We are frequently asked about recommendations for diligence in screening third parties, along with a slew of questions regarding insurability of third parties and exposures third parties may create. While the list of hypothetical questions could never end, the best advice is a strong process at the outset of engaging third parties and a strong vetting that should include incorporation of enterprise risk management practices through vendors.
LexisNexis outlines a good process for evaluating and monitoring third-party risk. From beginning to never-ending, the process they propose offers nine steps that include evaluation of objectives, compliance, screening, assessment, and ongoing auditing and review. While many financial institutions conduct due diligence because it’s compulsory, the exposure presented by third parties should be reason enough to make due diligence a serious undertaking to any organization.
Aside from LexisNexis, the FDIC offers guidance regarding third party risk, as does the NCUA and the CFPB. These resources may assist with specific requirements for financial institutions and provide guidance on expectations held by regulators. Clearly defining risk and building controls that help govern the response to those risks is vital for any organization, and consideration of the third-party exposures help to reinforce compliance and controls to risks inherent to business relationships.
Areas of risk to explore include compliance, reputation, strategic, operational, transactional, credit, and country or geographic risk. Review of these areas with regard to third parties may be more involved, but should lay atop the review of the organization’s internal and external assessments of risk, how that risk is addressed, controls to minimize exposure and approaches to transferring the risk via controls, agreements or insurance.
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