Legal Departments’ Lack of Third-Party Oversight Leaving Small, Midsized Banks Exposed
A new survey from Jones Walker found that many small and midsized banks are falling short on due diligence with their third-party cybersecurity vendors, leaving them dangerously exposed.
November 12, 2024 at 05:47 PM
4 minute read
Community and midsized banks are almost universally reliant on third-party vendors for cybersecurity, but according to a survey released Tuesday, many are exposing themselves to risk by failing to perform adequate due diligence on their contractors.
The 2024 Community and Midsize Banks Cybersecurity Survey, conducted by Jones Walker, gathered responses from 125 executives at banks with under $50 billion in assets. Slightly more than half of those surveyed worked as chief executive officers, chief operating officers or chief financial officers, while a further 37% served as chief information officers, chief information security officers or chief technology officers.
The new survey was the fourth biannual cybersecurity survey the law firm has conducted in critical infrastructure fields, and across industries respondents have tended to focus too much on postincident response at the expense of investing in prevention. Andy Lee, a New Orleans-based litigation partner and co-head of privacy data strategy and artificial intelligence at Jones Walker, told Legaltech News that community and midsized banks are no exception.
“They’re generally overfocused on the compliance activities after an incident, rather than the preventive activities, and so I like to say it’s sort of like having a great evacuation plan, but leaving your front door unlocked.”
According to the survey, 29% of the respondent banks rely entirely on third-party vendors for their cybersecurity protections, while a further 70% depend at least in part on these contractors.
However, only 53% of the banks surveyed review the ability of third parties to comply with applicable laws and regulations, while 51% require third parties to provide their cybersecurity policies and plans, and a bare majority investigate those procedures.
What’s more, less than half of respondents contractually obligate their vendors to adhere to data-security protections (42%) or evaluate their contractors’ legally binding subcontracts (41%), and fewer than a third of respondents require their third-party contractors to carry cyber insurance (30%).
Tom Walker, a corporate practice group partner in the firm’s Jackson, Mississippi, office, indicated that a lack of resources is one major impediment to more robust due diligence programs. “We serve as somewhat of a general counsel for a lot of those banks, because a lot of them are not large enough to really have an in-house counsel. … [There’s] a lack of resources as well, to be able to focus on the planning and the due diligence process before they really get into the engagement.”
These processes are not necessarily improved postengagement, either. While 62% of respondents review third-party vendors’ ongoing compliance with laws, regulations and contractual provisions, 29% do not hold them accountable for legal, contractual or regulatory liability. In addition, only 23% contractually obligate vendors to indemnify them for any claims arising from a data breach. Even information-sharing requirements are falling short, as only 50% of respondents require prompt notification in case of a data breach.
Rob Carothers, a Mobile, Alabama-based partner in the firm’s corporate practice group, noted that these lapses can be quite dangerous, as banks are ultimately responsible for any mistakes on the part of their less-regulated vendors.
“Unlike the bank, whose regulator is going to examine them once a year to make sure they’re doing these things, there’s going to be a vulnerability and some exposure if the bank is not essentially regulating its vendors. … Ultimately, the bank’s going to be the one with the responsibility if there’s a breach, and deal with customer fallout and reputational damage.”
Walker concurred, telling Legaltech News that banks “do a very good job of taking care of their own house, of making sure that their own systems are locked down, because they have examiners in the bank every 18 months. … What they have a more difficult time dealing with is making sure their vendors are locked down, because those are not as regulated.”
In addition to struggling with due diligence procedures, many smaller banks are not taking full advantage of available outside expertise and insurance. While 76% of respondents have obtained cyber insurance to help cover the costs of a potential cybersecurity incident, only 41% of respondents have had their policies reviewed to ensure they provide adequate coverage. What’s more, only 32% have engaged forensic service consultants for pre- or postincident work, while a slightly greater number (43%) have worked with experienced cybersecurity attorneys.
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