The U.S. Treasury, also known as the Department of the Treasury, manages the finances of the U.S. government. This department has various duties, including maintaining the economic stability of the United States, managing government finances, and implementing policy decisions that impact both domestic and international affairs.
Like most large organizations, the U.S. Treasury works with a complex network of external vendors for various services, such as data processing partnerships and financial transactions. However, this reliance on third-party service providers can pose risks that affect the operational integrity of the Treasury and the broader financial stability of the United States.
This blog explores the issue of third-party risk within the U.S. Treasury, including the major roles and responsibilities where such risks may occur. Additionally, the article covers best practices for effectively mitigating third-party risks, ensuring compliance with stringent regulatory standards, and maintaining the trust and confidence of the American public.
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The role of the U.S. Treasury
The Department of the Treasury is a crucial part of the federal government because it manages the finances and monetary resources of the United States. It has existed since 1789 and maintains the country's economic and financial systems. The Treasury plays a significant role in shaping national policies and ensuring fiscal stability, which is essential for the proper functioning of the government and the overall health of the nation's economy.
Primary responsibilities
The U.S. Treasury’s overall goal is to ensure the economic and financial security of the United States. To achieve its goals, the department holds several key responsibilities, which include:
- Revenue collection: The Treasury collects taxes, duties, and payments through the Internal Revenue Service (IRS).
- Public debt management: The Treasury manages the federal debt, issuing Treasury bonds, notes, and bills to finance government operations, and also manages the U.S. government's outstanding debts.
- Currency production: The Treasury produces all paper currency and coins in circulation through the Bureau of Engraving and Printing and the United States Mint.
- Government accounts management: The Treasury manages federal accounts, processes payments for government expenditures, and maintains an account of government receipts.
- Financial sanctions: The Treasury enforces economic and trade sanctions based on U.S. foreign policy and national security goals through the Office of Foreign Assets Control (OFAC).
- Financial systems oversight: The Treasury oversees national banks and thrift institutions, ensuring the safety and soundness of the national banking and financial system.
- Economic policy development: The Treasury advises the President on economic and financial issues, including domestic and international financial policy.
- International affairs: The Treasury manages the U.S. government's financial, economic, and business relationships with foreign governments and international financial institutions.
These responsibilities are crucial for the government to function and affect the overall health of the nation's economy, influencing everything from national security to individual financial well-being. To fulfill these goals, the Treasury may rely on third-party relationships and outsourcing work, which introduces third-party risk into the Treasury’s ecosystem.
Third-party risk in the U.S. Treasury
The U.S. Treasury's use of third parties for essential services introduces risks the Treasury must meticulously manage to safeguard national financial operations. From cybersecurity threats to compliance challenges, the spectrum of third-party risks can significantly impact the Treasury's ability to perform its critical functions effectively.
Key third-party risks facing the Treasury include:
- Cybersecurity risks: Third-party vendors may have inadequate cybersecurity measures, making the Treasury's data vulnerable to breaches, customer data theft, and cyber attacks. These risks are particularly concerning for operations involving sensitive financial and personal customer information.
- Compliance risks: Vendors may fail to comply with federal regulations and standards, such as those related to financial reporting, data protection (such as the GDPR and CCPA where applicable), and anti-money laundering (AML) standards. Non-compliance could result in legal penalties and reputational damage.
- Operational risks: The failure of a third-party vendor to deliver critical services reliably can disrupt Treasury business operations. Operational risks include failures in processing transactions, maintaining data integrity, and ensuring the availability of services.
- Supply chain risks: Disruptions in the vendor's supply chain can affect the Treasury's operations, especially in currency production, IT hardware procurement, or any service dependent on a complex supply chain.
- Reputational risks: Any misconduct or failure by a third-party vendor, such as breaches of ethics, legal issues, or service failures, could indirectly damage the Treasury's reputation and public trust.
- Financial stability risks: The Treasury's responsibilities (managing the national debt and financial policies) often require working with financial institutions and service providers. These entities' failure or instability could threaten financial markets and the broader economy, affecting the Treasury's operations.
- Regulatory and legal risks: Third-party engagements can expose the Treasury to legal risks, including litigation and regulatory sanctions, especially if vendors violate laws or regulations.
The Treasury can mitigate these and other strategic risks by implementing a vendor risk management program or managing third-party risk through specific best practices.
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Third-party vendor risk best practices for U.S. Treasury contractors
A comprehensive third-party risk management program designed for risk mitigation and seamless operations is necessary to navigate third-party vendor relationships and the risks they introduce to an organization—especially in the financial sector. In June 2023, The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued final interagency guidance designed to help banking organizations manage risks associated with third-party relationships, including relationships with financial technology companies.
This article outlines similar critical third-party vendor risk management practices, illustrating how the Treasury and other financial organizations can set a high standard for risk mitigation in vital operations with third-party vendors.
Comprehensive due diligence
Comprehensive due diligence is a cornerstone of financial operations, especially when evaluating third-party vendor risk before establishing a contractual relationship with a vendor. Due diligence processes assess a myriad of factors, including the vendor's financial health, operational resilience, cybersecurity measures, compliance with relevant regulations, and past performance history.
By conducting thorough due diligence, the Treasury only partners with vendors who align with operational requirements, meet security standards and share a commitment to maintaining the integrity and stability of the nation's financial system. This proactive approach helps mitigate risks from cyber threats like data breaches to non-compliance penalties, laying a solid foundation for secure and efficient collaboration with third-party vendors.
Vendors working with the Treasury should implement due diligence practices in their supply chain processes to ensure their service providers also meet the requirements necessary to protect the Treasury’s operations.
Risk assessments
Risk assessments serve as a systematic process to identify, analyze, and prioritize the level of risks associated with third-party vendors. This practice involves a detailed examination of how each vendor's specific services and operational practices could impact the Treasury's objectives, security posture, and compliance status.
By completing these assessments within a risk management process, the Treasury can pinpoint vulnerabilities, evaluate the likelihood and criticality of various risk scenarios, and implement targeted controls to mitigate high-risk vendors. This ongoing process ensures that vendor relationships are managed proactively and adapts to changes in the operational environment or the threat landscape, safeguarding the Treasury's operations against disruptions and ensuring the continuity of its critical functions.
Risk assessments are also a valuable assurance for Treasury vendors, illustrating their operational safety requirements are met. Regular internal assessments can help prepare for any risk assessment or audit required by the Treasury.
Contract management and SLAs
Contract management and Service Level Agreements (SLAs) are crucial practices that define the framework of the relationship between the Treasury and its vendors. These contracts and SLAs meticulously outline the expectations, duties, performance metrics, compliance requirements, and security standards that third-party vendors must meet.
By formalizing these aspects through clear and enforceable agreements, the Treasury ensures a mutual understanding of responsibilities and consequences for non-compliance. This level of detail and clarity facilitates smoother operational relationships and provides a solid basis for monitoring, risk management, and dispute resolution. Effective contract management and SLAs are essential for maintaining the integrity of Treasury operations, enabling the Treasury to achieve its objectives while minimizing exposure to third-party risks.
Third-party contractors can also utilize contract management and SLAs to set expectations for compliance management within their own supply chain.
Access controls and data security
Stringent access controls and data security measures reduce vendor risk across organizations, including the U.S. Treasury. This practice ensures that sensitive information and critical systems are safeguarded against unauthorized access and potential breaches, which could jeopardize national financial stability.
The Treasury protects itself from escalating threats in the digital age by enforcing strict external and internal controls and prioritizing data security. The Treasury mandates that third-party vendors implement robust authentication mechanisms, encryption protocols for data in transit and at rest, and regular security assessments to detect and mitigate vulnerabilities. Organizations can also implement these requirements across their supply chain to demonstrate robust security measures aligned with Treasury expectations.
Clear security controls enable the Treasury to uphold the confidentiality, integrity, and availability of the nation’s financial data. This approach is fundamental to maintaining trust in the Treasury's operations and preserving the resilience of the U.S. financial infrastructure against cyber risk.
Continuous monitoring and auditing
Continuous monitoring and auditing are indispensable vendor risk practices for U.S. Treasury operations, enabling the Treasury to actively oversee and evaluate the performance and compliance of its third-party vendors. This proactive approach involves systematic reviews and assessments of vendor activities on a regular basis to ensure adherence to contractual obligations, security standards, and regulatory requirements. Additionally, this approach is a best practice for all vendor risk management and third-party risk management programs—especially for organizations that provide services to financial institutions like the U.S. Treasury.
The Treasury can quickly identify and address deviations or issues, mitigating risks before they escalate into significant problems through ongoing monitoring and auditing mechanisms. Continuous monitoring ensures that vendors remain aligned with the Treasury's operational and security expectations and reinforces the resilience of the Treasury's operations against disruptions, fraud, and cybersecurity threats. Through this vigilant oversight, the Treasury upholds its commitment to operational excellence and safeguarding national financial interests. Organizations that want to achieve the same operational excellence as the Treasury can also implement these approaches to ensure security.
Incident response and recovery plans
Incident response and recovery plans are critical components of a vendor risk strategy within U.S. Treasury operations. These plans properly prepare the Treasury and its third-party vendors for potential security incidents or operational disruptions. These plans outline specific procedures and responsibilities for identifying, responding to, and recovering from incidents to minimize their impact on the Treasury's functions and the broader financial system.
The Treasury enhances its ability to maintain continuity of operations under adverse conditions by ensuring that vendors have robust incident response and business continuity plans in place. This preparation is crucial for mitigating the effects of unforeseen events, from cybersecurity breaches to natural disasters, thereby safeguarding the integrity and availability of critical financial services. Through collaborative planning and execution of these plans, the Treasury and its vendors strengthen their resilience against threats, demonstrating a proactive stance in protecting national economic security.
Regulatory compliance
Regulatory compliance is foundational to third-party risk management within U.S. Treasury operations. This practice ensures that all third-party vendors adhere to the relevant federal laws, regulations, and standards. These plans establish a structured approach for monitoring and enforcing compliance with financial regulations, data protection laws, and cybersecurity standards.
By integrating regulatory compliance into the TPRM process, the Treasury ensures that its vendors are aligned with its operational requirements and contribute to the overall legal and regulatory integrity of Treasury operations. This diligent focus on compliance helps prevent legal liabilities, financial penalties, and reputational damage, supporting the Treasury's mission to maintain a secure, efficient, and legally compliant financial environment. Regulations relating to the financial industry and federal agencies include:
- Gramm-Leach-Bliley Act (GLBA)
- Payment Card Industry Data Security Standard (PCI DSS)
- Sarbanes-Oxley Act (SOX)
- Federal Information Security Management Act (FISMA)
- Federal Risk Authorization Management Program (FedRAMP)
- NIST Special Publication 800-161 and 800-171
- Federal Information Security Management Act of 2002 (FISMA)
Through ongoing education, regular audits, and updates to reflect changing regulatory landscapes, these plans play a vital role in navigating the complex regulatory requirements that govern the financial sector.
Vendor risk management program
A comprehensive Vendor Risk Management Program is the best option for the U.S. Treasury and other financial institutions to identify, assess, monitor, and mitigate risks associated with third-party vendors. These programs cover every aspect of the vendor relationship lifecycle, from initial selection and onboarding to ongoing oversight and eventual offboarding as necessary. Both the Treasury and third-party vendors who supply services to the Treasury will benefit from a vendor risk management program.
By implementing a comprehensive VRM program, the Treasury ensures a standardized, consistent approach to managing vendor risks, while incorporating best practices in information security, regulatory compliance, performance monitoring, and incident management. These programs facilitate a deeper understanding of the risk landscape associated with third-party engagements and enable the Treasury to make informed decisions, allocate resources efficiently, and foster a culture of risk awareness and accountability. In doing so, comprehensive Vendor Risk Management Programs help safeguard the Treasury's operational integrity, protect sensitive information, and uphold the nation's financial security.
Enhance your vendor risk management with UpGuard
From national banking organizations to community banks, financial organizations can secure their assets and protect themselves from third-party risk through UpGuard.
Vendor Risk is our all-in-one TPRM platform that allows you to assess your organization’s Vendor Risk Management ecosystem. With Vendor Risk, you can streamline your third-party risk assessment workflows and get real-time notifications about your vendors’ security in one centralized dashboard. Additional Vendor Risk features include:
- Security Questionnaires: Automate security questionnaires with workflows to gain deeper insights into your vendors’ risk profile and utilize templates (NIST, GDPR, HIPAA, and more) and custom questionnaires for your specific security compliance needs.
- Security Ratings: Instantly understand your vendors' security posture with our metric-driven, objective, and dynamic security ratings.
- Risk Assessments: Let us guide you each step of the way with streamlined workflows that encompass gathering evidence, assessing risks, and requesting remediation.
- Monitoring Vendor Risk: Monitor your vendors daily and view the details to understand the risks impacting a vendor’s security posture.
- Reporting and Insights: UpGuard’s report templates provide tailor-made reports for different stakeholders.
- Managed Vendor Assessments: Partner with an UpGuard analyst and put your vendor assessments on autopilot.
