Canada: Lesson From VTech

Last Updated: February 13 2018
Article by Lisa R. Lifshitz

Originally published by Canadian Lawyer Online - IT Girl Column

A recent decision from the Office of the Privacy Commissioner of Canada has provided some useful guidance in connection with minimum security standards required for Internet of Things/web-connected devices, particularly those that collect personal information and data from children.

Background and scope: In PIPEDA Report of Findings #2018-001, the OPC reported on its investigation of VTech Holdings Limited, a manufacturer of electronic learning products for children headquartered in Hong Kong with operations in 13 countries and regions (VTech Technologies Canada Ltd. is its Canadian subsidiary). The case arose following a complaint from an affected individual whose information was compromised when VTech's global server was breached between Nov. 12 and Nov. 29, 2015. The hacker gained access to various VTech environments and ultimately to customer data, in a live production environment, copying customer data off of VTech's network. The OPC estimated that the breach affected more than 316,000 Canadian children and more than 237,000 Canadian adults.

What was accessed? VTech assumed that data residing on the compromised servers relating to several of its online websites/platforms and apps were accessed or copied, including: Learning Lodge Navigator (which allows customers to download child-directed apps, learning games, e-books and other educational online content to their VTech products); Planet VTech (an "online world" designed for children); and Kid Connect (an app that allows children to communicate with other children who have the app or with parents who download the adult version of the app through Apple's App Store or Google's Google Play Store to exchange voice and text messages, photos, etc. between VTech devices and parents' smartphones). The stolen data likely included parental account information, such as names, email addresses, secret questions and answers for password retrievals, IP addresses, mailing and billing addresses, the last four digits of credit cards and expiration dates, download history, history of device purchases and passwords. Even worse, the hacker likely obtained unauthorized access to children's information, including names, gender and birthdates, photos, voice recordings and chat messages (between parents and their children). Mercifully, no credit card or other financial account information was compromised as all payments were directed to secure third-party gateways.

Where did VTech's security practices go wrong? The OPC identified numerous "safeguard shortcomings" (to put it mildly).  These included the following:

1)     VTech's hacker obtained access to VTech's systems via SQL injection attacks that were not caught because the company did not engage in regular vulnerability testing, therefore failing to catch the attack. VTech also neglected to regularly patch its software or ensure that versions used were current.

2)     VTech did not implement rigorous administrative-level access controls on its servers, environments and databases. Production passwords had been shared in test environments, personnel were sharing accounts and local administrators were given broad access across networks. The hacker was thus able to gain initial access to a test environment and a local administrator account and later move between environments to gain access to sensitive information of customers (and their children) on a global basis.

3)     VTech's existing cryptographic protection was inadequate, inconsistent and haphazard. Some sensitive information (such as names, security questions and answers, etc.) was stored in plain text, while certain customer communication was transmitted in unencrypted clear text. Passwords were stored using vulnerable cryptographic methods.

4)     VTech was unable to detect potential intruder threats or unauthorized/unusual activities (i.e., no alarm bells went off when customer data was removed from its networks) because it did not employ adequate host and network security logging/monitoring services.

5)     Lastly, the company lacked a comprehensive data security policy, did not conduct security training or have a program for regular risk assessment.

What actions did VTech do to mitigate the breach? To its credit, VTech did move quickly to contain the original breach once it had been discovered, taking its relevant databases, servers and websites offline, rebuilding affected systems before going back online, notifying individual customers on Nov. 27, 2015 via notices that contained safety measures to mitigate risks as well as by press releases, social media and FAQs on its websites (it notified the OPC in December). VTech also required users to change their passwords upon their first subsequent login and co-operated with local law enforcement in various countries to assist investigations regarding the breach.

Cleanup: In response to its investigation and those of other regulators in the U.S. and Hong Kong, the OPC reported that VTech took "active and comprehensive measures" to clean up its security practices and mitigate against future breaches. The steps undertaken by VTech serve as a road map or a benchmark for good security practices that should be undertaken by all companies that hold sensitive data:

(i) Testing/maintenance: VTech ultimately implemented a regular, multi-faceted testing protocol to identify potential system vulnerabilities and an update/patch management program to lower the risk of known vulnerabilities.

(ii) Administrative access controls: VTech is now limiting the number of individuals with administrative access, as well as the scope of access available via individual accounts (e.g., to limit cross-network access of local administrators). The company has also strengthened authentication controls (e.g., strong passwords) and put in place organizational measures to better control the use of administrative accounts.

(iii) Cryptography: The company has adopted enhanced cryptography for stored information, as well as encryption for user information in transit via its websites and apps.

(iv) Logging and monitoring: VTech has increased and centralized log-event retention to assist in detecting and investigating unauthorized activities on its network, as well as restricting and monitoring outgoing traffic to the internet.

(v) Security Management Framework: Lastly, the company has deployed a (new) comprehensive data security policy, which includes the creation of a Data Security Governance Board to ensure, among other things: staff awareness via annual training regarding the policy and data security; policy compliance; and annual risk assessments, best-practice benchmarking and reviews so that the policy and associated data security measures remain adequate.

Breaching PIPEDA: Given the sensitivity of the information under VTech's control and the number of individuals affected, including children, the OPC found that VTech was required to have heightened safeguards in place to protect against unauthorized access — but it didn't. As a result, the OPC found VTech in violation of Principles 4.7 and 4.7.3 of Schedule I of PIPEDA relating to security safeguards and the fact that more sensitive information should be safeguarded by a higher level of protection. 

The FTC's order: VTech's compliance troubles did not end with the OPC. In addition to having inadequate security practices, the U.S. Federal Trade Commission severely chastised the privacy and security practices of related companies VTech Electronics Limited (based in Hong Kong) and its U.S. subsidiary, VTech Electronics North America, LLC, based in Illinois (collectively "VTech USA"). On the same day the OPC decision was released, the FTC announced that it was settling charges filed by the U.S. Department of Justice on behalf of the FTC against VTech USA for violating the Children's Online Privacy Protection Act by collecting personal information from children without providing direct notice to parents (including prominently displaying links to online notices of information practices with regard to children on the home page or screen of its website or online services and at each area of the website or online service where personal information is collected) or obtaining verifiable consent concerning its information collection practices. VTech USA also allegedly failed to use reasonable and appropriate data security measures to protect the personal information collected. The FTC also claimed that VTech USA expressly violated the Federal Trade Commission Act by engaging in several deceptive acts or practices, including by falsely stating in its privacy policy that most personal information (including registration data) submitted by users through the Planet VTech and Learning Lodge platform/apps would be encrypted in transmission/storage, but this was, in fact, not done.

Next steps: The complaint and stipulated final order was filed in the U.S. District Court for the Northern District of Illinois and, following signature by the District Court Judge, will have the force of law. VTech USA was ordered to pay US$650,000 in civil penalties as part of its settlement with the FTC and, in addition to the monetary settlement, is permanently prohibited from violating COPPA and from further misrepresenting its privacy and security practices. 

Implementing a comprehensive information security plan: VTech USA is also required to implement a comprehensive information security program that must be fully documented in writing and contain administrative, technical and physical safeguards appropriate to VTech USA's size, complexity, activities and the sensitivity of the personal information. The FTC's guidance in this area is also illustrative as it highlights that such information program must include:

(a)    the designation of an employee or employees to co-ordinate and be responsible for the information security program;

(b)   internal and external risk assessments, including (i) employee training and management; (ii) information systems, such as network and software design, information processing, storage, transmission and disposal; and (iii) prevention, detection and response to attacks, intrusions or other systems failures;

(c)    the design and implementation of reasonable safeguards to control these risks, including regular testing or monitoring of the effectiveness of the safeguards' key controls, systems and procedures;

(d)   the development/use of reasonable steps to select and retain service providers capable of appropriately safeguarding personal information they receive from VTech USA and requiring such service providers, by contract, to implement and maintain appropriate safeguards; and

(e)    the evaluation and adjustment of this information security program in light of the results of testing and monitoring, changes to VTech USA's operations or business arrangements or other circumstances that VTech USA know (or ought to know) that could have an impact on the effectiveness of the information security program.

VTech USA is obliged to obtain initial and biennial assessments conducted by independent third-party auditors for the first 180 days after the initial date of the order and each two-year period thereafter for 20 years after issuance of the order for the biennial assessments. One year after entry of the order, VTech USA must submit a detailed compliance report, sworn under penalty of perjury, that describes how VTech USA is in compliance with each section of the order, along with other (onerous) information requirements. It's an understatement to say that the FTC takes auditing duties very seriously.

Conclusion: Among others, the "lessons" that can be gleaned from the VTech and VTech USA cases include: (i) IoT/connected toys and devices remain very vulnerable in the face of haphazard/sloppy security practices; (ii) inadequate security safeguards will no longer be tolerated by regulators, particularly when children's information or other sensitive information is involved; (iii) robust and adequate security safeguards involve multi-level tiers of protection per the above; (iv) vendors should never misrepresent the state of their security practices in their privacy policies; and (iv) in a connected world, regulators are willing to work together and share data and resources to combat "deceptive and unfair practices that cross national borders" (in the words of the FTC).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Lisa R. Lifshitz
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