Privacy and Artificial Intelligence - 2.8 Vendor and Third-Party Risk Management

2.8 Vendor and Third-Party Risk Management

Introduction

Vendor and third-party risk management is a critical component of responsible artificial intelligence (AI) adoption, ensuring that organizations can leverage external expertise and technology while maintaining security, compliance, and trust. As organizations increasingly rely on third-party vendors for AI solutions, cloud services, data processing, and specialized tools, they must carefully manage the risks associated with these partnerships. Effective vendor risk management helps organizations avoid data breaches, regulatory penalties, and reputational damage, while also enabling innovation and operational efficiency (PwC, 2025; Magai, 2025).

In today’s digital landscape, almost every organization depends on external partners for essential services. Third-party vendors may provide cloud infrastructure, AI models, software-as-a-service (SaaS) applications, or support for business processes. These relationships introduce new risks, including unauthorized access to sensitive data, supply chain vulnerabilities, and compliance challenges. By implementing robust vendor and third-party risk management practices, organizations can reduce these risks and ensure that their AI systems remain secure, reliable, and aligned with ethical and regulatory standards (Aon, 2024; Venminder, 2024).

Technical or Conceptual Background

Vendor and third-party risk management (TPRM) is a structured process for identifying, assessing, and mitigating risks associated with external partners. This process is especially important in the context of AI, where vendors may handle sensitive data, operate critical systems, or influence decision-making through automated tools (PwC, 2025; Magai, 2025).

The TPRM lifecycle typically includes several key stages: onboarding, due diligence, contracting, continuous monitoring, and offboarding. During onboarding, organizations evaluate potential vendors to ensure they meet security, compliance, and operational requirements. Due diligence involves collecting and reviewing documentation, such as security policies, audit reports, and compliance certifications. Contracting establishes legal agreements that define responsibilities, service levels, and data protection requirements (Venminder, 2024; EY, 2025).

Continuous monitoring is essential to ensure that vendors maintain high standards over time. This may involve regular audits, performance reviews, and real-time monitoring of vendor activities. Offboarding ensures that when a vendor relationship ends, data is securely transferred or deleted, and access rights are revoked (Venminder, 2024; Magai, 2025).

AI-powered tools are increasingly used to streamline and enhance TPRM processes. For example, AI can automate data collection and analysis, identify patterns of risk, and generate alerts for potential issues. Machine learning algorithms can assess vendor performance, detect anomalies, and predict future risks based on historical data (Certa, 2024; TrustCloud, 2025). These technologies make it easier for organizations to manage large and complex vendor ecosystems, reducing manual effort and improving accuracy.

Key risk areas in vendor and third-party relationships include data security, regulatory compliance, operational resilience, and vendor stability. Data security risks arise when vendors have access to sensitive information, increasing the potential for data breaches or misuse. Regulatory compliance risks occur when vendors fail to meet legal requirements, such as data protection laws or industry-specific regulations. Operational resilience risks include service disruptions, quality issues, or failures to meet contractual obligations. Vendor stability risks relate to financial health, business continuity, and the potential for vendor lock-in (Aon, 2024; Linford & Co, 2024).

Problems Being Solved or Best Practice Being Applied

Vendor and third-party risk management directly addresses the problem identified in Sub-Point 1.7: Vendor and Third-Party Risks. This Sub-Point highlights the unique challenges and vulnerabilities introduced when organizations rely on external partners for AI solutions, data processing, and critical services. By implementing robust TPRM practices, organizations can mitigate risks such as unauthorized access, data breaches, compliance violations, and operational disruptions (PwC, 2025; Magai, 2025).

Best practices in vendor and third-party risk management include conducting thorough due diligence, establishing clear contractual agreements, and implementing continuous monitoring and auditing. Organizations should also prioritize vendors based on their criticality and the sensitivity of the data or services they provide. High-risk vendors, such as those handling personal data or operating core systems, should be subject to more rigorous assessments and controls (Aon, 2024; Venminder, 2024).

AI-powered tools can enhance TPRM by automating risk assessments, detecting anomalies, and providing real-time insights into vendor performance. These tools enable organizations to identify and respond to risks more quickly and effectively, reducing the likelihood of incidents and improving overall resilience (Certa, 2024; TrustCloud, 2025).

Another important aspect is the management of fourth-party and nth-party risks, which arise when vendors themselves rely on additional subcontractors or service providers. Organizations should extend their risk management practices to cover these extended supply chains, ensuring that all parties adhere to security and compliance standards (EY, 2025; Magai, 2025).

By adopting a holistic and proactive approach to vendor and third-party risk management, organizations can reduce the likelihood of security incidents, comply with regulatory requirements, and maintain trust with customers and stakeholders. This approach not only addresses Sub-Point 1.7 but also supports broader goals of security, compliance, and responsible AI adoption (PwC, 2025; Magai, 2025).

Role of Government and Regulatory Authorities

Governments and regulatory authorities play a central role in shaping and enforcing standards for vendor and third-party risk management. They establish legal and regulatory frameworks that require organizations to assess, monitor, and manage risks associated with external partners, especially in sectors where data security and privacy are critical (Magai, 2025; Venminder, 2024).

Regulatory bodies such as the European Data Protection Board (EDPB), the UK Information Commissioner’s Office (ICO), and the US Federal Trade Commission (FTC) provide guidelines and best practices for TPRM. These guidelines help organizations understand their obligations and implement effective risk management strategies (Venminder, 2024; NIST, 2023). For example, the EU AI Act and GDPR require organizations to conduct due diligence on vendors and ensure that they comply with data protection laws.

Governments also support the development of national and international standards for vendor risk management. The National Institute of Standards and Technology (NIST) in the US has published frameworks and guidance for managing risks in supply chains and third-party relationships (NIST, 2023; Mitratech, 2025). These frameworks provide a structured approach to identifying, assessing, and mitigating risks, and are widely adopted by organizations across industries.

In addition to setting rules and providing guidance, governments raise public awareness about the importance of vendor risk management. They run educational campaigns, host workshops, and provide resources to help organizations and individuals understand their rights and responsibilities (Venminder, 2024; Mitratech, 2025).

International cooperation is also important, as vendor risks often cross borders. Organizations like the OECD, G7, and UNESCO promote global standards for vendor risk management, facilitating information sharing and collaboration among countries (Mitratech, 2025; Alan Turing Institute, 2025). These efforts help harmonize regulations and ensure that best practices are adopted worldwide.

Governments can also serve as model users of TPRM practices, demonstrating best practices and creating demand for secure and compliant vendor solutions. By adopting robust TPRM in their own operations, governments show leadership and help build a market for innovative risk management solutions (Venminder, 2024; Mitratech, 2025).

Role of Organizations and Businesses

Organizations and businesses are responsible for implementing effective vendor and third-party risk management practices in their operations. This involves developing policies and procedures that prioritize security, compliance, and operational resilience (PwC, 2025; Magai, 2025).

One key step is to establish a dedicated TPRM function or team that oversees vendor relationships, conducts due diligence, and monitors vendor performance. This team should include members from IT, security, legal, compliance, and procurement, ensuring a comprehensive and coordinated approach (Venminder, 2024; EY, 2025).

Organizations should conduct thorough due diligence on potential vendors, including reviewing security policies, audit reports, and compliance certifications. High-risk vendors, such as those handling sensitive data or operating critical systems, should be subject to more rigorous assessments and controls (Aon, 2024; Magai, 2025).

Contracting is another critical component of TPRM. Organizations should establish clear legal agreements that define responsibilities, service levels, and data protection requirements. These contracts should include provisions for incident response, data breach notification, and termination procedures (Venminder, 2024; Linford & Co, 2024).

Continuous monitoring is essential to ensure that vendors maintain high standards over time. This may involve regular audits, performance reviews, and real-time monitoring of vendor activities. Organizations should also implement incident response plans to address any issues that arise with vendors (Venminder, 2024; Magai, 2025).

Transparency and communication are also important. Organizations should provide clear information to users, regulators, and the public about how vendor relationships are managed and monitored. They should also allow users to exercise their rights, such as access to information and the ability to report concerns or incidents (Venminder, 2024; PwC, 2025).

By adopting these best practices, organizations can reduce the risk of incidents, comply with regulations, and build trust with users and partners. Effective TPRM also enables organizations to learn from past incidents and improve their vendor management processes over time (PwC, 2025; Magai, 2025).

Role of Vendors and Third Parties

Vendors and third-party providers play a key role in supporting secure and compliant AI adoption. They must demonstrate that their products and services meet high standards for security, privacy, and reliability (PwC, 2025; Magai, 2025).

Vendors should provide clear documentation about their security practices, data handling procedures, and compliance with relevant regulations. They should also undergo regular audits and assessments to verify that they meet organizational and regulatory requirements (Venminder, 2024; Linford & Co, 2024).

Third-party auditors and consultants can provide independent assessments of vendor practices, helping organizations identify vulnerabilities and improve risk management. These auditors may review security controls, data protection measures, and incident response capabilities (Venminder, 2024; EY, 2025).

Vendors should also support incident response and breach notification processes, ensuring that any issues are quickly identified and resolved. They should work closely with organizations to address security incidents, provide remediation, and prevent future occurrences (Venminder, 2024; Magai, 2025).

Collaboration between organizations and vendors is essential for advancing the state of the art in TPRM. Vendors can help organizations stay informed about emerging threats and best practices, while organizations provide valuable feedback and use cases that drive innovation (PwC, 2025; Magai, 2025).

Role of Employees and Internal Teams

Employees and internal teams are essential for the successful implementation and operation of vendor and third-party risk management practices. Procurement teams are responsible for selecting and onboarding vendors, ensuring that they meet organizational requirements (Venminder, 2024; EY, 2025).

IT and security teams oversee the technical aspects of vendor relationships, including access controls, data protection, and incident response. They conduct regular audits and monitoring to ensure that vendors maintain high standards (Venminder, 2024; Magai, 2025).

Legal and compliance teams review contracts, ensure regulatory compliance, and manage incident response procedures. They also provide guidance on risk management best practices and help resolve any disputes with vendors (Venminder, 2024; Linford & Co, 2024).

Training and awareness programs help all employees understand the importance of vendor risk management and their role in maintaining security and compliance. Regular training ensures that staff are prepared to recognize and respond to vendor-related risks (Venminder, 2024; Magai, 2025).

Internal teams also monitor and audit vendor performance to ensure ongoing effectiveness. They review access logs, check for vulnerabilities, and update risk management measures as needed. By maintaining high standards of data governance, employees help protect user privacy and build trust in AI systems (Venminder, 2024; Magai, 2025).

Role of Industry Groups and Professional Bodies

Industry groups and professional bodies develop standards, guidelines, and certifications to promote best practices in vendor and third-party risk management. They facilitate knowledge sharing, research, and advocacy to advance security and compliance (Venminder, 2024; Mitratech, 2025).

Organizations such as the International Organization for Standardization (ISO), the National Institute of Standards and Technology (NIST), and the International Association of Privacy Professionals (IAPP) publish technical standards and best practices for TPRM (NIST, 2023; Mitratech, 2025). These standards help organizations select, implement, and audit vendor risk management measures, and provide a common language for discussing risks and controls.

Professional bodies offer training and certification programs for risk and compliance professionals, helping them develop the skills needed to implement and manage TPRM practices (IAPP, 2024; Venminder, 2024). These programs cover topics such as due diligence, contract management, and incident response.

Industry groups also advocate for strong privacy and security regulations and support public awareness campaigns. They organize conferences, workshops, and working groups where experts can share insights, discuss emerging challenges, and develop new solutions (Mitratech, 2025; Venminder, 2024).

By setting industry-wide benchmarks and promoting ethical conduct, industry groups and professional bodies help build public trust in AI technologies and encourage widespread adoption of best practices in vendor and third-party risk management (Venminder, 2024; Mitratech, 2025).

Role of International and Multilateral Organizations

International and multilateral organizations play a key role in promoting global standards for vendor and third-party risk management. They develop frameworks, guidelines, and recommendations that influence national policies and industry practices (Mitratech, 2025; Alan Turing Institute, 2025).

The OECD, G7, and UNESCO promote AI governance and vendor risk management best practices, encouraging countries to adopt robust risk management strategies (Mitratech, 2025; Alan Turing Institute, 2025). These organizations support capacity building, technical assistance, and research to help countries implement effective risk management.

International organizations also facilitate dialogue among stakeholders, helping to address emerging challenges and harmonize approaches to vendor risk management. They publish reports, host conferences, and provide platforms for collaboration and knowledge exchange (Mitratech, 2025; Alan Turing Institute, 2025).

By fostering global cooperation and setting high standards, international organizations help ensure that vendor and third-party risk management practices are consistent, effective, and aligned with global best practices (Mitratech, 2025; Alan Turing Institute, 2025).

Role of Consumers and Users

Consumers and users play an important role in driving the adoption of strong vendor and third-party risk management practices. By demanding transparency, accountability, and robust privacy protections, they encourage organizations to prioritize security and compliance (Venminder, 2024; Magai, 2025).

Users can exercise their rights under data protection laws, such as requesting access to their data, correcting inaccuracies, or reporting incidents. Feedback mechanisms, such as surveys, complaint channels, and public forums, provide valuable insights into user concerns and experiences (Venminder, 2024; Magai, 2025).

Educational initiatives help raise awareness about vendor risks and the importance of risk management. By understanding their rights and how their data is protected, users can make informed decisions and advocate for stronger protections (Venminder, 2024; Magai, 2025).

Ultimately, empowered consumers contribute to a market environment where security and compliance are competitive advantages, motivating organizations to adopt best practices and innovate in vendor and third-party risk management (Venminder, 2024; Magai, 2025).

Role of Members of the Public

Members of the public influence the adoption of vendor and third-party risk management practices through advocacy, education, and participation in policymaking. Civil society organizations promote awareness of vendor risks and push for stronger privacy and security protections (Mitratech, 2025; Alan Turing Institute, 2025).

Public consultations and participatory policymaking processes allow citizens to voice their concerns and contribute to the creation of balanced and effective risk management frameworks. Media coverage and educational programs inform the public about the importance of vendor risk management (Mitratech, 2025; Alan Turing Institute, 2025).

By holding organizations and governments accountable, members of the public help ensure that vendor and third-party risk management practices are robust and effective. Public opinion and activism can influence the direction of innovation and policy, driving progress toward a more secure and trustworthy digital society (Mitratech, 2025; Alan Turing Institute, 2025).

Role of Artificial Intelligence Itself

Artificial intelligence can support vendor and third-party risk management by automating risk assessments, detecting anomalies, and providing real-time insights into vendor performance (Certa, 2024; TrustCloud, 2025). AI-powered tools can analyze large volumes of data, identify patterns of risk, and generate alerts for potential issues.

For example, AI can automate the collection and analysis of vendor documentation, assess compliance with regulatory requirements, and monitor vendor activities for suspicious behavior. Machine learning algorithms can predict future risks based on historical data, enabling organizations to take proactive measures (Certa, 2024; TrustCloud, 2025).

AI-driven analytics can accelerate root cause analysis, helping organizations identify and resolve issues more quickly. Automated reporting reduces the time spent on manual documentation and helps organizations learn from past incidents (Certa, 2024; TrustCloud, 2025).

However, human oversight is essential to ensure that AI-driven risk management is fair, transparent, and effective. Organizations must regularly review and validate the results of AI-powered tools, and involve human experts in interpreting findings and making decisions (Certa, 2024; TrustCloud, 2025).

Role of Bad Actors

Bad actors, including hackers, cybercriminals, and malicious insiders, pose significant challenges to vendor and third-party risk management. They may attempt to exploit vulnerabilities in vendor systems, manipulate data, or bypass security controls (Aon, 2024; Venminder, 2024).

Robust security measures, continuous monitoring, and independent verification are necessary to protect against these threats. Organizations should implement strong access controls, encryption, and audit trails to prevent unauthorized changes to data or system configurations (Aon, 2024; Venminder, 2024).

Collaboration among organizations, governments, and industry groups is essential to share threat intelligence and develop effective countermeasures. By working together, stakeholders can identify emerging risks and respond quickly to protect system integrity and user trust (Aon, 2024; Venminder, 2024).

Bad actors may also target the technology underlying vendor risk management systems. Organizations must ensure that these technologies are implemented securely and that vulnerabilities are promptly addressed (Aon, 2024; Venminder, 2024).

Glossary

Term	Meaning and Example Sentence
Vendor	An external company or organization that provides goods or services. Example: “The vendor supplies the AI software we use.”
Third-Party Risk Management (TPRM)	The process of identifying, assessing, and mitigating risks associated with external partners. Example: “TPRM helps organizations manage risks from vendors.”
Due Diligence	The process of evaluating potential vendors to ensure they meet security, compliance, and operational requirements. Example: “Due diligence includes reviewing vendor documentation.”
Continuous Monitoring	Ongoing tracking of vendor performance and activities to detect risks or issues. Example: “Continuous monitoring ensures vendors maintain high standards.”
Contracting	The process of establishing legal agreements with vendors. Example: “Contracting defines responsibilities and data protection requirements.”
Incident Response	The set of actions taken to address and resolve issues with vendors. Example: “Incident response ensures quick resolution of vendor-related problems.”
Audit	A systematic review of vendor practices and compliance. Example: “Audits help verify that vendors meet organizational standards.”

Questions

1. What is vendor and third-party risk management, and why is it important for AI systems?

2. How do organizations conduct due diligence and continuous monitoring of vendors?

3. What roles do governments and regulatory authorities play in promoting vendor and third-party risk management?

4. What responsibilities do organizations and businesses have in implementing these practices?

5. How can consumers and users contribute to the adoption of strong vendor and third-party risk management?

Answer Key

1. Suggested Answer: Vendor and third-party risk management is the process of identifying, assessing, and mitigating risks associated with external partners that provide goods or services. It is important for AI systems because vendors may handle sensitive data, operate critical systems, or influence decision-making, introducing risks such as data breaches, compliance violations, and operational disruptions (PwC, 2025; Magai, 2025).

2. Suggested Answer: Organizations conduct due diligence by reviewing vendor documentation, security policies, and compliance certifications. Continuous monitoring involves regular audits, performance reviews, and real-time tracking of vendor activities to ensure ongoing compliance and security (Venminder, 2024; Certa, 2024).

3. Suggested Answer: Governments and regulatory authorities establish legal and regulatory frameworks, provide guidelines and best practices, and enforce compliance with vendor risk management requirements. They also support the development of national and international standards and promote public awareness (Venminder, 2024; Mitratech, 2025).

4. Suggested Answer: Organizations and businesses are responsible for implementing vendor and third-party risk management practices, including conducting due diligence, establishing clear contracts, and monitoring vendor performance. They must also ensure transparency, communicate with stakeholders, and respond to incidents (Venminder, 2024; Magai, 2025).

5. Suggested Answer: Consumers and users can drive adoption by demanding transparency and accountability, exercising their rights under data protection laws, providing feedback, and participating in educational initiatives. Their actions encourage organizations to prioritize security and compliance (Venminder, 2024; Magai, 2025).

References

PwC. (2025). Responsible AI and third-party risk management. https://www.pwc.com/us/en/tech-effect/ai-analytics/responsible-ai-tprm.html
Magai. (2025). Ultimate guide to AI vendor risk management. https://magai.co/ultimate-guide-to-ai-vendor-risk-management/
Aon. (2024). Emerging risks in third-party AI solutions and how to help address them. https://www.aon.com/en/insights/cyber-labs/emerging-risks-in-third-party-ai-solutions-and-how-to-help-address-them
Venminder. (2024). Overview of a third-party risk management framework. https://www.venminder.com/blog/overview-third-party-risk-management-framework
Certa. (2024). AI-powered vendor management: A game-changer for procurement teams. https://www.certa.ai/blogs/ai-powered-vendor-management-a-game-changer-for-procurement-teams
EY. (2025). How AI transforms third-party risk management in a rapidly changing risk landscape. https://www.ey.com/en_gl/insights/consulting/how-ai-navigates-third-party-risk-in-a-rapidly-changing-risk-landscape
Mitratech. (2025). Global AI regulations and their impact on third-party risk management. https://mitratech.com/resource-hub/blog/global-ai-regulations-and-tprm/
TrustCloud. (2025). How AI is revolutionizing third-party risk assessments. https://www.trustcloud.ai/ai/how-ai-is-revolutionizing-third-party-risk-assessments/
Linford & Co. (2024). Vendor & third-party risk management process, best practices. https://linfordco.com/blog/vendor-third-party-risk-management/
NIST. (2023). Artificial Intelligence Risk Management Framework (AI RMF 1.0). https://www.nist.gov/itl/ai-risk-management-framework
Alan Turing Institute. (2025). Evaluating the potential functions of an international institution for AI safety. https://arxiv.org/pdf/2409.10536.pdf
IAPP. (2024). Privacy and security by design: Best practices for AI. https://iapp.org/resources/article/privacy-and-security-by-design-best-practices-for-ai/