Bank Regulators' Evaluation of Electronic Signature Systems
(Correspondence, 11/08/2000, GAO/GAO-01-129R).

This report discusses bank regulators' evaluation of electronic
signature systems. Financial institutions use signature systems to
verify or authenticate the identity of customers conducting financial
and nonfinancial transactions over the Internet and other open
electronic networks. Officials at the Office of the Comptroller of the
Currency (OCC) and the Federal Reserve told GAO that they are developing
an examination strategy for Identrus LLC, which is an entity that
provides services to financial institutions to authenticate electronic
signatures. OCCofficials have not determined what role they will play in
assessing Identrus' operations, but they believe that financial
institutions should take an active role in assessing the risks
associated with electronic signatures.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-129R
     TITLE:  Bank Regulators' Evaluation of Electronic Signature
	     Systems
      DATE:  11/08/2000
   SUBJECT:  Electronic forms
	     Banking regulation
	     Financial institutions
	     Internal controls
	     Risk management
	     Internet

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GAO-01-129R

Electronic Signature Systems Page 1

United States General Accounting Office Washington, DC 20548

November 8, 2000 The Honorable Alan Greenspan Chairman Board of Governors of
the Federal Reserve System

The Honorable John D. Hawke, Jr. Comptroller of the Currency

Subject: Bank Regulators' Evaluation of Electronic Signature Systems This
letter presents the results of our review, conducted as part of our research
and development work, of actions taken by the Federal Reserve System
(Federal Reserve) and the Office of the Comptroller of the Currency (OCC) in
connection with the operations of Identrus, LLC, New York, NY (Identrus). 1
Identrus is a global rulemaking and coordinating body for a network of
financial institutions that will act as certification authorities and
thereby provide services designed, in part, to verify or authenticate the
identity of customers conducting financial and nonfinancial transactions
over the Internet and other open electronic networks. To provide these
services, Identrus and its network of participating financial institutions
will utilize digital certificates and digital signatures in an electronic
authentication system based on public key cryptography.

The use of electronic signature systems- which include digital signatures-
in the financial services industry will likely increase in the future as a
result of the implementation of the Electronic Signatures in Global and
National Commerce (E- SIGN) Act. 2 Since the act promotes the legal validity
of electronic signatures, a financial institution may begin to use
electronic signatures as evidence of on- line transactions, such as the
acceptance of the terms of a credit agreement by the customer. Further,
consumers may begin to use electronic signatures to complete on- line
transactions, such as opening bank accounts, obtaining credit, or
establishing an insurance policy or brokerage account.

1 See Federal Reserve Board Order of November 10, 1999, approving the
application of Bayerische Hypo- und Vereinsbank AG, Munich, Germany;
Deutsche Bank AG, Frankfurt, Germany; and Stichting Prioriteit ABN AMRO
Holding, Stichting Administratiekantoor ABN AMRO Holding, ABN AMRO Holding
N. V., and ABN AMRO Bank, N. V., all of Amsterdam, The Netherlands, each to
retain up to 12.5 percent of the voting interests of Identrus, LLC, New
York, NY, and to engage in acting as a certification authority in connection
with financial and nonfinancial transactions and other related activities.
See also Office of the Comptroller of the Currency Conditional Approval #339
letter dated November 16, 1999, to Bank of America and Citibank, NA,
approving their application for Identrus to provide a system infrastructure
within which the participants will provide certification authority services
and concluding that the proposed activities of Identrus, LLC, are part of or
incidental to the business of banking.

2 See P. L. 106- 229, which was enacted on June 30, 2000.

GAO- 01- 129R Electronic Signature Systems Page 2 During November 1999,
while we were monitoring technical developments pertinent to

public key infrastructure (PKI) systems, we learned of the Federal Reserve's
approval of banking institutions' investments in Identrus and of OCC's
decision that Identrus' activities were permissible national bank
activities. In monitoring these developments, we noted that Identrus
intended to generate the public/ private key pairs used by their customers
for electronically signing transactions. Since any such practice would need
to provide appropriate controls to link a given signature to a specific
individual, we initiated this study to determine whether the Federal Reserve
and OCC have taken, or plan to take, steps to evaluate the controls
surrounding electronic signature systems, such as the Identrus PKI system.

Results in Brief

The Federal Reserve and OCC both issued decisions concluding that Identrus'
certification authority services are part of or closely related to banking
operations. Although the decisions outlined some of the business processes
that may be used by an entity that performs certification authority
services, these decisions did not, and were not intended to, provide the
criteria that should be used by the financial institutions in setting up
their PKI systems. Neither do they discuss criteria to be used by bank
examiners to review PKI systems.

Officials from OCC and the Federal Reserve told us that they are currently
in the process of developing an examination strategy for Identrus. OCC
officials said that they plan to conduct a formal risk assessment and
examination of Identrus at the beginning of next year. Federal Reserve
officials told us that they have not yet determined the role they should
play in assessing Identrus' operations, but stated that depository
institutions should be taking the lead in assessing the risks posed by PKI
systems.

OCC and the Federal Reserve have not yet developed a specific program to
evaluate the risks associated with, and the controls surrounding, electronic
signature systems, although they have issued guidance related to information
technology assessments. Developing more specific regulatory guidance that
includes criteria for evaluating electronic signature systems could assist
the examiners and financial institutions in their information technology
risk assessments and control evaluations. Such guidance could also assist
the entities developing electronic signature systems in their requirements
definition process. This letter includes a recommendation to develop this
guidance. In developing the guidance, the banking regulators may want to
consider the technology- neutral criteria that we have adopted that
facilitates our assessment of whether an electronic signature system
provides reasonable assurance that the signatures generated by the system
were generated by the reported signer.

Background

Five federal regulators- the Federal Reserve, OCC, the Federal Deposit
Insurance Corporation (FDIC), the National Credit Union Administration
(NCUA), and the Office of Thrift Supervision (OTS)- supervise and examine
all federally insured depository institutions. The Federal Reserve and OCC
are the primary federal regulators of the largest banks in the United
States. In addition, the Federal Reserve supervises bank holding

GAO- 01- 129R Electronic Signature Systems Page 3 companies and is the
umbrella regulator for financial holding companies. 3 The five federal

regulators work together through the Federal Financial Institutions
Examination Council (FFIEC), an interagency forum Congress created in 1979
to promote consistency in the examination and supervision of depository
institutions. 4 The FFIEC issues interagency guidance on crosscutting
supervisory and examination issues.

Under the National Bank Act, OCC supervises national banks. In exercising
this responsibility, OCC approves applications by national banks to engage
in certain activities directly or through ownership in a subsidiary.
Generally, the activities of a national bank are limited to those that are
part of or incidental to the business of banking. A national bank may also
engage in these activities by means of an operating subsidiary. 5 Similarly,
under the Bank Holding Company Act, a bank holding company may not acquire
an interest in a nonbank affiliate unless the Federal Reserve Board (FRB)
has concluded that the affiliate's activities are closely related to
banking. OCC and the FRB have both found that certification authority
services are part of or closely related to banking.

A certification authority performs a function similar to that of a notary in
the paper- based environment. In paper- based systems, a notary provides a
means to bind a signature to the stated signer. A certification authority
performs a similar function in public- key- based electronic signature
systems. The certification authority provides a means to link a given
signature to a specific individual or entity. In the case of Identrus, the
certification authorities provide the means to confirm the identities of
parties sending and receiving electronic payments or other communications
using a digital signature 6 and a PKI. A PKI is a system of computers,
software, policies, and people that can be used to facilitate the protection
of sensitive information and communications. A primary function of a PKI is
to generate and manage the certificates that bind an individual or entity to
a given public key. The resulting certificates are used for such items as
verifying digital signatures (authentication and data integrity) and
facilitating data encryption (confidentiality). For example, an entity that
desires to validate a signature uses a properly designed and implemented PKI
to ensure that the individual or entity associated with a given signature is
still bound to that signature. This authentication service is commonly
referred to as nonrepudiation.

Regulators Approved Certification Authority Activities

The Federal Reserve and OCC have both issued decisions stating that
certification authority services are closely related to the business of
banking. In the case of Identrus, the Federal Reserve, on November 10, 1999,
approved several banking institutions' applications to each retain up to
12.5 percent of the voting interests of Identrus, and to act as a
certification

3 Under the recently enacted Gramm- Leach- Bliley Act , commercial banks,
insurers, securities firms, merchant banks, and other financial entities are
permitted to affiliate in a financial holding company structure, subject to
the overall supervision of the Federal Reserve, with functional regulation
of the component institutions.

4 FFIEC is composed of the Comptroller of the Currency, one Federal Reserve
Board governor, the OTS Director, the FDIC Chairman, and the Chairman of the
NCUA Board.

5 12 C. F. R. sect.5.34.

6 A digital signature is one form of electronic signature that recent law
(P. L. 106- 229) defines as an electronic sound, symbol, or process attached
to or logically associated with a contract or other record and executed or
adopted by a person with the intent to sign the record.

GAO- 01- 129R Electronic Signature Systems Page 4 authority in connection
with financial and nonfinancial transactions and other related

activities. Specifically, the Federal Reserve determined that Identrus'
activities as a certification authority and, more generally, those connected
with authenticating the identity of customers conducting financial and
nonfinancial transactions, are activities that are closely related to
banking within the meaning of section 4( c)( 8) of the Bank Holding Company
Act. 7 Additionally, on November 16, 1999, OCC found that the certification
authority services proposed by the banking institutions with investments in
Identrus are part of or incidental to the business of banking. 8

Although the Federal Reserve and OCC decisions outlined some of the business
processes that may be used by an entity that performs certification
authority services, these decisions do not, and are not intended to, provide
the criteria that should be used by the financial institutions in setting up
their electronic signature systems. Nor do they discuss criteria used by
examiners to review electronic signature systems. According to a Federal
Reserve official, the Federal Reserve staff took steps to gather information
concerning the business processes of Identrus and its PKI services during
the application process in order to assist with the development of risk-
focused supervisory strategies for the banking organizations supervised by
the Federal Reserve that are participants in Identrus' activities, as well
as with an appropriately risk- focused supervisory program for Identrus.

Following the passage of the Gramm- Leach- Bliley Act and the Federal
Reserve's approval of the Identrus order, providing certification authority
services is now a preapproved activity for both bank holding companies and
financial holding companies. Accordingly, bank holding companies and
financial holding companies must comply only with applicable notice
requirements (not approval requirements) for future transactions involving
certification authorities.

Lack of Guidance Hinders Evaluation of Electronic Signature Systems

Officials from OCC and the Federal Reserve told us they are currently in the
process of developing an examination strategy for Identrus. OCC officials
said that they plan to conduct a formal risk assessment and examination of
Identrus at the beginning of next year. 9 Federal Reserve officials told us
that they have not yet determined the role they should play in assessing
Identrus' operations, but stated that depository institutions should be
taking the lead in assessing the risks posed by electronic signature
systems.

7 In order to approve the application, the Federal Reserve also had to
determine that the performance of the proposed activities “can
reasonably be expected to produce benefits to the public . . . that outweigh
possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, or unsound banking
practices.” See 12 U. S. C. sect.1843( c)( 8). Also, see page 14 of the
Federal Reserve Board's approval of Identrus' activities, November 10, 1999.

8 See footnote 1.

9 OCC's Conditional Approval Letter #339, November 16, 1999, stated:
“The OCC has assigned to [Identrus] an examiner with special expertise
in bank information systems to meet regularly with management to discuss
their plans, monitor project management and observe trial implementations.
OCC will conduct an onsite examination of [Identrus] and major non- bank
service providers of [Identrus] . . ., as [Identrus] begins operations. . .
. The scope of the review will be a thorough examination of the
certification authority system, based on OCC's familiarity with the proposed
activity” (pp. 11 and 12).

GAO- 01- 129R Electronic Signature Systems Page 5 OCC and the Federal
Reserve have not yet developed a specific program to evaluate

electronic signature systems. Specifically, the Federal Reserve has not
developed any guidance with industry- specific criteria to evaluate
electronic signature systems and the adequacy of internal controls over such
operations, although it has issued supervisory guidance related to
information technology assessment. 10 This guidance directs examiners to
explicitly consider information technology when developing their risk
assessments and supervisory plans. OCC has issued similar guidance on
technology risk management. 11 It has also issued general guidance related
to certification authorities that defines the elements of certification
authority systems, describes the roles of banks in emerging systems, and
identifies some of the risks of such systems using the OCC supervision- by-
risk framework. 12

However, this general guidance does not apply to all electronic signature
systems. Although the Federal Reserve and OCC have not yet developed a
specific program to evaluate electronic signature systems, including PKI
systems, officials from the agencies have agreed to evaluate the need for
guidance that includes criteria for evaluating such systems. The development
and issuance of guidance by the banking regulators that includes criteria
for the evaluation of electronic signature systems would help not only the
information technology risk assessment and evaluation process of the
financial institutions and regulators, but also the entities that are
developing electronic signature systems, since this framework would assist
the requirements definition process. Consequently, an entity developing an
electronic signature system could reduce its information technology risks of
developing a solution that, when evaluated by the financial institutions or
the regulators, would be found lacking in critical internal controls.
Additionally, because the use of electronic signatures will likely increase
as a result of the implementation of the E- SIGN Act, all banking regulators
are likely to be involved in overseeing electronic signature systems in the
future. Therefore, it would be beneficial for the Federal Reserve and OCC to
work through the FFIEC to develop guidance to evaluate such systems. By
working through the FFIEC to develop guidance, the banking regulators could
help ensure that they have a consistent methodology for evaluating
electronic signature systems.

We have been asked by several federal agencies to review electronic
signature systems- which may include digital signatures- used in financial
management systems 13 and to discuss how such systems should be evaluated.
Because of some of the unique risks associated with highly automated
environments, traditional data integrity techniques used to authenticate an
individual may not provide the same degree of assurance that the individual
intended to be bound by a transaction as that provided by paper- based
systems. For example, in a paper- based system, an individual's signature on
the paper document is a

10 See “Assessment of Information Technology in the Risk- Focused
Frameworks for the Supervision of Community Banks and Large Complex Banking
Organizations,” SR 98- 9 (SUP), Division of Banking Supervision and
Regulation, Board of Governors of the Federal Reserve System, April 20,
1998.

11 See “Technology Risk Management,” OCC Bulletin 98- 3, Office
of the Comptroller of the Currency, February 4, 1998.

12 See “Certification Authority Systems,” OCC Bulletin 99- 20,
Office of the Comptroller of the Currency, May 4, 1999.

13 Examples of GAO's work pertaining to electronic signatures include Corps
of Engineers Electronic Signature System (GAO/ AIMD- 97- 18R, Nov. 19,
1996); and State Electronic Signature System (GAO/ AIMD- 00- 227R, July 10,
2000).

GAO- 01- 129R Electronic Signature Systems Page 6 time- tested method of
showing that an individual intended to be bound by the terms and

conditions contained in the paper document. However, in an electronic world,
where adequate controls may not have been implemented, the similar approach
of having an individual's name appended to a data record does not provide
the same assurance because, for example, the terms and conditions can be
changed without changing the individual's name.

When reviewing electronic signature systems, we evaluate whether a system
generates electronic signatures that represent an individual's or entity's
intent to be bound. To do this, we determine whether the electronic
signature system provides reasonable assurance that the signature produced
by the system is (1) unique to the signer; (2) under the signer's sole
control; (3) capable of being verified; and (4) linked to the data in such a
manner that, if the data are changed, the signature is invalidated upon
verification. Adopting these criteria facilitates our evaluation of how well
the electronic signature system addresses its threats and helps identify
vulnerabilities that may be present in the system. We have also found these
criteria useful since they are technology neutral and allow for a variety of
implementation methods, depending on the degree of risk associated with a
given application. When considering what their guidance should be, the
banking regulators may want to consider including, as appropriate, elements
of our criteria.

Recommendation for Executive Action

Given that the importance of electronic signature systems is likely to grow,
banking regulators need a consistent methodology for assessing the risks and
appropriateness of internal controls surrounding such systems. We recommend
that the Chairman, Board of Governors of the Federal Reserve System, and the
Comptroller of the Currency, OCC, work through the FFIEC to develop guidance
that includes criteria for evaluating electronic signature systems in order
to provide reasonable assurance that electronic signatures generated by the
system are valid.

Agency Comments

We requested comments on a draft of this letter from the Comptroller of the
Currency, OCC, and the Chairman, Board of Governors of the Federal Reserve
System. OCC provided written comments that are included in enclosure I. An
Associate Director, Division of Banking Supervision and Regulation, Board of
Governors of the Federal Reserve System, provided comments electronically on
a draft of this report.

OCC agreed to take our recommendation to the FFIEC. Additionally, as OCC
exercises its oversight responsibilities in evaluating the safety and
soundness of certification systems offered by national banks and their
subsidiaries, it agreed to consider, as appropriate, the technology- neutral
criteria that we have adopted in assessing whether an electronic signature
system provides reasonable assurance that the signatures generated by the
system were generated by the reported signer.

The Associate Director, Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System, commented that our letter
accurately reports that the FRB staff is currently in the process of
deciding what role, if any, the Federal Reserve

GAO- 01- 129R Electronic Signature Systems Page 7 should play in assessing
Identrus' operations. On behalf of the FRB staff, he agreed with the

general thrust of our recommendation and stated that the need for guidelines
for evaluating electronic signature systems through the bank supervision
process should be discussed on an interagency basis under the auspices of
the FFIEC. He also stated that FRB staff would work with their colleagues at
the FFIEC to address our recommendation, and that an FFIEC subcommittee
could review the current environment associated with digital certification
authorities and PKI- related technology. He stated that this review could,
for example, look into the steps that are being taken by the banking
industry and other private sector firms providing certification authority
services to establish safeguards for their services; the roles played by
internal and external auditors in evaluating their clients' services; the
adequacy of the due diligence processes and internal controls systems; and
the responsibilities of banking organizations' boards of directors to
oversee the contracts that their institutions are entering into for PKI and
related services. After its assessment, the FRB official said the
subcommittee could formulate recommendations to the banking agencies
concerning whether any new bank examination- related guidance should be
developed.

Scope and Methodology

We conducted our review from November 1999 to October 2000 in accordance
with generally accepted government auditing standards. During this review,
we examined the details of the Federal Reserve's Identrus Order and OCC's
Conditional Approval #339. Our examination included an analysis of public
key infrastructure issues presented in “Identrus Operating
Rules,” IL- OPRUL- 00D (Aug. 3, 1999); OCC Conditional Approval #267,
Re: Operating Subsidiary Application by Zions First National Bank, Salt Lake
City, Utah, Application Control Number: 97- WO- 08- 0006 (January 1998); and
“Certification Authority Systems,” OCC Bulletin 99- 20 (May 4,
1999).

We interviewed officials from the Federal Reserve System and OCC to
determine how the Federal Reserve System and OCC evaluate risk associated
with electronic signature systems and to further understand technical
accuracy and coordination issues pertaining to the Federal Reserve's
Identrus Order and OCC's Conditional Approval #339, and we compared their
plans to criteria we use to review electronic signature systems.
_____________________________________________________________________________
We will send copies of this letter to interested congressional committees;
the Honorable Lawrence H. Summers, Secretary of the Treasury; the Honorable
Donna A. Tanoue, Chairman, Federal Deposit Insurance Corporation; the
Honorable Ellen S. Seidman,

GAO- 01- 129R Electronic Signature Systems Page 8 Director, Office of Thrift
Supervision; and the Honorable Norman E. D'Amours, Chairman,

National Credit Union Administration. We will also make copies available to
others on request. If you have questions concerning the report, please
contact Richard J. Hillman on (202) 512- 8678, who will serve as the focal
point. Key contributors to this letter are listed in enclosure II.

Richard J. Hillman Director Financial Markets and

Community Investment Keith Rhodes GAO Chief Technologist

Robert H. Hast Managing Director Office of Special Investigations
*** End of document ***