Banks, credit unions, and other financial institutions need to take strong and detailed steps to protect themselves and their clients from risks. There are many potential risks, ranging from improper handling of sensitive data to cyberattacks to identity theft to other serious security breaches. Failing to take steps to reduce these risks can cause significant problems.
Not only could you be faced with large fines and other penalties, but if a bank, credit union, or other financial institution experiences a significant security incident, this could jeopardize the organization’s operations or reputation, both of which can be devastating.
When you are working to reduce risk and keep data, information, and other resources safe, you need to think about more than how your organization and your staff operate. You also need to think about any third-party relationships you may have.
Vendor management is crucial. This means fully understanding the security policies of each third-party vendor you are working with, doing a full analysis of all potential risks before you work with them, and conducting ongoing monitoring to ensure safety and compliance throughout the course of your business relationship.
Third-Party Risk Assessment
In June 2023, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) issued final guidance on managing risks associated with third-party relationships. It states that “a banking organization’s use of third parties can increase its risk” and that working with a third-party “does not diminish or remove a banking organization’s responsibility to perform all activities in a safe and sound manner.”
This means that banking organizations and financial institutions need to ensure that any third party they work with uses proper risk management practices and takes steps to protect all critical and sensitive information. It simply isn’t enough to care about your own processes and protection. It is your responsibility to verify that the vendors you work with are secure as well.
A banking institution is required to “perform all activities in a safe and sound manner” and must follow consumer protection laws, security of customer information regulations, and all other relevant laws and regulations, even when working with third parties.
The guidance also specifically states that a business relationship revolving around lending, payment, or deposit activities should be evaluated using third party risk management guidance and the “processes and rules that apply to traditional lending and deposit relationships.”
Vendor management and risk assessment isn’t just a process that happens once. Since security threats and organizational actions and policies change frequently, it’s important to regularly review all vendors that your organization works with. The June 2023 guidance lists “ongoing monitoring” as an important aspect of third-party risk management.
How to Keep Your Organization Safe and Compliant
While nearly every business works with third parties in some capacity, it’s important to always remember that a third party typically isn’t under your control. They may not even be completely transparent with their security controls. This is a potential issue if you are sharing financial information, customer details, or other sensitive information with them. Some vendors will have robust security standards and sound risk management practices in place, but others will not. Unfortunately, each one can be a potential security risk.
For instance, cyberattacks or other cybersecurity breaches can expose data and lead to legal, regulatory, or compliance issues, as can improper data handling or storage. There are operational risks as well. If a third party is critical for your business operations and this vendor suffers a disruption, your organization could be negatively affected. Reputational risks, financial damage, and strategic risks exist too. Understanding these risks and taking steps to mitigate them is critical.
To effectively reduce third-party risks, you should have a vendor risk management program in place. It should begin when onboarding any new vendor. You’ll need to ensure that you identify the risks of working with any business partner and determine if these potential risks are acceptable for your business before you agree to move forward with a business relationship.
When working with any vendor, address all laws, regulations, and critical standards that are applicable to your financial institution. Outline your requirements and ensure that the vendor understands them and is in compliance.
Your vendor management program will require that you get accurate information on the security controls and processes used by each vendor to verify compliance. This information isn’t typically available to outsiders, so you’ll probably need to request these details from the vendor.
If you determine that there are significant risks to working with a third party, you may choose to find another vendor or you may want to work with them to resolve the security issues. You’ll then need to verify that the vendor properly meets your compliance requirements.
Once a vendor has been approved and onboarded, regular monitoring is required. This is especially vital if the vendor has access to sensitive data and/or your internal systems. Annual inspections and reviews are recommended, but you may wish to conduct these reviews more often if it makes sense for your business. Taking a proactive approach reduces your risks and allows you to spot potential issues before they become significant problems.
Any security breach or other issue with a vendor can potentially jeopardize your entire company. Having the right tools in place to ensure your vendors are operating securely, productively, and efficiently is critical. RADD LLC is a leading provider of compliance and internal audit services. We work with businesses to ensure compliance and adherence to regulations while reducing risks and other potential issues. You can trust us to help you properly evaluate third parties, assess the risk of working with any vendor, and implement robust workflows that make ongoing monitoring and remediation thorough and effective.
We’ll help keep your business safe and compliant, reducing your risk, protecting you from fines and penalties, and helping your organization avoid reputational and operational risks. For more information, please contact us today to set up a consultation.