthen the safety of global payments in light of the potential vulnerabilities.” It did not give specifics. But the source familiar with the Fed's handling of the Bangladesh affair told Reuters that the Fed has now set up a 24-hour hotline for emergency calls from some 250 account holders, mostly central banks, around the world.

THE HACK

Unlike the Fed, the world's most influential central bank whose New York headquarters sits atop 508,000 gold bars stored below street level, Bangladesh Bank is not a large and powerful operation with a global footprint.

It had not protected its computer system with a firewall, and it had used second-hand $10 electronic switches to network computers linked to the SWIFT global payment system, according to Mohammad Shah Alam, head of the Forensic Training Institute of the Bangladesh police's criminal investigation department. Hackers may have exploited such weaknesses after Bangladesh Bank connected a new electronic payment system, known as real time gross settlement (RTGS), in November last year. However, it remains unknown exactly who broke into its systems or how they did it.

What is evident, according to investigative reports by cyber-security company FireEye seen by Reuters, is that someone obtained the computer credentials of a SWIFT operator at Bangladesh Bank, installed six types of malware on the bank's systems and began probing them in January. The hackers did a series of test runs, logging into the system briefly several times between Jan 24 and Feb 2. One day they left monitoring software running on the bank's SWIFT system; on another they deleted files from a database.

On Thursday, Feb 4, the hackers began sending fraudulent payment orders via SWIFT. It was late evening in Bangladesh and most of the staff had gone home. The hackers appear to have timed the heist to coincide with the weekend that in Bangladesh began the following day.

The first SWIFT message arrived at the New York Fed just after 9:55am and ordered the transfer of $20 million from the central bank of Bangladesh to an account in Sri Lanka. Over the next four hours, 34 more orders arrived asking the US central bank to move a total of nearly $1 billion from the account it holds for Bangladesh Bank.

Compared to the great maelstrom of global finance, the sums were unremarkable: The New York Fed handles about $800 billion of payments a day. Nevertheless, the Bangladesh orders were odd, surprisingly odd.

First, all 35 of the messages lacked the names of “correspondent banks” -- the necessary next step in the payment chain -- according to a senior Bangladesh Bank official and a person familiar with the New York Fed's handling of the payments. That fault meant the orders could not immediately be fulfilled. Second, most of the payments were to individuals rather than institutions, according to police investigators in Dhaka and a source close to Bangladesh Bank.

And third, the slew of payments that morning was out of whack with the usual pattern of orders from Bangladesh Bank.

Over the eight months to January 2016, Bangladesh Bank had issued 285 payment instructions to the Fed, averaging fewer than two per working day, according to a source close to Bangladesh Bank. None of those payments had been to an individual, the source said. The US central bank allows payments to individuals, but it's not common and is generally discouraged, according to one of the former New York Fed employees.

The New York Fed declined to comment on the number of payments it typically received from Bangladesh Bank or whether staff had found the numerous messages on Feb 4 surprising or suspicious.

MISSED WARNING SIGNS

At the New York Fed, such payment orders are handled by a small group of CBIAS staff who tend to keep to themselves, according to five former employees and senior officials who worked on the team or closely with it. The unit looks after the foreign accounts of mostly central banks and its work is sometimes like “economic diplomacy,” said one of the sources, with staff having to make judgements on confidential payments ordered by a wide range of clients.

A subset of about 10 staff actually process payment requests, according to the sources. These staff, some fairly junior, can find up to 100 requests waiting for them when they arrive in the morning and may manually review hundreds of payments during the day. Most of the transactions are automatically executed. But when there is a problem, staff mainly check for SWIFT formatting and authentication, and violations of US economic sanctions or money laundering regulations. They may ask clients for more information.

When the first 35 messages from Bangladesh Bank were rejected for incorrect formatting, the hackers simply fixed the formatting and sent another 35 requests for payment to the same beneficiaries as before. This time the New York Fed cleared five of them, despite the oddities. They were properly formatted, SWIFT authenticated and went through automatically.

The Fed monitors for unusual transactions, but its system had a weakness: While credit card companies can spot unusual patterns in real time, the New York Fed typically looks back through payments, usually the day after they are requested, according to two of the former employees.

After the five payments had been made, staff did flag “several” other requests for review to check whether they complied or not with US sanctions, according to a letter that Thomas Baxter, the New York Fed's general counsel, later sent to Rep Maloney. That manual review found that the payments were “potentially suspicious,” Baxter wrote.

The Reuters examination found that on that Thursday Fed staff had sufficient concerns about 12 of the payment requests to send a message to Bangladesh Bank at the end of the day, New York time. “The payments contained individuals as beneficiaries and have varying details,” the message said.

But it was nearly 4:00am on the weekend in Bangladesh and no one was available to respond. Besides, the hackers had sabotaged Bangladesh Bank's systems to stop messages getting through.

It was only the following day, Friday Feb 5, that the Fed began a full manual review of the orders from Bangladesh Bank, according to Baxter's letter and sources in Bangladesh. Baxter, the New York Fed's top lawyer, said in his letter that such reviews can occur after payments have been made.

Sources in the United States and Bangladesh said that it was at this stage that the presence of the name Jupiter in the payment orders rang alarm bells. One of the Fed's responsibilities is to avoid violating US laws and prevent payments to sanctioned companies or individuals. It was just a stroke of luck that the name Jupiter featured on a sanctions list, thus raising a red flag.