Understanding 4th Party Risk Management

September 28, 2023

Understanding 4th Party Risk Management

Companies leverage 3rd-party vendors and suppliers to cut down costs and increase productivity. To further keep up with demand, 3rd-party vendors also utilize outside vendors. While companies typically execute 3rd party risk management programs, 4th party risk management plans are fast becoming critical to prevent serious security and financial damage from occurring.

4th party risk management Compyl

Why Is 4th Party Risk Management Important?

Fourth parties are the vendors that your vendors contract. Typically, most companies do not interact with parties beyond direct contractors. Because corporations do not have direct contact with sub-contractors, data security teams should closely monitor the risk management programs of all vendors to ensure that outside entities are appropriately screened.

This screening process is crucial because corporations inherit all risks associated with the vendors they choose to work with. If outside vendors do not maintain acceptable compliance and security measures, corporations are vulnerable to serious data breaches that can cause both reputational and financial damage. According to the Cyentia Institute, the average business employs around 10 third-party vendors and can have60 to 90 times more 4th party vendorsthan direct contractors.

How Can Companies Discover Potential Fourth Parties? 

Security teams should closely review the System and Organization reports of vendors to identify potential fourth parties and to determine if they follow security and compliance measures that meet their corporation’s standards. SOC reports contain information on how vendors prevent unauthorized access to personal and sensitive data. For sound 4th party risk management, IT and data security personnel should review the SOC 1 and SOC 2 Reports of vendors to assess potential risks that can arise from sub-contractors.

The SOC 1 Report 

This report pertains to a vendor’s internal controls over financial reporting. Enterprises that handle any type of financial transaction, especially with external stakeholders, should perform regular SOC 1 audits. Failure to identify how fourth parties handle financial data can be extremely costly. In 2020, non-compliancefines against financial institutionswere over $10 billion.

The SOC 2 Report

This report examines a service entity’s non-financial controls relating to availability, security, privacy, confidentiality, and processing integrity. Corporations that handle private and sensitive information should routinely carry out SOC 2 audits.

SSAE 18 Reports

Both of these reports must adhere to the Statement on Standards for Attestation Engagements 18, which is an audit standard for the framework of SOC reporting. These reports should detail the sub-contractors that third parties utilize for services that involve financial transactions and sensitive data handling. SSAE 18 requires third-party vendors to be responsible for reporting their critical service providers, giving corporations a more direct focus on 4th-party security vigilance.

What Risks Are Associated with Sub-Contractors? 

Fourth-party vendors can pose several threats to corporations. The following situations can severely damage the reputation of a business, causing negative downstream effects. Each of these scenarios highlights the need for 4th party risk management to be included in a corporation’s security protocols.

Data Breaches

If vendors use external service providers to store or transmit sensitive information, data breaches can occur if these service entities do not have a strong cybersecurity system. A data breach for healthcare systems, financial institutions, or even government bodies can be devastating to any involved party. In 2023, the average cost of a single data breach wasover $4 millionand is projected to continually increase over time.

Service Downtime 

If a fourth party experiences power outages, this service downtime may be visible to an enterprise’s clients. Downtime can equate to decreased productivity, increased risk for cyberattacks, and loss of revenue. Moreover, service downtime can cause legal disputes if outages last longer than contracted service-level agreements.

Poor Surveillance

Sub-contractors may not have strong enough cybersecurity vigilance measures leaving themselves vulnerable to cyberattacks. These attacks can have upstream effects that make corporations vulnerable to potential malware attacks.

What Are Key Elements To Include in a 4th Party Risk Management Plan? 

Every corporation should examine how well their TPRM programs manage 4th party risk by performing these steps.

1. Critical Fourth Party Identification

Enterprises should audit their third parties to identify every fourth-party vendor involved in critical workflows. If possible, vendors should provide third-party risk assessments. This allows the security team to envision a better picture of the compliance and surveillance measures of outside vendors.

2. Risk Factor Analysis and Mitigation

Rather than performing a comprehensive fourth-party risk assessment, identify concentration risks that expose critical vulnerabilities created by outside vendors. Role-based access controls can be tested to see where threats can occur and thus be mitigated.

3. Incident Response Update

Security teams should update or create monitoring systems that alert the enterprise of fourth-party incidents before they cause downstream effects. If a fourth party becomes compromised, the risk management plan should state how to separate internal data and network systems from the fourth-party system.

4. Continuous Fourth-Party Compliance Monitoring 

TPRM plans should be updated to include a routine report of sub-contractor compliance status for 4th party risk management. Third-party vendors should also alert the primary enterprise if an outside vendor is penalized for compliance breaches.

5. Enterprise-Wide Security Controls

Security controls should be based on the following principles:

  • Least Privilege Access
  • Zero Trust Access

The Least Privilege principle refers to the concept that users should only have access to specific data or assets that are necessary to complete their day-to-day tasks. Zero Trust Access refers to the required authentification and verification of any entity attempting to gain access to an enterprise’s network. This applies to both internal and external system users.

How Can Compyl Improve 4th Party Risk Management Protocols?

In today’s fast-paced world, automation is essential to keep up with the security and compliance measures required to safely run your enterprise. At Compyl, we offer three levels of our security and compliance platform to meet your corporation’s needs. Each level delivers vendor management to assist and guide your security team on effective 4th party risk management. For custom risk mitigation solutions,contact our teamto learn how we can improve your security and build solutions that are scaled to your organization’s future growth.

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