Safeguarding Your Business from Third-Party Cybersecurity Risks

Businesses of all shapes and sizes increasingly rely on third-party vendors for a wide range of services. From payroll processing and cloud-based accounting systems to IT support and customer service platforms, these strategic partnerships can streamline operations, reduce costs, and allow internal teams to focus on core business functions. But with that convenience comes increased exposure—third-party relationships can introduce serious cybersecurity risks that may compromise sensitive client data, disrupt operations, and leave businesses vulnerable to regulatory and reputational fallout.

Understanding Third-Party Cybersecurity Risks

Third-party vendors often have broad—and, at times, unrestricted—access to sensitive information, including client financial records and proprietary data. With that level of access comes a critical responsibility to uphold strong cybersecurity standards and safeguard the trust placed in them. Vendors lacking adequate cybersecurity measures can become vulnerable entry points for cybercriminals. A single breach can expose your business to regulatory penalties, legal liabilities, and lasting reputational harm.

Another growing concern is the rise in supply chain attacks, which are cyberattacks that target a business indirectly by infiltrating less secure elements within its network of vendors, suppliers, or service providers. In these attacks, instead of attacking a company head-on, cybercriminals exploit vulnerabilities in third-party systems to gain access to the primary organization’s data and infrastructure. These attacks are particularly dangerous because they often go unnoticed until significant damage has already been done. In many cases, the impact isn’t limited to a single organization—it can cascade across the supply chain, affecting multiple businesses at once, making it crucial to assess the security of every third-party relationship you maintain.

Evaluating AI Risk Within Third-Party Relationships

The use of artificial intelligence (AI) by third-party service providers (TSPs) is another emerging risk area. Businesses should evaluate whether their vendors are leveraging AI to deliver services—and whether that use puts company data at risk of exposure or misuse.

Some providers may incorporate client data into proprietary large language models (LLMs) or rely on third-party tools like ChatGPT, increasing the risk of data loss, unauthorized access, or policy violations. While AI can offer valuable efficiencies, its use within your vendor network should be carefully assessed as part of your broader supply chain risk strategy.

The Regulatory Push for Third-Party Cybersecurity Oversight

As cybersecurity threats tied to third-party service providers grow more complex and far-reaching, several regulatory bodies have responded with heightened scrutiny, proposing new rules and updates to improve oversight, accountability, and data protection across the vendor landscape.

In October 2022, the SEC proposed regulations to strengthen oversight of investment advisers’ use of outsourced services. These rules would require advisers to conduct due diligence before engaging third-party vendors and to monitor their performance on an ongoing basis. The goal is to ensure outsourced functions meet the same standards as internal operations—protecting client interests and maintaining compliance with federal securities laws.

More recently, in May 2024, the SEC amended Regulation S-P to address data security and breach response. The update introduced a broader definition of “customer information” and expanded the safeguards rule. Covered institutions must now implement written policies to secure and protect client data, mitigate foreseeable threats, and prevent unauthorized access that could cause substantial harm or inconvenience.

Even at the state level, the New York State Department of Financial Services (NYDFS) has also issued targeted guidance, emphasizing the cybersecurity risks associated with artificial intelligence, particularly those stemming from third-party and supply chain dependencies. The guidance encourages financial institutions to apply existing cybersecurity regulations to emerging AI-related threats, such as AI-enhanced phishing or data manipulation.

Effective Practices for Managing Third-Party Cybersecurity Risks

While the risks are real, there are practical steps you can take to protect your business and hold vendors to a higher security standard. Taking a proactive and intentional approach to managing third-party relationships can reduce exposure, maintain compliance, and reinforce trust with your clients.

Consider implementing the following practices to help you manage third-party cybersecurity risks effectively:

1. Conduct Thorough Due Diligence: Before engaging with a vendor, assess their cybersecurity policies, protocols, and compliance with relevant regulations.
2. Implement Continuous Monitoring: Regularly monitor and audit vendor activities to promptly detect and address potential vulnerabilities. Continuous oversight helps ensure that vendors maintain the security standards required to protect your firm’s data.
3. Establish Clear Contractual Agreements: Define security expectations, responsibilities, and incident response procedures within vendor contracts. Confirm that vendors are obligated to notify your firm promptly in the event of a cybersecurity incident.
4. Limit Data Access: Grant vendors access only to the data necessary for them to perform their functions. Implement strict access controls and regularly review permissions to minimize exposure.
5. Utilize System and Organization Controls (SOC) Reports: Request SOC reports from vendors to gain insights into their control environments and identify potential risks within the supply chain. SOC 2 reports, in particular, assess controls related to security, availability, confidentiality, processing integrity, and privacy.
6. Provide Regular Security Training: Educate your employees about the risks associated with third-party vendors and the importance of adhering to security protocols when interacting with them.

Protecting Your Business Starts with the Right Partnerships

While third-party vendors play a crucial role in the operations of most businesses, they can also introduce significant cybersecurity challenges. The good news is that with rigorous vendor risk management practices, awareness of evolving regulations, and a strong cybersecurity culture, you can mitigate these risks and maintain the trust of your clients.

Have questions or need help evaluating your vendor risk strategy? Contact a CRI advisor for personalized guidance and support. Taking the time now to strengthen your third-party oversight could be the difference between peace of mind—and a costly breach down the road.