How to Assess 3rd vs 4th Party Risk Management

A concerning trend has emerged in recent years: organizations are increasingly falling victim to breaches that originate not from direct attacks on their systems but from vulnerabilities within their third-party vendors.

As businesses adopt new technologies—whether outsourcing due to resource constraints or striving to stay competitive—the growing number of vendors can undermine an organization's security, leaving it exposed to more risks than anticipated.

Understanding and managing third- and fourth-party cybersecurity risks is no longer just a best practice; it's a necessity that has caught the attention of regulators.

In this blog, we will aim to provide a comprehensive overview of these risks and offer practical steps for managing 3rd party and 4th party risks effectively.

Overview of Third-Party and Fourth-Party Risks

So what exactly is the difference between the two?

• Third-Party Risk: refers to the risks associated with any vendor, contractor, or partner that your company directly engages with. These entities might have access to your systems, networks, or sensitive data to perform their services.
• Fourth-Party Risk: These are the vendors associated with your vendors. Essentially, these are the service providers or subcontractors that your third parties rely on. Even if you don't have a direct relationship with these fourth parties, their cybersecurity posture can still impact your organization.

For financial institutions, the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) have established robust guidelines to help banks and credit unions maintain effective oversight of their third-party relationships. A critical part of these guidelines is conducting thorough due diligence before engaging with any vendor. This process includes evaluating the vendor’s financial health, security practices, legal compliance, and ability to meet service requirements. It also extends to understanding the vendor’s relationships with their own vendors (fourth-party vendors). 

Unfortunately the guidelines are less specific when it comes to managing the risks posed by these fourth-party vendors but still remain important. To help financial institutions navigate this complexity, a valuable resource they can use is the Interagency Guidance on Third-Party Relationships: Risk Management. Issued by the Federal Reserve, FDIC, and the Office of the Comptroller of the Currency (OCC), this guidance encourages financial institutions to continuously enhance their third-party risk management (TPRM) programs, especially those that are customer-facing or impact consumers. 

There have been numerous cases of third-party breaches affecting organizations downstream. One prominent example is the 2013 Target data breach, where an HVAC vendor with access to Target's internal network compromised the credit and debit card information of over 40 million customers. More recently, in 2021, a third-party mortgage services provider for Bank of America experienced a data breach, exposing sensitive customer information. These incidents underscore the critical need for continuous monitoring of third-party vendors to detect and address potential vulnerabilities promptly.

Steps to Properly Assess Third-Party Risk 

Here are some steps you can take when assessing third-party risks:

Identify and Categorize Critical Vendors Based on Risk

Not all vendors pose the same level of risk. Begin by identifying which vendors have access to sensitive data or critical systems and categorize them based on the level of risk they present. Prioritize those that would have the most significant impact on your business in the event of a cybersecurity incident.

Conduct Vendor Due Diligence

Thorough due diligence is essential before entering into any vendor relationship. This process should include assessing the vendor's cybersecurity policies, procedures, and previous incidents. Vendor risk assessments, cybersecurity questionnaires, and reviewing third-party certifications can provide valuable insights.

Understand and Evaluate Technical and Access Management Controls

Evaluate the technical controls your vendors have in place, such as encryption, multi-factor authentication, and network security measures. Also, assess how vendors manage access to your data and systems, including who has access and under what circumstances.

Establish Strong Contractual Agreements

Strong contractual agreements are a critical safeguard in managing vendor cybersecurity risks. These contracts should go beyond basic service terms and explicitly include detailed cybersecurity requirements. Key elements to cover include data protection measures, access controls, and clear protocols for handling sensitive information. Additionally, the contract must outline the vendor’s responsibilities in the event of a security breach—such as reporting timelines, liability for damages, and the steps they must take to remediate the issue.

Perform Ongoing Monitoring

Cybersecurity is not a one-time effort. Regularly monitor your vendors' security practices and ensure they continue to meet your standards. This can include periodic reviews, audits, and continuous monitoring solutions that provide real-time insights into your vendors' cybersecurity posture.

Plan for Incident Response and Contingency

Have a clear plan in place for responding to cybersecurity incidents involving vendors. This should include communication protocols, escalation procedures, and contingency plans to ensure business continuity in the event of a breach.

*Foster a Culture of Continuous Improvement*

Cybersecurity threats are constantly evolving. Encourage continuous improvement within your organization and among your vendors by regularly updating security practices, conducting training sessions, and staying informed about the latest threats and trends.

Steps to Properly Assess Fourth-Party Risk 

The most effective way to manage fourth-party risk is by building a mature, comprehensive Third-Party Risk Management (TPRM) program. With the right TPRM practices and processes in place, integrating fourth-party risk management becomes much more seamless and manageable.

If your approach to third-party risk isn’t fully developed or clearly defined, jumping ahead to address fourth-party risk will prove challenging. Once you feel like you got there, here are some steps to include during the assessment. 

Identify Your Most Critical Third-Party Vendors

Start by identifying which of your third-party vendors are critical to your operations. These vendors are often those that handle sensitive data, have access to your systems, or are integral to your business processes.

Work with Each Vendor to Create a List of Their Most Critical Vendors

Collaborate with your third-party vendors to identify their most critical vendors. Understanding your vendors' vendor relationships helps you assess potential risks that could impact your organization indirectly.

Review and Revise Third-Party Contracts 

Based on the risks identified, you may need to revise your contracts with third-party vendors to include specific requirements for managing fourth-party risks. This ensures that your vendors are also holding their subcontractors to high cybersecurity standards.

Conduct Periodic Audits to Validate Vendor Security Practices

Regular audits of your third-party and fourth-party vendors are essential to verify that they are adhering to the agreed-upon security standards. These audits can help you identify potential vulnerabilities before they lead to a breach.

How Rivial Can Help

Utilizing a specialized tool like the Rivial Platform can streamline the intricate process of vendor cybersecurity management. Our tool integrates seamlessly with your existing workflows, allowing you to efficiently manage vendor relationships, automate due diligence, and monitor compliance in real time. This reduces manual effort, minimizes errors, and ensures that all aspects of vendor management are handled consistently and effectively.

Our vendor security module simplifies the process of assessing and monitoring third and fourth-party cybersecurity risks. Our platform provides streamlined workflows, standardized control frameworks, and customizable questionnaires to ensure that your vendors meet your security standards.

Book some time to see our platform in action!