Neiman Marcus says 'complex' malware defeated its security

The retailer's CIO writes that the company exceeded security recommendations for handling card data

Neiman Marcus was unaware attackers had harvested payment card details until six weeks after the activity had ended, when its merchant processor zeroed in on a fraudulent spending pattern.

The retailer gave its most complete account yet of its data breach in a letter Wednesday to U.S. Sen. Richard Blumenthal, a Democrat from Connecticut, who has pushed Neiman Marcus and Target for more details on how they've responded to the attacks.

Neiman Marcus characterized the malware involved as "complex" and described in part how it collected card details despite security measures that the retailer says exceeded industry recommendations.

As many as 1.1 million payment cards may have been exposed, and so far 2,400 cards have been fraudulently used, wrote Neiman Marcus CIO Michael R. Kingston in the letter, posted on Blumenthal's website.

Forensic investigators have determined that malicious software that "scrapes" payment card details was installed, he wrote.

The same kind of malware, which is installed on point-of-sale terminals, was used against the retailer Target, which has said up to 40 million card details may have been compromised. The malware grabs unencrypted card data while it is still in a cash register's memory.

Neither retailer has revealed how the attackers breached their systems. The malware was installed on Neiman Marcus' system as early as July 2013 and was active through Oct. 30, 2013, Kingston wrote.

The retailer's first hint of fraud came on Dec. 13 when its merchant processor said Visa identified an unknown number of fraudulent purchases with cards that had been used at a small number of stores. Over the next week, Visa and MasterCard sent more reports of cards that had been fraudulently used after their holders visited stores.

Neiman Marcus hired a forensics firm Dec. 20 to investigate and notified federal law enforcement on Dec. 23, Kingston wrote. A second computer investigation consultant, Stroz Friedberg, was hired Dec. 29.

On Jan. 1, the forensics firm said it appeared to find malware that related to payment card transactions. Over the next two days, Neiman Marcus began planning how to notify affected consumers and financial institutions.

It started notifying customers Jan. 10, the day the breach was revealed by security writer Brian Krebs.

In an updated post on the company's website, Neiman Marcus Group President and CEO Karen Katz said it is notifying all customers for whom it has contact information and who have shopped at its stores since January 2013. It will offer them a year of free credit monitoring and identity theft protection.

Nieman Marcus says Social Security numbers and birth dates were not taken, and that its stores don't require customers to enter a payment card PIN (personal identification number).

According to Kingston, Neiman Marcus' systems exceed the Payment Card Industry's Data Security Standard (PCI-DSS) requirements, a set of security best practices around handling card data.

PCI-DSS does not require encryption of network traffic within a retailer. Data from cards swiped at Neiman Marcus passes through a point-of-sale device's memory, "then is transmitted through an encrypted tunnel to a central point on our network," Kingston wrote.

"The data is then forwarded through a firewall to the merchant payment processor over a dedicated circuit," he wrote.

Kingston described the malware used as "complex and its output encrypted."

Its investigators analyzed the encryption algorithm and created a script that allowed them to decrypt the information it scrambled, which showed "payment card information had been captured," Kingston wrote.

Security experts believe a variant of "Kaptoxa," also called "BlackPOS," was used against Target. The malware was spotted by security companies as early as March 2013. It wasn't clear from Kingston's letter if Kaptoxa is the same malware used against Neiman Marcus.

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