When Vendors Get Hacked: Your Guide to Third-Party Data Breaches

In today's interconnected business ecosystem, organizations rely heavily on third-party vendors for everything from payroll and marketing to cloud hosting, customer support, and specialized financial-services processing. While these partnerships unlock efficiency and innovation, they also introduce significant risk—especially when personally identifiable information (PII) flows to a vendor.

We are seeing a surge in third-party compromises, especially in highly regulated markets such as banking. In many cases, the bad actors realize financial institutions (and other markets that are highly regulated and controlled) may be less susceptible to a direct attack, but many of their vendors do not have the same level of security and provide easier targets.

The issue is that even though the attack didn't occur inside your environment, the consequences often fall squarely on you. Regulators, customers, and the public rarely differentiate between who held the data and who lost it. Because of this, learning methods to protect your company, as well as how to respond if something should happen, is crucial.

This is not a "what-if" scenario. In just the last few months, many companies were the victim of ransomware. This past August, data analytics firm Marquis Software Solutions was breached, exposing the data of multiple banks that used their services. And just last month, mortgage management company SitusAMC was the victim of hacking. In the latter case, the scope is still being analyzed, but it is known some customer records were stolen.

Below, we break down the risks, consequences, response actions, and long-term strategies to strengthen your organization against third-party data exposures.

The Risks of Third-Party Data Sharing

Third-party relationships expand your operational footprint—often in ways that are invisible until something goes wrong. When you share PII with a vendor, your risk surface immediately expands to include:

1. Loss of Control Over Sensitive Data

Once PII leaves your environment, you depend on your vendor's security posture. Their controls, patch cadence, access management practices, and incident response maturity become your liability.

2. Inherited Regulatory and Legal Obligations

Even if the vendor mishandled or failed to properly secure your data, your organization remains accountable for ensuring proper due diligence under regulations such as GLBA, HIPAA, PCI DSS, CCPA, or state data-breach notification laws.

3. Reputational Damage

Customers don't typically distinguish between you and your vendor. If their data is exposed, your brand suffers—even if you were not technically breached.

4. Operational and Financial Exposure

A vendor breach can disrupt processes that rely on that third party, trigger costly notification campaigns, drive legal expenses, and—in some industries—lead to regulatory scrutiny or fines.

How to Reduce Third-Party Breach Risk Going Forward

Preventing third-party data compromise requires a mature, proactive vendor-risk management program. Strong controls reduce the likelihood and severity of future incidents.

1. Strengthen Vendor Due Diligence

Before sharing any PII, do your vendor diligence! If you haven't reviewed the security of your third party, you are skipping a crucial step in risk prevention. For critical vendors (vendors that you share customer data with or provide critical services to your organization), you should look for the following at a minimum:

• SOC 2 Type 2 or ISO 27001 audit reports
• Cyber insurance evidence
• MFA across administrative access
• Clear data-handling and data-retention practices
• Annual risk assessments or penetration testing summaries

Also remember that vendors need to be reviewed based on their criticality. In addition to performing due diligence, annual reviews of critical vendors ensure standards haven't slipped and the vendor is still compliant to your satisfaction. This can be done manually or through third-party assessment services that can provide financial and security reviews of companies.

2. Limit the Amount of Data Vendors Can Access

The easiest way to lower the risk of compromised data is don't send it if you don't need to! In many cases, people send full customer and account information to vendors, even if they would only use certain key fields. As an example, if you collect SSN from your customers, unless there is a business need to share it, you should never include it. We have seen breaches of third-party companies where SSN, account number, and financial information were exposed, but NONE of those fields were needed by the third-party vendor to provide services. This made what could have been a minor issue into a major incident. The less data the vendor stores, the lower your exposure.

In other words, use least-privilege and data minimization principles:

• Only send the minimum PII needed for the service
• Mask or tokenize sensitive data where possible
• Use anonymized datasets for testing or analytics

3. Strengthen Contract Language

With many companies using multiple third-party vendors, having language in contracts that deals with compromises and breaches is crucial to protect both sides. For new vendors, contracts should require:

• Security controls aligned with appropriate regulators' (NIST/ISO/FFIEC/PCI) expectations
• Breach notification timeframes (24–48 hours)
• Right-to-audit clauses
• Data return and data destruction requirements
• Mandatory MFA, encryption, and secure development practices

Well-written contracts reduce ambiguity and improve accountability. If you do not have legal counsel in-house, consider hiring a firm to not only review vendor contracts, but assist in drafting default contract language for your organization when dealing with third parties.

What Happens When Your Vendor Is Breached?

Despite taking on all these precautions, a third-party data compromise will happen at some point, and it has ripple effects across the entire organization. Common consequences include:

1. Customer Notification and Crisis Management

If PII was exposed, you may be required to notify affected individuals, regulators, or law enforcement within strict timelines. Managing communications quickly and accurately becomes critical. Having templates and playbooks on incident response is the best way to prep for this.

2. Regulatory Reporting

Financial institutions, healthcare providers, and any business storing sensitive data may be subject to strict reporting rules. Failure to notify regulators in time can worsen the event significantly. DO NOT wait it out and hope it goes away. Speaking from experience, most regulators usually are aware of a third-party breach before you report it, since it usually affects multiple clients. Reporting quickly and effectively allows you to use the regulator as a source of support and information rather than an adversary.

3. Operational Disruption

The vendor may need to take systems offline to investigate the breach, resulting in service outages, processing delays, or work stoppages. Depending on the service, you may need workarounds or alternate service methods. Making sure these are documented in a business continuity plan can go a long way to saving time and money in keeping services running.

4. Reputational Trust Impact

Stakeholders—customers, employees, auditors, the Board—may question your third-party risk management program, even if the vendor was at fault. This is where risk and security needs to work hand in hand with executive management to review all the items above to see if there are gaps in response plans that could have mitigated the event.

How to Respond When a Vendor Is Breached

A fast, structured response minimizes damage and positions your organization as responsible, transparent, and in control.

1. Activate Your Incident Response and Vendor Management Teams

Treat the incident as if it happened in your own environment. Assemble IT security, legal, risk management, compliance, and communications teams immediately. While the necessary team members might be different for a third-party event, you want to start the response as soon as you can, even if it is just "waiting on the third party" to provide more information. The reason here is that many vendors will wait until forced to before they supply information, so formal tracking of the event becomes crucial. Which leads us into the next point:

2. Get Clear, Documented Information from the Vendor

While the third-party vendor may take weeks or longer to identify exactly what happened and what data was compromised, you want to be proactive and have them send you multiple pieces of information. Ideally, you can set up a regular cadence via email or meetings to get regular updates, but at the onset, you should request the following:

• A formal incident notification letter
• What data elements were involved (e.g., SSN, DOB, account info)
• When the incident occurred and when it was discovered
• How the breach happened
• What containment and remediation actions are underway
• Whether law enforcement or regulators have been notified

Ensure all communication is logged in your incident response report.

3. Assess Scope and Risk Impact

Back at your company, once you start getting data from the vendor, you want to determine:

• Who is affected (customers, employees, partners)
• Whether PII, financial data, or authentication information was exposed
• The likelihood of identity theft, fraud, or targeted phishing

This drives your notification and remediation decisions. We've seen some where although some data was compromised, based on the data itself, the risk of the data being used was low, which allowed for a different response than if it were highly desired data that could be easily used.

4. Consult Legal and Compliance Early and Often

Legal counsel should guide notification requirements, contract enforcement, and documentation. For financial institutions, ensure alignment with GLBA, FFIEC, state breach laws, and any supervisory expectations.

Do not forget to leverage your cybersecurity insurance. Even though it was not your organization that was compromised, it was your data that was affected, which means it is your responsibility. While you may not need forensics or some of the insurance services, they will often provide legal assistance from lawyers that deal in breaches, and be able to review any communications to customers or regulatory bodies. This can be critical if customers are in multiple states, with multiple breach laws in place. Note, however, that many cybersecurity insurance policies have deductibles, so be prepared to pay until that deductible is hit. For example, if you have a $5 million policy, but you have a $25K deductible, you will be paying for services out of pocket for a while.

5. Prepare Customer and Regulator Communications

This is also an area where legal/insurance folks can assist to save time and effort. Templates could include:

• A clear explanation of the incident
• What type of data was exposed
• Steps your organization is taking
• Recommended actions for affected individuals
• Offers for credit monitoring or identity protection, if appropriate

Making sure communication is vetted first can save a lot of headaches, especially if you have regulatory requirements where certain criteria must be met.

Final Thoughts

When a third-party vendor suffers a breach involving your PII, the consequences are real, and they also land on your organization whether or not you were directly responsible. But with strong vendor oversight, smarter data sharing practices, and a prepared incident response playbook, organizations can dramatically reduce their exposure.

Third-party data compromise is not a matter of if, but when. The organizations that fare best are those that understand their vendor ecosystem and EXACTLY what data is shared with whom, enforce strong security expectations, and respond quickly and transparently when something goes wrong.

Compass IT Compliance: Your Partner in Third-Party Risk Management

At Compass, we understand the complexities of managing third-party vendor risk in today's regulatory environment. Our team specializes in helping organizations develop comprehensive vendor risk management programs, conduct thorough security assessments, and build incident response playbooks tailored to your specific industry requirements. Whether you need assistance with vendor due diligence, contract reviews, regulatory compliance guidance, or breach response planning, we provide the expertise and hands-on support to protect your organization from third-party data compromises.

Don't wait until a vendor breach puts your organization at risk—contact us today to strengthen your third-party security posture and ensure you're prepared for whatever comes next.