Navigating Regulatory Challenges With Third Party Risk Management

In today’s interconnected economy, organizations rely on a vast network of third-party vendors, suppliers, and service providers. This reliance creates new third-party risk management concerns – if a vendor fails to meet legal or security requirements, the hiring company can end up facing serious consequences. Companies are expected to maintain the same standards of compliance and security in their extended enterprise as they do internally. When a vendor exposes sensitive data or violates regulations, the primary organization often faces regulatory scrutiny, reputational damage, and financial fallout. The growing web of outsourcing, cloud services, and global supply chains means that third-party compliance management is now a fundamental part of corporate risk strategy.

The Regulatory Landscape: Oversight and Accountability

Regulators have made it abundantly clear that companies cannot outsource their regulatory obligations. In sectors like finance, healthcare, and beyond, authorities are holding organizations accountable for the acts of their vendors. Third-party risk management remains a top priority. These actions illustrate a broader point: if a critical service provider fails to comply with laws – whether it’s data privacy rules, anti-money-laundering requirements, or consumer protection standards – the hiring company may be on the hook for the violation.

Multiple regulatory bodies have issued guidance on managing vendor and third-party governance and compliance. Banking regulators like the Office of the Comptroller of the Currency (OCC) and Federal Reserve have outlined detailed expectations for third-party risk programs, emphasizing a risk and compliance framework that covers every stage of the vendor relationship, from due diligence to ongoing monitoring. Engaging a supplier or service provider does not absolve an organization of responsibility. The message from regulators is to “trust, but verify”: companies must ensure their vendors adhere to applicable laws and standards, and they should be able to demonstrate this oversight through documentation and reporting. Failing to do so can lead to enforcement actions, fines, and damaging publicity, especially if a third-party lapse results in consumer harm or a data breach.

From financial institutions to tech companies, the U.S. regulatory environment is increasingly stringent about third-party governance. We see this in areas like data protection and anti-corruption. The clear takeaway is that strong vendor oversight and third-party governance best practices are not just advisable – they are expected. Organizations need to proactively assess and control third-party risks to stay in compliance with the law and to avoid costly surprises from vendor failures.

Regulatory Compliance Challenges

Navigating the complex landscape of third-party compliance presents significant challenges for organizations. From managing numerous relationships to adapting to an ever-evolving regulatory environment, companies constantly struggle to ensure their extended ecosystem adheres to necessary standards. Understanding these hurdles is the first step toward building a robust and effective third-party risk management strategy.

• Complexity of Overlapping Laws and Standards: A significant regulatory compliance challenge arises from the intricate web of laws and standards that third parties must follow. Companies are responsible for ensuring vendors comply with industry-specific regulations and various regional and global mandates, such as GDPR. This oversight for each vendor can overwhelm internal compliance teams, leading to oversights. A vendor's compliance lapse can directly expose the hiring company to liability, even if the incident originated externally.
• Undetected Risks from Poor Vendor Practices: The vast nature of supply chains exposes organizations to compliance risks that may not be immediately apparent. If a vendor has poor security protocols or engages in unethical practices, the primary organization faces significant exposure. These issues often remain undiscovered until a damaging incident occurs, such as a data breach or a regulatory audit uncovers non-compliance. By then, the reputational and financial damage can be substantial.
• Rapidly Changing Regulatory Environment: The dynamic nature of regulatory frameworks creates a constantly moving target for third-party compliance management. What is compliant today might not be tomorrow, as new regulations are continuously introduced. Organizations must ensure current compliance and proactively monitor these changes, effectively communicating them to their third parties. This need for continuous adaptation requires significant resources and vigilance to avoid falling behind and becoming vulnerable to non-compliance.
• Vendor Sophistication Disparity: A significant hurdle is the varying sophistication levels among vendors. Some third parties may lack the knowledge, resources, or infrastructure to quickly adapt to new or evolving laws. This disparity can inadvertently leave the hiring company exposed, as the weakest link can compromise the entire compliance posture. Ensuring all vendors, regardless of size, can meet compliance demands requires diligent oversight and tailored support.
• Reactive vs. Proactive Compliance Discovery: Companies often only discover compliance issues after an incident, such as a data breach or regulatory audit. This reactive approach means damage has already occurred before the problem is identified. A proactive strategy is crucial—one that anticipates vulnerabilities and establishes robust monitoring and assessment frameworks to identify and mitigate risks before they escalate into costly incidents or penalties.

Effectively addressing these challenges requires a comprehensive and adaptable approach to third-party risk management. By proactively identifying and mitigating potential compliance gaps, organizations can safeguard their reputation, avoid costly penalties, and maintain trust within their extended network of partners.

Strategies and Frameworks

To tackle these challenges, organizations should establish a structured risk management framework for vendors that integrates compliance at every step. A good starting point is to formalize a vendor risk assessment process whenever onboarding a new third party. This means conducting due diligence that evaluates a vendor’s security controls, financial stability, operational capabilities, and compliance history. The goal is to identify high-risk vendors upfront. For critical suppliers or those handling sensitive data, the bar for approval should be set high. By categorizing vendors into risk tiers (critical, moderate, low risk), organizations can apply appropriate levels of scrutiny and oversight – an approach recommended in many risk management frameworks for vendors.

Once a vendor is on board, strong contracting and governance practices come into play. It’s important to bake compliance requirements directly into vendor agreements. This can include clauses obligating the vendor to follow specific regulations and industry standards, rights for the company to audit or monitor the vendor’s compliance, and clear repercussions if standards are not met. Defining these expectations contractually ensures both parties understand the compliance obligations from the outset. It also provides legal leverage if the vendor falls short. Building a comprehensive risk and compliance framework around third-party relationships means that every vendor is bound by the rules the company itself must follow.

Third-party risk management frameworks typically involve five phases: risk assessment/due diligence, contracting/onboarding, ongoing monitoring, incident management, and termination/renewal. This systematic approach transforms third-party risk management into an integral part of corporate compliance, reducing the likelihood of overlooking crucial compliance factors. Aligning with well-known standards can provide a roadmap for third-party compliance. Companies often adopt frameworks such as NIST or COSO internally; extending those to third parties can help set clear benchmarks. These compliance strategies for third-party relationships ensure that vendors are not operating in a vacuum but are held to recognized best practices.

Leveraging Technology and Tools

As organizations grow their vendor networks, manual processes like spreadsheets and email checklists become inadequate and error-prone. Yet surprisingly, many companies are still catching up on automation – as of a recent survey, about 26% of organizations were still using spreadsheets to manage third-party risks. The good news is that a wide range of vendor risk management solutions and software tools have emerged to streamline third-party compliance oversight. 

Compliance risk assessment tools help automate the initial due diligence and periodic evaluations of vendors. These platforms often come with standardized questionnaires, scoring systems, and even integrations to external data sources to rapidly assess a vendor’s risk profile. Instead of juggling spreadsheets, a risk manager can use a central dashboard to see which vendors have submitted necessary compliance documentation, whose insurance or certifications are up to date, and where the potential red flags are. Some third-party oversight tools incorporate artificial intelligence to analyze open-source information or past performance to flag issues that might not be obvious from a questionnaire.

Integration and reporting are also important aspects of technology solutions. By using a compliance management platform such as Certa, teams can maintain a single source of truth about vendor status and compliance. These platforms often include regulatory reporting software features that make it easier to generate reports for audits or regulatory inquiries. Automated reporting helps ensure nothing is overlooked – it can compile data on vendor performance against key risk indicators or adherence to service-level agreements that relate to compliance.

Third-Party Oversight and Best Practices

Implementing a comprehensive approach that prioritizes clear communication, standardized compliance, continuous monitoring, and enterprise-wide accountability, organizations can significantly mitigate the risks associated with external vendors. This strategic framework ensures that third-party relationships are managed with the same rigor and attention to detail as internal operations, safeguarding against potential compliance gaps and data breaches.

• Vendor Compliance Checklist: A foundational element for managing third-party compliance involves developing a comprehensive vendor compliance checklist and a detailed governance policy. This critical step outlines all essential checks and requirements that a vendor must fulfill throughout the entire engagement, from onboarding to offboarding. These requirements must be formally documented and explicitly agreed upon, moving beyond mere assumptions about adherence to security policies. 
• Industry Standard Alignment: Another critical component of third-party governance best practices is mandating alignment with recognized industry standards and certifications. Suppose an organization highly values specific frameworks, such as ISO 27001 for information security or SOC 2 for cloud service providers. In that case, it should require critical vendors to obtain and maintain these certifications or attestations. This creates a vital layer of assurance and fosters uniformity across the entire vendor ecosystem. A robust governance program should necessitate prompt reporting from vendors regarding any compliance violations or security incidents, enabling the hiring firm to take swift, informed action to mitigate damage and fulfill regulatory obligations.
• Regular Vendor Oversight: Regular oversight is a non-negotiable pillar of effective third-party governance. Businesses must consistently monitor vendors throughout the entire relationship, not just during the initial onboarding phase. This continuous assessment can be facilitated through periodic audits or independent assessments conducted by the company, the vendor, with supporting evidence, or impartial third parties.
• Centralized Vendor Inventory: Maintaining a centralized inventory of all third-party relationships is also crucial for sound governance. This inventory should include comprehensive risk ratings and up-to-date status information for each vendor. By diligently tracking this information, companies can prevent any vendor from "falling off the radar" and ensure that high-risk partners receive the heightened attention they require. This systematic approach allows for proactive risk management and facilitates a comprehensive understanding of the entire third-party landscape. This data-driven strategy supports informed decision-making and helps to prioritize resources effectively, ensuring compliance efforts are targeted where they are most needed.

Organizations must cultivate robust internal awareness and accountability concerning third-party risk, integrating it into broader enterprise risk management discussions. When contemplating new products or market entries, decision-makers must consider the associated third-party risks to avoid siloed decisions that could inadvertently introduce compliance gaps.

Compliance Culture Through Training

Employees who deal with contractors or suppliers should be trained to understand the importance of third-party compliance. Regulatory training programs for procurement teams, project managers, and others who manage vendor relationships can highlight what to watch for – such as red flags in a vendor’s operations or how to handle a vendor’s non-compliance. Training should also extend to the onboarding phase: whenever a new third party is brought in, the team overseeing that vendor needs to convey the company’s code of conduct and compliance expectations to them.

By pushing compliance awareness outward to your partners, you create an environment where everyone understands the stakes and their roles. Driving third-party compliance training across the entire organization and its partners can have a broad, positive impact on company culture. Through training, vendors are made to feel like they are part of the compliance team, not just outsiders. This often encourages more open dialogue – vendors might be more likely to self-report issues or ask questions if they know the company is committed to collaboration on compliance rather than just policing.

Companies should establish clear channels for two-way communication with their third parties on compliance matters. Regular meetings or check-ins can be scheduled for critical suppliers to discuss any new regulatory developments or to review performance against compliance KPIs. Recognizing and rewarding vendors for good compliance performance can also reinforce positive behavior.

When internal staff are educated and vigilant, and when vendors are treated as partners in compliance, the whole network becomes more resilient. Problems are more likely to be caught early or prevented altogether, and if they do occur, all parties are prepared to respond in a unified, effective manner. This culture can even become a competitive advantage: businesses that manage third-party risks well are less likely to suffer disruptions or scandals, and they may even attract better partners who appreciate the clarity and support in compliance matters.

Third-party relationships are essential to modern business, but they come with inherent risks that no company can afford to ignore. Navigating the regulatory challenges of third-party risk management requires a proactive and comprehensive approach. Organizations must implement strong frameworks and clear processes to vet and monitor vendors, utilize technology and automated compliance monitoring to stay ahead of issues, and enforce robust governance practices backed by top-down support. By doing so, companies can transform vendor risk management from a source of anxiety into a source of strength – turning compliance into a collaborative effort that safeguards all parties involved.

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Sources

• processunity.com ProcessUnity Research – “10 Critical Third-Party Risk Management Challenges and How to Mitigate Them,” March 2025.
• ibm.com IBM – “How to address increasing regulatory concerns for third-party risk management,” Aug 2024.
• upguard.com UpGuard – “Top 10 Challenges and Solutions in Managing Third-Party Risks,” June 2025.
• hyperproof.io Hyperproof – “Top Findings on Third-Party Risk from the 2024 Benchmark Report,” 2024.
• bitsight.com Bitsight – “What You Need To Know About Vendor Compliance (Vendor Compliance Checklist),” Feb 2025.
• sai360.com SAI360 – “The Importance of Third-Party Compliance Training,” Mar 2023.

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