When a company contracts or partners with a third party to handle and process its sensitive customer data, it is crucial for those third parties to use effective strategies to safeguard that data. Third parties should treat the data they handle from organizations as their own, complying with regulations and security requirements set by the organization.

If your organization provides services that include handling sensitive data, read on for some insight and best practices to make sure you are prioritizing safety and security for everyone involved.

Learn how UpGuard helps organizations achieve third-party data protection with Vendor Risk >

Risks Involved with Third-Party Data

While third-party data provides extensive insights and analytics, it also carries inherent risks. These risks can become vulnerabilities, which put that data at risk for unauthorized access and misuse.

Third-Party Risk

While third parties provide extensive insights and analytics, handling sensitive data carries inherent risks. If data used by third parties do not have adequate security controls, it can result in significant damages, such as data loss, identity theft, misuse, fraud, or other malicious activities.

Risks of Using Third Parties

Contracting with a third party for data analysis or other services is particularly vulnerable to various risks because different organizations store and use that data. Personal information shared via third parties is often misused, causing significant privacy concerns, especially when there is no transparency about how data is collected, used, or stored.

Third parties are also vulnerable to data breaches or cyberattacks because of differences in how it is transferred and stored across different systems. If one system has a weakness, it can expose that data to potential risk. There are also ethical concerns regarding how this sensitive data is obtained, how it is used, and whether users consented to share it.

Data Breaches

A third-party data breach is a data breach that occurred through a third-party company. In this type of data breach, the third party’s system has been compromised and used to steal data that belongs to you. Even if a data breach happens at the third-party level, the original company can still be liable, especially if they did not take adequate steps to ensure the third party utilized strong data security practices.

These data breaches can expose sensitive user data with severe consequences. In 2013, cybercriminals hacked Target’s network systems through a third-party vendor and installed malware on the point-of-sale (POS) systems throughout Target stores. The hackers managed to steal credit card details and personal information for over 40 million Target customers, costing Target over $200 million in breach-related expenses.

Data Protection for Third Parties: Legal Compliance

Because of data breaches and privacy implications, there are substantial legal requirements for third-party organizations that utilize data. Companies are expected to adhere to these regulations and face steep penalties if non-compliant.

Laws and Regulations

Privacy Laws and regulations set legal standards for third-party organizations that utilize data, ensuring sensitive information is kept private and secured across each organization that accesses them.

A few  examples of these laws with compliance requirements are:

  • The European Union’s General Data Protection Regulation (GDPR): aims to standardize data protection regulation in the EU, protect personal data and privacy for EU citizens, and simplify regulation processes for internal organizations. This regulation also encourages controllers and processors to follow relevant protocols, implement data privacy measures, and ensure that data is collected with consent before becoming publicly available.
  • The California Consumer Privacy Act (CCPA): Gives California consumers greater transparency into how their personal information is handled. Under the CCPA, California residents have a right to know when their data is collected by a business, when that personal data is sold to or shared with a third party, deny the sale of their data, and have their data deletion request honored.
  • Health Insurance Portability and Accountability Act (HIPAA): Protects patient health information from being disclosed without the patient’s knowledge or consent. HIPAA ensures the confidentiality, integrity, and availability of individuals' health information while giving patients the right to obtain and correct their medical records.

These protection laws typically require organizations to obtain necessary user content, utilize minimum security measures, maintain transparency, and uphold the rights of the data subjects.

Penalties for Non-Compliance

Third parties that are non-compliant with data protection laws face severe penalties, depending on the nature and severity of the violation. The most common penalties are fines, which can increase when violations are not remedied within specific timeframes.

For example, the Health Insurance Portability and Accountability Act (HIPAA) sets a national standard for protecting patients' rights and specific health information, known as protected health information or PHI. HIPAA violations can result in civil penalties between $100-$50,000 per violation, and criminal penalties include fines up to $250,000 and potential imprisonment.

While penalties are steep, the long-lasting loss of customer trust and damaged business reputation from a security incident can be even more severe. Therefore, complying with data protection laws extends beyond the legal obligation to maintain customer trust and business sustainability.

Data Protection for Third Parties: Best Practices

If your organization deals with third-party data or works with a company that does, there are steps you can take to ensure legal compliance and ethical handling of the data. These measures will help protect the information and maintain compliance.

Vendor Risk Management

Vendor Risk Management (VRM) is the process of managing and monitoring security risks resulting from third-party vendors, IT suppliers, and cloud solutions. VRM programs, like UpGuard Vendor Risk, combine continuous third-party attack surface monitoring, risk assessments, and other third-party risk management functionality to mitigate business disruptions caused by third-party security risks.

VRMs have specific practices that help identify how secure a third party is, ensuring the data they work with is also secured. These practices include

  • Vendor Selection and Due Diligence: a comprehensive security screening of a potential third-party vendor before forming a partnership
  • Risk Assessment Questionnaires: a set of questions designed to help an organization identify potential cybersecurity weaknesses among its third-party and fourth-party vendors, business partners, and service providers
  • Security Requirements and Controls: methods of restricting access to sensitive data.
  • Ongoing Monitoring: monitoring of information security controls, vulnerabilities, and other cyber threats to support organizational risk management decisions
  • Incident Response Plans: written instructions that outline your organization's response to data breaches, data leaks, cyberattacks, and security incidents.
  • Regular Audits: assess the effectiveness of your organization’s cybersecurity program and ensure you’ve implemented or will implement the measures required to improve your security posture.

Check out how UpGuard’s Vendor Risk platform can streamline your organization’s Vendor Risk Management process >

Establishing Risk Tolerance and Minimum Security Requirements

Third parties should establish their risk tolerance and set minimum security requirements before handling any data. This is a critical aspect of the data management process and goes a long way in showcasing their prioritization of cybersecurity standards.

After conducting a risk assessment, third parties can define their risk tolerance level and the amount of risk they are willing to accept. This depends on different factors, like the type of business, regulations, and potential impact of risks identified. A risk tolerance level determines the minimum security requirements a third party should establish. These minimum requirements include encryption, access control tools, and backup/recovery procedures.

Regular Auditing and Monitoring

A proactive protective measure for third parties is regular auditing and monitoring. Organizations utilize these audits to verify their data protection policies are correctly used and identify any vulnerabilities or gaps in an organization’s cybersecurity strategy.

Continuous monitoring helps address any unusual activity or potential threats before they cause damage or an unauthorized data breach. Especially when a third party handles sensitive data, identifying a vulnerability before a cybercriminal takes advantage of it can save your organization from a potentially devastating data breach.

Learn how UpGuard helps organizations consistently monitor their attack surface with BreachSight >

Encryption and Anonymization

Data Encryption is the process of encoding information or sensitive data so that only authorized parties can access it. Even during a data breach, encrypted data remains useless without a decryption key. Encryption is foundational for third parties that handle data because it provides an additional layer of security.

Anonymization removes or alters identifiable information so data cannot be traced back to a specific individual. This measure protects an individual’s privacy, especially when dealing with data a third party uses.

Staff Training

Third parties that handle data are responsible for ensuring their staff understands the importance of data security and are aware of policies and procedures for securely handling that data. An extensive training program helps employees beyond security teams learn about basic cybersecurity measures and how to respond to potential cyber threats.

When third-party employees have the knowledge and skills to handle data appropriately, organizations are at a much lower risk for human error, a common cause of data breaches. Take time to help your staff learn about phishing attempts, best practices for password management, and how to report suspected data breaches.

Securing Your Data with a Vendor Risk Management Program

Protection starts with prevention. Read on for a step-by-step list to create a solid Vendor Risk Management program that protects your data when used by a third party.

Essential Steps to Build a VRM Program

  1. Identify and Understand Risks: Review your organization’s data used by third parties, where it is stored, and how it is processed. Analyze this information to identify potential vulnerabilities in your current processes.
  2. Assess Your Vendors: Review your organization’s existing vendors and data security practices. Utilize questionnaires, audits, or a platform like UpGuard Vendor Risk, to get a baseline of their security posture.
  3. Establish Policies and Procedures: After review, develop a list of clear policies and procedures for how that organization will handle data—include detailed requirements for data access, sharing, retention, and disposal.
  4. Design an Incident Response Plan: If a data breach should occur, be sure your organization is ready to respond in real time. Think through and outline steps for identifying and containing the breach, investigating, noticing, and preventing future violations.
  5. Implement Security Measures: Once policies are in place, implement those security measures and any other technical and physical security measures that protect data used by third parties. These measures include multi-factor authentication, secure data storage, network security, and data disposal processes.
  6. Train your Staff: Train all staff members on this updated data protection program regularly. As the program evolves, update your staff along the way.

Get more information on how to start your own VRM program >

Protect Your Data with UpGuard

UpGuard has helped hundreds of organizations manage their VRM programs and protect data used by third parties. Our research has been featured in the New York Times, Wall Street Journal, Bloomberg, Washington Post, Forbes, Reuters, and Techcrunch.

Minimize the time your organization spends on managing third-party relationships with UpGuard Vendor Risk. Our all-in-one platform provides vendor questionnaire templates mapped to the NIST Cybersecurity Framework and automates those vendor questionnaires so you can monitor your vendors’ security posture over time.

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