Modern organizations operate in a complex business landscape. Increasingly, they rely on a plethora of third-party partners, vendors, and subcontractors to generate value, boost competitiveness, and strengthen their bottom line.

And yet, these same third parties also create numerous risks that can disrupt the organization’s operations, affect its financial standing, and damage its reputation.

To minimize these risks, third-party risk management (TPRM) with risk assessments, security questionnaires, vendor due diligence during third-party selection, and ongoing monitoring of risk are all crucial.

Several third-party risk management regulations have also evolved over the years to help organizations cope with such threats and minimize their potential impact. This article explores some of these regulations and their benefits.

7 Common Risks When Managing Third-party Partners

Financial Risk

The use of third parties brings financial risk. The performance of a third party can impact its client organization’s financial performance. For instance, if a supplier provides a faulty component to you, it could impair your sales and thus damage revenue and profit potential.

Credit Risk

When a third-party vendor fails to make payments to a financial institution, it creates a credit risk that could also impact your organization.

Reputational Risk

When a third party indulges in illegal or unethical business practices, gets poor recommendations, or suffers a cybersecurity attack or data breach, business dealings with them could harm your company’s reputation and standing.

Compliance Risk

If a supplier violates a law or regulation, its customer companies can also be deemed complicit and held legally liable. For instance, if a vendor violates information protection laws like HIPAA or PCI-DSS, your organization may be found liable and may have to pay a fine.

Transactional and Operational Risk

If a vendor is impacted by a natural disaster, its operations could be disrupted, which might lead to downtime in your organization and even financial losses. Other issues such as human error, technology failure, or fraud at their end could also affect your ability to complete day-to-day transactions.

Strategic Risk

Strategic risks are long-term risks that arise when a third party makes business decisions that don’t align with your organization’s strategic goals or prevent you from achieving your long-term vision.

Cybersecurity Risk

Cybersecurity risks created by third parties include unauthorized access attempts, data breaches, information exfiltration, and intellectual property theft, all of which can have an impact on your operations, finances, regulatory compliance posture, and reputation.

5 Well-Known Third-Party Risk Management Regulations

There are several risk management regulations to help organizations manage and mitigate third-party risks. Some of these regulations are explained below.

General Data Protection Regulation (GDPR)

What it is: A consumer protection law to protect the personal information of EU citizens and residents

Applicable to: Any organization within or outside the EU that processes the personal data of EU citizens or residents

The GDPR requires organizations to conduct regular risk assessments in order to strengthen cybersecurity and prevent attacks or breaches that could cause havoc if left unchecked.

A risk assessment is a good way to understand what data you and your third parties collect, store, and process on EU citizens, identify the risks around it (e.g., accidental data disclosures, Shadow IT, etc.), and implement measures to mitigate these risks.

Health Insurance Portability and Accountability Act of 1996 (HIPAA)

What it is: A U.S. federal law to protect sensitive electronic protected health information (ePHI) of U.S. citizens and residents

Applicable to: All healthcare organizations (“covered entities”) and business associates that collect, handle, process, or store ePHI

The HIPAA Security Rule mandates that covered entities and their third parties (business associates) implement specific procedures to prevent, detect, contain, and correct security violations with respect to ePHI.

One such policy is a risk management policy which is an “administrative safeguard” under HIPAA. A HIPAA risk management plan should include:

  • A risk analysis that lists all likely and unlikely risks with probability impact (high/low)
  • A risk mitigation or loss prevention strategy to minimize or limit the probability and impact of the risk

FED SR 13-19 Guidance on Managing Outsourcing Risk

What it is: A “supervisory letter” to help financial institutions, financial services providers, and banking organizations develop a secure third-party risk management program

Applicable to: All financial institutions operating under the U.S. Federal Reserve

The financial industry is particularly vulnerable to data frauds and cybercrime threats, which often result in significant losses to organizations and their customers. The FED SR 13-19 provides extensive third-party risk management guidance for financial institutions that engage the services of third-party providers.

The proposed guidance describes the various elements of an appropriate service provider risk management program and is applicable whenever any financial business functions are outsourced to third-party suppliers.

Similar to FED SR 13-19, the FIL-44-2008 published by the Federal Deposit Insurance Corporation (FDIC) also addresses the risks that may arise from financial institutions’ third-party relationships. It outlines the principles of risk oversight, risk management, vendor contract negotiation and structures, and vendor oversight.

Payment Card Industry Data Security Standard (PCI DSS)

What it is: A set of requirements to secure and protect customer information, in particular, their payment data

Applicable to: All companies that transmit, process, or store credit card information

PCI-DSS includes a set of standards, specification frameworks, tools, and support resources to help organizations secure cardholder information at all times.

One of the critical requirements of PCI-DSS is that access to all cardholder data must be on a strict “need to know” basis. This means that all third parties who do not need access to this data should not have it. If they do have access, their roles should be well-documented and regularly updated.

PCI-DSS also states that all third-party service providers must demonstrate PCI-DSS compliance through regular risk assessments. They must understand the probability and potential impact from various threats, implement controls to protect data, regularly evaluate their security posture, and mitigate risks to an acceptable level.

Sarbanes-Oxley Act (SOX)

What it is: A law aimed at improving the accuracy and reliability of financial statements and corporate disclosures to protect U.S. investors

Applicable to: All public companies operating in the U.S.

SOX defines the internal audit requirements applicable to U.S. public companies to protect investors from fraudulent accounting activities by addressing financial reporting risks. SOX includes several controls for managing third-party risk:

  • APO10.01/APO10.02: Vendors must be selected per the organization’s third-party vendor risk management policy and processes
  • APO10.03: A designated individual must regularly monitor and report on whether third parties are meeting the organization’s service level performance criteria
  • APO10.04: Third-party service contracts must address the various risks, security controls, and procedures to protect information systems and networks

Other Third-Party Risk Management Regulations

In addition to the five regulations explained above, there are many other regulations and laws related to third-party risk management. These include:

  • System and Organization Controls (SOC): How an organization assesses and manages risks associated with third parties
  • ISO/IEC 27001: Controls related to information security in third-party relationships and supplier service delivery management
  • HITRUST CSF: Framework to identify the risks to information assets when a third party is introduced and implement the controls to control their access to these assets
  • New York SHIELD Act: Organizations must assess all third parties and identify, categorize, prioritize, and manage risks arising from them

Benefits of Third-Party Risk Management Regulations

Third-party risk management regulations provide frameworks, policies, and resources to help you manage third-party risk and develop contingency plans. They also provide guidance on the controls and procedures you must implement to mitigate and, if possible, eliminate third-party risk.

By complying with regulators and protocols, you can prove your willingness to go the extra mile to earn trust and establish a reputation for reliability and ethical business practices.

Compliance with applicable laws can also help reduce the impact of any interruptions to third-party operations, maintain business continuity, and protect your organization from security incidents, data breaches, and any resultant penalties or fines.

ZenGRC Can Help You Manage Third-Party Risks

Compliance with third-party risk management regulations is vital to mitigate third-party risks. Management of third-party relationships is also essential. For this, a robust third-party risk management process is required.

However, the third-party risk management lifecycle can be a complex and intimidating endeavor. An integrated and automated platform like ZenGRC can help reduce stress and anxiety when it comes to addressing third-party risks.

ZenGRC provides an automated system of record to simplify compliance efforts. With ZenGRC, you can stay on top of constant regulatory changes without cumbersome spreadsheets or time-consuming manual efforts.

Pre-loaded with compliance framework content from 30+ standards and regulations, ZenGRC helps identify compliance gaps, so you can address them quickly and mitigate third-party risks.

Learn how ZenGRC provides continuous compliance monitoring and easy audit management.