Vendor Management

1. Vendor Management Presented by Kristina Buckley of Buckley Technology Group

2. Understanding New Vendor Management Risks and Key Areas for Improvement Risk Assessment & Due Diligence Vendor Management Program 1 2 3 Monitoring and Annual Reporting SSAE16’s 4 Contracts 5

3. Vendor Management • The risks of Vendor Management and Outsourcing are numerous and complicated • A large number of critical processes are outsourced that contain customer and employee non-public information, along with the financial institution’s intellectual property in many cases • Upon outsourcing you have countless risks; reputation and brand risks, security breaches and regulatory compliance concerns. • All of above; costs the financial institution money from legal liability, business interruption and compliance fees to name a few!

4. Vendor Management • Also have the issue of vendor relationships are scattered throughout the business units at the bank • Legal risks associated to lack of visibility into the vendor practices even if you get everything you would like into the contract • Information security issues at most banks lack the resources to monitor large number of potential security risks associated in-house, at the vendor, and at their vendors!

5. Vendor Management How to Improve?

6. Vendor Management • Common knowledge are the requirements of a program including Service Providers, Third Parties and Subcontractors • Risk Assessment • Due Diligence/Documentation • Contracts • Monitoring

7. Vendor Management • Let’s discuss some of the pitfalls or dilemmas we run into within each category • Risk Assessment • Due Diligence/Documentation • Contracts • Monitoring

8. Risk Assessment • A preliminary review should be performed upon every vendor. The philosophy “they have been a long term vendor they warrant no review” is flawed. • A list of all vendors should be maintained and reviewed annually. Without a preliminary and annual you may miss: • If the long term vendor has NPI you have no way of knowing how that data is being retained, secured or disposed of without performing a risk assessment. • Without the risk assessment you may miss the fact your contract with this long term vendor is obsolete for GLBA, cybercrime and other compliance requirements. • You may miss identifying the vendor’s technology is outdated and vulnerable to the weekly attacks we all see.

9. Risk Assessment • We all agree the risk assessment needs to be tempered for the relationship. • We typically recommend an initial review of each vendor looking at five categories. • NPI • Financial • Operational/Impact • Reputation • Compliance • Build your risk assessment based on your findings above.

10. Risk Assessment • A risk assessment should also be performed for any prospective vendor or changed relationship. • Business change (merger and acquisitions) • Product change • Controls are changed • Regulations are changed (even if your contract states they will remain in compliance)

11. Risk Assessment • The Business Owner (Contract) is responsible for the Vendor and the Risk Assessment process. • If there are multiple relationships/contracts, all employees should be involved because the risks may vary by service. • Assign one employee as the primary. They are responsible to pull the team together. • The vendor management of a vendor should not be delegated to an employee unfamiliar with the vendor and the related processes.

12. Risk Assessment • Define and document up front the responsibilities of: • Business Owner • Legal • Vendor Management facilitator • Information Security • IT • Audit • Risk Management • Compliance

13. Risk Assessment • Require these employees to sign off on the risk assessment. If they are required to sign you will see a great deal more time and concern from them! • A big complaint is the time this process takes due to the number of vendors and the involvement of so many departments. Look at the time and costs your financial institution undergoes when something happens! It is worth the time. • Security Breach and customer reputation risk, notification, insurance and legal liability • Poor product implementation and impact upon IT infrastructure, security and compliance re-working! • Centralize the contracts and identify the business processes for DD and BCP.

14. Risk AssessmentNPI • When reviewing NPI during the risk assessment make sure to identify the level and volume of NPI but also who is providing the NPI to the vendor. • Financial Institution? • Consumer? • What is the consumer’s perception of the relationship? Do they realize they are providing information to a third party or feel it may be a division of the bank? • NPI and Reputation risk • Call Centers & Mortgage & Investment Services

15. Risk AssessmentReputation • Recent example of ATM branding vendor. • The machine does not notify the customer that the machine is not owned or operated by the financial institution. So, what is the customer to think? • The bank does not have any control over who has access for cash replenishment or maintenance to the machines. • Typically, the security controls at the stores in which the machines reside is very limited.

16. Risk AssessmentReputation • Will the customer blame the store or the financial institution in the situation of a security breach? • Will the bank’s insurance cover a security breach? • A review of the vendor contract identified some concerns for the financial institution. • SLA regarding maintenance and uptime was not tied to a measurement period and no penalties or credits were identified if SLA’s were missed. • Indemnification provision was too narrow and did not include verbiage for if any claim was made against FI as a result of Vendor’s performance under agreement. Also did not include a provision regarding cybercrime, loss of data.

17. Risk AssessmentNPI • Confidentiality provision was too narrow and did not address GLBA/NPI compliance although BIN numbers are provided. • Confidentiality provision did not address the retention, destruction and/or return of confidential information upon the termination of the agreement. • Contract was missing a provision giving the ability to audit the vendor/ or have access to vendor’s audit reports. (subcontractors) Also the ability to audit the site of the ATM machines.

18. Risk AssessmentGovernment Fannie Mae and Freddie Mac • FHFA’s annual examination program assesses Fannie Mae's and Freddie Mac's financial safety and soundness and overall risk management practices. • Fannie Mae's and Freddie Mac's financial condition, earnings, liquidity, and efforts taken to mitigate losses in its single-family and multifamily portfolios. • Assess their response to continued stress in the mortgage markets and its effect on their risk profile, performance, and condition.

19. Risk AssessmentGovernment • Reporting Framework  • Use a specific framework to summarize examination results and conclusions to Fannie Mae's and Freddie Mac's board of directors and Congress is known as GSEER, which stands for Governance, Solvency, Earnings, and Enterprise Risk (enterprise risk comprises credit, market, and operational risk management). • http://www.fhfa.gov/SupervisionRegulation/FannieMaeandFreddieMac.

20. Risk Assessment Other Risk Questions to think of: • Does the financial institution need additional insurance coverage for the services? • Has a cost benefit analysis been performed? • Any lawsuits or legal proceedings involving the vendor, third parties or subcontractors? • Has the financial institution performed a reference review? (refer to sample risk assessment form)

21. Risk Assessment Other remaining Risk Categories: • Transactional • Credit • Interest Rate • Liquidity • Out of Country

22. Due Diligence & Documentation If you have collected it, you are responsible to review it. • Business Continuity/Disaster Recovery Plan – • Is it current and applicable to the bank’s service? • Most Recent BC/DR Test Results – • Testing at least annual, applicable to the bank’s service and are the banks involved in testing? Is there any involvement from an independent third party?

23. Due Diligence & Documentation • Internal Audits Reports for GLBA, BSA, Red Flag Compliance • Most Recent Audited Financials • SSAE 16 Reports • Information Security Policies and Procedures • Current and includes all areas of security documented in a SSAE16

24. Due Diligence & Documentation • Current GL and E&O Insurance Certificates • Cybercrime if applicable • Most Recent Penetration/Vulnerability Test Results • Performed at a minimum of annually (depends on the service). • PCI DSS Compliance Certification • Privacy Policies and Procedures • Current and in compliance with Bank’s requirements

25. Due Diligence & Documentation Recommendations for Documentation based on Risks: • NPI = High • SSAE16 or like Security Policy • Privacy Policy • PEN Test If not in contract: • Red Flag, GLBA, BSA, PCI • Security breach notification and Incident response • NPI disposal, retention, return • Confidentiality • Insurance

26. Due Diligence & Documentation • Recommendations for Documentation based on Risks: • Financial = High - Audited Financials • Operational/Impact = High • - BCP/DR

27. SSAE16 Reports • Reports should be used to evaluate the vendors internal controls. • Report should be within two year period • Report should include relevant products • Exceptions and Management Responses and User Control Considerations should be reviewed, noted and documented. • Exceptions should be audited to ensure vendor is correcting vulnerabilities and maintaining security controls.

28. SSAE16SOC1 • SOC 1SM Report – Report on Controls at a Service Organization Relevant to User Entities’ Internal Control over Financial Reporting (SSAE 16) • These reports, prepared in accordance with Statement on Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization, are specifically intended to meet the needs of the of entities that use service organizations (user entities) and the CPAs that audit the user entities’ financial statements (user’ auditors), in evaluating the effect of the controls at the service organization on the user entities’ financial statements. • User auditors use these reports to plan and perform audits  of the user entities’ financial statements.   There are two types of reports for these engagements:

29. SSAE16SOC1 • SOC 1Report – Report on Controls at a Service Organization Relevant to User Entities’ Internal Control over Financial Reporting (SSAE 16) • Type 2 -  report on the fairness of the presentation of management’s description of the service organization’s system and the suitability of the design and operating effectiveness of the controls to achieve the related control objectives included in the description throughout a specified period. • Type 1 – report on the fairness of the presentation of management’s description of the service organization’s system and the suitability of the design of the controls to achieve the related control objectives included in the description as of a specified date. • Use of these reports is restricted to the management of the service organization, user entities, and user auditors.

30. SSAE16SOC2 Report on Controls at a Service Organization Relevant to Security, Availability, Processing Integrity, Confidentiality or Privacy • These reports are intended to meet the needs of a broad range of users that need to understand internal control at a service organization as it relates to security, availability, processing integrity, confidentiality and privacy. • These reports are performed using the AICPA Guide:  Reporting on Controls at a Service Organizations Relevant to Security, Availability, Processing Integrity,  Confidentiality, or Privacy  and are intended for use by stakeholders (e.g., customers, regulators, business partners, suppliers, directors) of the service organization that have a thorough understanding of the service organization and its  internal controls.

31. SSAE16SOC2 • Report on Controls at a Service Organization Relevant to Security, Availability, Processing Integrity, Confidentiality or Privacy • These reports can form an important part of stakeholders: • Oversight of the organization • Vendor management program • Internal corporate governance and risk management processes • Regulatory oversight • Similar to  SOC 1sm  engagement there are two types of report : Type 2, report on management’s description of a service organization’s system and the suitability of the design and operating effectiveness of controls; and Type 1, report on management’s description of a service organization’s system and the suitability of the design of controls.  These reports may be restricted in use.  

32. SSAE16SOC3 SOC 3SM Report— Trust Services Report for Service Organizations • These reports are designed to meet the needs of users who need assurance about  the controls at a service organization that affect  the security, availability, and processing integrity of the systems used by a service organization to process users’ information ,and the  confidentiality, or privacy of that information, but do not have the need for or the knowledge necessary to make effective use of a SOC 2 Report. • These reports are prepared using the AICPA/Canadian Institute of Chartered Accountants (CICA) Trust Services Principles, Criteria, and Illustrations for Security, Availability, Processing Integrity, Confidentiality, and Privacy.  Because they are general use reports, SOC 3 reports can be freely distributed or posted on a website as a SysTrust for Service Organizations seal. 

33. SSAE16SOC1 SOC 3SM Report— Trust Services Report for Service Organizations • For more information about the SysTrust for Service Organization seal program go to www.webtrust.org. • Unlike a SOC 1 report, which is only an auditor-to-auditor communication, SOC 2 Reports are generally restricted use report  (at the discretion of the auditor using the guidance in the standard) and  SOC 3 Report (in all cases) will enable the service organization to share a general use report that would be relevant to current and prospective customers or as a marketing tool to demonstrate that they have appropriate controls in place to mitigate risks related to security, privacy, etc.  ** American Institute of CPA’s www. Aicpa.org

34. SSAE16 Determination When determining which SOC to require for a vendor consider the following areas: • What level of Operational/Impact, NPI and Reputation Risk has been assessed? • What is the availability of the service? Is it in-house, private server, data center, public cloud? • Are there any restrictions for the service? Time of usage, employee and vendor access, etc.

35. SSAE16 Determination • What are the known security controls? Are they adequate in comparison to the NPI and Reputation Risk rating? • What are the potential confidentiality issues that could arise? Security breach, loss of data by vendor or employee, disgruntled employee, etc. • What is the customer usage level for the service? • What are the legal ramifications of loss or data or service interruption?

36. Red Flags • Be cautious if you run into any of the following during Risk Assessment or Documentation review: • Incomplete answers to your questions. • Confidential, we can’t share? • We have to run it by legal and get back to you. • IS Policies are not based on any accepted security standard (ISO27001).

37. Red Flags • Be cautious if you run into any of the following during Risk Assessment or Documentation review: • No formal security awareness training program noted for employees and subcontractors. • Old documentation such as Privacy policy. • Difficulty providing the overall material.

38. Monitoring • Review all due diligence documentation. Question if reports are not being updated at a minimum of every two years • Review of Penetration Test results (more during IT session • Monitor vendors with NPI risk for any changes in volume, data changes • Encryption • New technology for sending files • Remote access • Employee terminations

39. Annual ReportingFive Components Annual report of High risk vendors should include: • Vendor Overview • Vendor Risk Level Assessment • Operational Review • Legal/Regulatory Review • Conclusion

40. Annual Reporting1. Vendor Overview • Service provided • Location of vendor corporation • If it is publicly traded or not • Experience in the financial industry • Number of other financial institutions using vendor • General reputation of the Vendor

41. Annual Reporting2. Vendor Risk Level Assessment should answer: Strategic Risk and Reputation Risk • Vendor’s product/services have what kind of direct impact on Strategic and Reputation risk? • Vendor’s products/services impact the financial institution how in these areas?

42. Annual Reporting2. Vendor Risk Level Assessment should answer: Operational Risk • Vendor’s product/services have what kind of direct impact on Operational risk? • OR • Vendor’s products/services do not directly impact the financial institution’s operations.

43. Annual Reporting2. Vendor Risk Level Assessment should answer: Transaction Risk • Vendor’s product/services have what kind of direct impact on Transaction risk? • OR • Vendor’s products/services do not interact with transaction processing.

44. Annual Reporting2. Vendor Risk Level Assessment should answer: Credit Risk • Vendor’s product/services have what kind of direct impact on Credit and Interest rate risk? • OR • Vendor’s products/services do not interact with our lending area.

45. Annual Reporting2. Vendor Risk Level Assessment should answer: Compliance Risk • Vendor’s product/services have what kind of direct impact on Compliance risk?

46. Annual Reporting2. Vendor Risk Level Assessment should answer: Liquidity Risk • Vendor’s product/services have what kind of direct impact on Liquidity risk? OR • Vendor’s products/services do not impact our ability to fund obligations as they come due. Identify other Risk Categories as applicable!

47. Annual Reporting3. Operational Review • Identify Vendor’s Financial strength noting: • Balance sheet • Debt • Income And any other pertinent discussion

48. Annual Reporting4. Operational Review • A review of the Information Security controls indicated that • Information Security Audits • Vendor’s accounting firm provided a ___________ report • Report indicated that the internal controls were effective or ineffective. • Vendor provided a summary of its Information Security and Privacy Policies and procedures and they appear to be: • Current • Adequate

49. Annual Reporting4. Operational Review • Privacy policy included: • Proper employee background checks are or are not conducted • Confidentiality provisions are / are not executed by employees, contractors and or subcontractors. • Appropriate for the level of NPI being shared with the vendor and the financial institution’s compliance requirements.

50. Annual Reporting3. Operational Review • Privacy policy included: • Proper employee background checks are or are not conducted • Confidentiality provisions are / are not executed by employees, contractors and or subcontractors. • Appropriate for the level of NPI being shared with the vendor and the financial institution’s compliance requirements.