Third-Party Risk Management

Third-party risk management helps do a background check on other entities, such as contractors, vendors, or suppliers, and ensures transparency in their operations. 

With TPRM, companies can collect and verify information regarding:

• Who their third parties are
• How they’re integrated into operations
• What controls and safeguards they have in place

While TPRM differs, key processes include key due diligence, ongoing monitoring, and risk-based assessments, which are standard practice in various industries. Without following such processes, regulated sectors that are more prone to financial risks, including potential fraud risks linked to third parties, face non-compliance fines if they lack internal TPRM policies. 

Three core factors shape a company’s TPRM program. These steps include:

1. Identifying which third parties pose the highest risks.
2. Understanding how those risks impact the organization.
3. Tailoring risk controls to meet regulatory standards and internal policies.

So, a good TPRM program involves reviewing the risks that come from working with external partners. These elements provide the insights needed to build a proper program that fits the company’s risk appetite and compliance needs, as well as other risk factors, such as industry risks or jurisdictional risks. 

These stages are often mandatory for a compliant third-party risk management lifecycle:

1. Vendor identification and verification
2. Assessment and risk segmentation
3. Risk assessment and risk mitigation
4. Reporting and record-keeping
5. Ongoing monitoring

For example, identifying the other company involves collecting key information, such as the vendor name, business context and scope of the engagement, purpose, contact details, prior security reviews or certifications, ownership structure, etc. Any red flags found need to be looked into, no matter the stage of the TPRM process. 

Here are several risks that are assessed during the third-party risk assessment process:

• Compliance risk. A third party can affect the organization’s ability to comply with laws, such as the EU’s General Data Protection Regulation (GDPR) or Anti-Money Laundering (AML) policies. 
• Financial risk. A vendor can hurt the organization’s financial performance. For instance, poor supply chain management or bad financial health might lead to delayed operations and lost revenue. Solutions like bank account verification help assess the financial risk factor and minimize the chances of unwanted consequences like these.
• Reputational risk. A third party can damage the organization’s brand image. Poor security practices, non-compliance, data breaches, cyberattacks, or other inappropriate actions can result in adverse media. 
• Operational risk. A vendor can disrupt day-to-day business operations. This risk can be managed through strong service-level agreements (SLAs). Additionally, especially larger companies, often have backup vendors to support business continuity in case something happens with the other service provider.

At the risk mitigation stage of the TPRM program, companies need to assign a risk level or score to the determined risk. 

During the initial assessment phase, organizations decide whether the risk falls within their defined risk appetite. Afterwards:

• The analyst working with the risk assessment needs to confirm that the necessary controls are in place to lower the risk to the target residual level.
• Companies then continuously monitor risks for potential red flags and events that could raise the risk level. 

This is required to measure and assess risks before the company can actually follow through with methods to mitigate them later.

Risk tiering is the process of determining the level of risk and its priority tier. Special solutions, such as iDenfy’s AI Risk Assessment, can provide the risk level automatically based on custom calculations and frameworks that the company sets prior. 

In the risk tiering system, risks are divided into:

• Tier 1. High criticality and high risk
• Tier 2. Medium criticality and medium risk
• Tier 3. Low criticality and low risk

This risk is calculated using the company’s industry standards and the business context of the vendor relationship. Custom risk factors can be added or adjusted to fit the company’s internal risk appetite better. That means each vendor poses a different level of risk and importance to the organization.