Organizations attacked with ransomware have a bevy of decisions to make, very quickly! One of those decisions is whether to pay the ransom. Earlier this year, I had the honor of contributing to a two-part series, entitled Ransomware: To pay or not to pay? (Part 1 and Part 2). Joined by Danielle Gardiner, CPA, CFF, SVP of Lowers Forensics International, and Shiraz Saeed, VP, Cyber Risk Product Leader at Arch Insurance Group, we explored a range of considerations that organizations need to weigh when making this consequential and potentially decision under very difficult circumstances. A new law in North Carolina makes this decision a lot easier for certain public sector entities in the state – they cannot pay.

North Carolina’s Current Operations Appropriations Act of 2021 added a new article to Chapter 143 of the State’s General Statutes which now reads in part:

No State agency or local government entity shall submit payment or otherwise communicate with an entity that has engaged in a cybersecurity incident on an information technology system by encrypting data and then subsequently offering to decrypt that data in exchange for a ransom payment.

If a state agency or local government entity experiences a “ransom request” in connection with a cybersecurity incident, it must consult with the state’s Department of Information Technology. These rules apply to the following entities:

  • State agency – Any agency, department, institution, board, commission, committee, division, bureau, officer, official, or other entity of the executive, judicial, or legislative branches of State government. The term includes The University of North Carolina and any other entity for which the State has oversight responsibility.
  • Local government entity – A local political subdivision of the State, including, but not limited to, a city, a county, a local school administrative unit as defined in G.S. 115C‑5, or a community college.

Double extortion ransomware attacks raise an interesting issue under this law. These attacks are more sinister because they do not just encrypt the victim’s system and demand payment in exchange for a decryption utility. They also exfiltrate data from the victim’s systems, threatening to disclose it on the dark web unless the attacker is paid ransom in exchange for the “promise” to delete and not disclose the data.

It is unclear if the North Carolina law reaches this second extortion in double extortion ransomware attacks, but its proscription is consistent with the Federal Bureau of Investigation’s position; the FBI does not support paying a ransom in response to a ransomware attack. But when the possibility of payment is on the table, organizations need to know that simply making the payment could put them into legal jeopardy.

As stated in Ransomware: To pay or not to pay? – Part 2:

The primary basis of this legal jeopardy is that under the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) U.S. persons engaging in transactions with certain listed organizations can subject those persons to significant penalties. Specifically, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) maintains the Specially Designated Nationals and Blocked Persons List (SDN List), in addition to other blocked persons. A cryptocurrency transaction with one of these entities may result in the victim’s ability to retrieve access to its systems and data, but it could subject the organization to OFAC enforcement.

In its latest round of guidance on this issue, on October 1, 2020, OFAC issued the Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments (Advisory). The Advisory makes clear that entities involved in facilitating a ransom payment may have done so in violation of OFAC regulations, subjecting them to enforcement action and fines. This risk is heightened by the difficulty of determining who is on the other side of the Bitcoin transaction.

The Advisory highlights these concerns, while also noting that certain pre- and post-breach actions could mitigate OFAC exposure. Implementing “a risk-based compliance program” pre-breach and promptly making a “complete report of a ransomware attack to law enforcement” after an attack can, according to the Advisory, mitigate enforcement.

OFAC compliance may not be the only regulatory hurdle to overcome if momentum is moving in favor of payment. In the summer of 2021, following a string of massive ransomware attacks including the Colonial Pipeline attack referred to above, four states proposed legislation that would ban ransom payments. These efforts were not successful to date, but organizations need to consider regulatory limitations on ransom payments as privacy and cybersecurity laws rapidly evolve.

Ransomware attacks can happen to any organization, large or small. It is critical that organizations not only strengthen their systems to prevent such attacks. They should also strengthen their preparedness should an attack happen. This includes thinking through ahead of time the organization’s approach to the question of whether pay or not to pay ransom.

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Photo of Joseph J. Lazzarotti Joseph J. Lazzarotti

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP)…

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP) with the International Association of Privacy Professionals. Trained as an employee benefits lawyer, focused on compliance, Joe also is a member of the firm’s Employee Benefits practice group.

In short, his practice focuses on the matrix of laws governing the privacy, security, and management of data, as well as the impact and regulation of social media. He also counsels companies on compliance, fiduciary, taxation, and administrative matters with respect to employee benefit plans.

Privacy and cybersecurity experience – Joe counsels multinational, national and regional companies in all industries on the broad array of laws, regulations, best practices, and preventive safeguards. The following are examples of areas of focus in his practice:

  • Advising health care providers, business associates, and group health plan sponsors concerning HIPAA/HITECH compliance, including risk assessments, policies and procedures, incident response plan development, vendor assessment and management programs, and training.
  • Coached hundreds of companies through the investigation, remediation, notification, and overall response to data breaches of all kinds – PHI, PII, payment card, etc.
  • Helping organizations address questions about the application, implementation, and overall compliance with European Union’s General Data Protection Regulation (GDPR) and, in particular, its implications in the U.S., together with preparing for the California Consumer Privacy Act.
  • Working with organizations to develop and implement video, audio, and data-driven monitoring and surveillance programs. For instance, in the transportation and related industries, Joe has worked with numerous clients on fleet management programs involving the use of telematics, dash-cams, event data recorders (EDR), and related technologies. He also has advised many clients in the use of biometrics including with regard to consent, data security, and retention issues under BIPA and other laws.
  • Assisting clients with growing state data security mandates to safeguard personal information, including steering clients through detailed risk assessments and converting those assessments into practical “best practice” risk management solutions, including written information security programs (WISPs). Related work includes compliance advice concerning FTC Act, Regulation S-P, GLBA, and New York Reg. 500.
  • Advising clients about best practices for electronic communications, including in social media, as well as when communicating under a “bring your own device” (BYOD) or “company owned personally enabled device” (COPE) environment.
  • Conducting various levels of privacy and data security training for executives and employees
  • Supports organizations through mergers, acquisitions, and reorganizations with regard to the handling of employee and customer data, and the safeguarding of that data during the transaction.
  • Representing organizations in matters involving inquiries into privacy and data security compliance before federal and state agencies including the HHS Office of Civil Rights, Federal Trade Commission, and various state Attorneys General.

Benefits counseling experience – Joe’s work in the benefits counseling area covers many areas of employee benefits law. Below are some examples of that work:

  • As part of the Firm’s Health Care Reform Team, he advises employers and plan sponsors regarding the establishment, administration and operation of fully insured and self-funded health and welfare plans to comply with ERISA, IRC, ACA/PPACA, HIPAA, COBRA, ADA, GINA, and other related laws.
  • Guiding clients through the selection of plan service providers, along with negotiating service agreements with vendors to address plan compliance and operations, while leveraging data security experience to ensure plan data is safeguarded.
  • Counsels plan sponsors on day-to-day compliance and administrative issues affecting plans.
  • Assists in the design and drafting of benefit plan documents, including severance and fringe benefit plans.
  • Advises plan sponsors concerning employee benefit plan operation, administration and correcting errors in operation.

Joe speaks and writes regularly on current employee benefits and data privacy and cybersecurity topics and his work has been published in leading business and legal journals and media outlets, such as The Washington Post, Inside Counsel, Bloomberg, The National Law Journal, Financial Times, Business Insurance, HR Magazine and NPR, as well as the ABA Journal, The American Lawyer, Law360, Bender’s Labor and Employment Bulletin, the Australian Privacy Law Bulletin and the Privacy, and Data Security Law Journal.

Joe served as a judicial law clerk for the Honorable Laura Denvir Stith on the Missouri Court of Appeals.