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News Analysis: CardSystems violated contracts by not encrypting data and retaining data it wasn’t supposed to?and then became the nation’s largest data-theft victim. Now it wants bygones to be bygones.

When credit card processing firm CardSystems announced Thursday that an independent auditor had declared its systems sound, one CardSystems executive said he now wants Visa and American Express to take it back.

CardSystems Inc. was at the center of the nation’s largest known data security breach back in May, when it reported that someone had broken into its systems and stolen the details of as many as 40 million payment cards, including names, account numbers and expiration dates.

CardSystems might have been seen as the victim had it not admitted that it violated its contracts with Visa International Service Organization, American Express Co. and others, by failing to encrypt credit card transaction data and by keeping on file card verification numbers that are never supposed to be stored.

Those transgressions made the data theft much more dangerous, company officials conceded.

When CardSystems CEO John Perry testified to an investigating congressional committee in July, he said that an earlier audit, done by the Cable & Wireless Security unit now owned by Savvis Communications Corp., had failed to identify the encryption and data-retention problems.

Saavis officials said the systems they were told to look at were fine at that time and that either the problems were on other machines or the sloppy procedures began after their audit had wrapped up.

The challenge of using security audits properly, and understanding what their results do and do not reveal, is becoming a major issue in retail payment systems.

On Thursday, CardSystems announced that a new audit, from AmbironTrustWave, had been completed.

“We believe that the Report on Compliance concludes that CardSystems meets the PCI standard. We are hopeful that MasterCard, Visa, American Express and Discover will accept this PCI report and validate that CardSystems is PCI compliant,” Perry said in a statement.

“The data security protocols currently in place at CardSystems make it one of the data security leaders among payment processors in the payment card industry.”

Bill Reeves, a senior vice president at CardSystems in charge of marketing and communications, said in an interview that the company wants Visa and American Express to resume doing business with CardSystems. Both credit card giants had suspended CardSystems two days before the July congressional hearing.

But industry security officials said they doubted either Visa or American Express would welcome CardSystems back with open arms. Officials with neither card company returned messages seeking comment.

The reason the turnaround is unlikely is that CardSystems had not been suspended for being out of PCI compliance alone. It was suspended for the contract violations. More to the point, though, the security business is about perceptions of security and the negative publicity surrounding CardSystems was too intense and too public.

Mark Rasch, former head of the U.S. Justice Department’s computer crime unit and current senior vice president and chief security counsel for Solutionary Inc., said CardSystems’ breach ripped at the heart of what credit card companies fear most.

“Why do they even have a PCI standard? It’s to increase public confidence,” Rasch said. “Anything that undermines public confidence is an anathema to Visa and MasterCard and American Express.”

Although CardSystems faces extensive civil liability risks, lawsuits are a minor problem for CardSystems compared with perception. Rasch said that public perception can cripple companies much more effectively than can jury verdicts, and cited Union Carbide as one that succumbed to this problem,and Johnson & Johnson (the Tylenol poisoning) and Exxon Mobil Corp. (the Valdez oil leak) as companies that came close.

“When you’re in the trust business, a single failure in security can put your company out of business,” Rasch said.

Can CardSystems do anything to redeem itself in Rasch’s view? Maybe.

“We haven’t seen any major change in management or accountability or business process,” he said. “Nobody took personal responsibility for this.”

If someone did take personal responsibility, would Rasch think CardSystems could be trusted?

Yes, he said, adding, “If there is any company in the world that is going to try their damnedest to be compliant, it will be CardSystems.”

But saying that CardSystems could be trusted is very different from predicting that it will be trusted.

In an interview with Ziff Davis Internet shortly after CardSystems issued its statement, CardSystems’ Reeves was asked, if he were working at Visa or American Express, whether he would hire CardSystems back given the current situation. It was the only question he said he didn’t want to answer.