A Complete Guide to Third-Party Data Breach

Let’s travel back in time to 2023 to show you how a third-party data breach can trigger legal action and cost millions, even when your own systems are untouched.

Accounting giant Berry, Dunn, McNeil & Parker experienced a cybersecurity breach because of their third-party IT service provider, Reliable Networks. Hackers infiltrated Reliable Networks’ systems and accessed sensitive personal data belonging to the accounting firm’s clients.

The breach exposed many Americans' personal information (like financial account details and social security numbers), putting them at risk of financial fraud and identity theft. What followed soon after was a class-action lawsuit, and Berry Dunn agreed to a $7.25 million settlement to resolve claims.

Why should this incident concern you?

Because even your most trusted vendor can become a gateway to a cyberattack. Your systems may be secure, but you mustn’t overlook the risks introduced by third parties who handle your data or critical operations. This blog post takes a deeper look at third-party data breaches to help you avoid getting exposed to cascading breaches that are beyond your direct control.

What Is a Third-Party Data Breach?

A third-party data breach happens when a company’s sensitive data is compromised through a third party with access to the data. Third parties such as IT providers, cloud services, and payroll processors manage key business functions and store confidential information.

A security incident can easily expose the sensitive data they hold (like credit card numbers, patient data, or trade secrets). Third-party attacks are often successful because third parties lack strong security controls than the businesses they provide services to.

A third-party breach may happen externally, but the primary company is legally and reputationally responsible for safeguarding the data it entrusted to the third party. Third-party breaches cost organizations millions of dollars every year as they rush to gain access to business-critical information, restore normal operations, and save their reputation. According to Statista, the average cost of a data breach in 2024 was 9.36 million.

Importance of third-party data breaches

Third-party data breaches expose weaknesses in many companies’ cybersecurity strategies. Most organizations invest heavily in protecting their internal systems but overlook the security practices of vendors handling sensitive data. A minor breach can lead to serious consequences, such as regulatory fines and brand damage.

For example, if your cloud services provider is hacked and customer information is leaked, regulators may hold your company accountable. Third-party risk management is a vital part of overall business resilience. Remember, the weakest link in your supply chain can cause the biggest chaos.

The Role of Third Parties in Data Breach

Just like security guards at an entrance, third parties serve as silent gatekeepers to your data. They must keep their doors locked for your data to be safe. Many companies rely on vendors for key business functions, granting them access to confidential data without assessing their security posture.

Hackers know third parties typically have weaker security controls than the primary organization and frequently target them. Once in, they can move laterally to compromise data belonging to the primary organization. A single third-party data breach can affect multiple organizations simultaneously, which is why third-party risk management should feature in every organization's cybersecurity strategy.

Proven Methods for Reducing Third-Party Breach Exposure

The best way to reduce third-party breach exposure is by detecting, addressing, and monitoring third-party cybersecurity risks. Here’s how to go about it:

1. Assess vendors before onboarding them

Many companies assume that a vendor’s great reputation reflects their security posture. This is far from the truth. Multiple high-profile organizations have experienced major data breaches in the past. You can use third-party risk management software to get a detailed evaluation of a vendor’s internal data security practices. The results will help you know if a vendor is worth onboarding.

2. Practice network segmentation

Network segmentation means dividing a network into smaller, isolated segments for improved security and to block pathways to sensitive data in the event of an attack. Even if hackers penetrate your network through a compromised third-party, the impact will be minimal. You can boost security by combining network segmentation with access management security controls.

3. Use honeytokens

Honeytokens are fake data pieces placed within a system to detect unauthorized access and trigger alerts, signaling a potential security breach. They add an additional layer of security by distracting malicious actors from the real sensitive resources. They can guide hackers away from sensitive information and into an isolated region, enabling security teams to deploy an incident response plan.

4. Conduct penetration testing

You’ll only know how strong your defense mechanisms are after a cybercriminal enters your ecosystem. Perform penetration testing early to find out if security features like network segmentation and honeytokens work and if there are any weaknesses in your network security plan. Once you discover vulnerabilities, implement remediation efforts.

5. Use Multi-Factor Authentication (MFA)

Microsoft reports that more than 99.9% of compromised accounts don’t have MFA enabled. Multi-Factor Authentication is one of the most effective security controls for protecting sensitive data. Even if a hacker gains access to your systems through a third party, they must provide multiple verification factors before accessing information.

6. Use vendor risk management software

Don’t try to reduce the risk of third-party breaches manually; get a third-party risk management tool and streamline the process. It manages the entire third-party risk lifecycle by detecting risks, continuously monitoring your systems, and effecting remediation strategies.

Key Examples of Third-Party Data Breaches

Here are two examples of third-party data breaches that show how a single vulnerability can compromise thousands of organizations or customer data.

1. MOVEit Transfer breach (2023)

The Clop ransomware gang exploited a zero-day flaw in the platform’s code via SQL injection and stole sensitive files. The attack affected over 2,500 organizations, including healthcare institutions, banks, universities, and government agencies. Victims included Johns Hopkins University, British Airways, the BBC, and many U.S. government agencies.

2. Hertz Corporation Breach (2025)

Between October and December 2024, ransomware hackers launched a zero-day exploit on Cleo’s file transfer platform. Hertz Corporation used the managed file transfer solution for data transfer. The breach affected over 1 million customers across Hertz, Thrifty, and Dollar brands, exposing customers’ names, payment card information, driver’s licenses, and in some cases, Social Security numbers.

Third-Party Security Protocols: What You Should Require

Don’t believe what vendors say about their cybersecurity posture if there’s no data to back up what they are saying. Ask for these certifications and documentation to protect your enterprise.

ISO/IEC 27001 certification: This proves that a vendor has implemented an internationally recognized Information Security Management System (ISMS) and is committed to protecting data confidentiality and integrity
SOC 2 Type II report: This report shows third parties have policies, procedures, and controls that effectively protect sensitive data. It proves they follow the AICPA’s five Trust Service Criteria: security, availability, processing integrity, confidentiality, and privacy
HIPAA compliance: Vendors dealing with healthcare data in the U.S. must be HIPAA compliant. It shows they have robust administrative and technical safeguards for protecting health information
PCI DSS compliance: Compliance demonstrates a vendor implements controls to protect cardholder data throughout its lifecycle. Vendors who comply prove they take payment security seriously and are proactive about preventing data breaches, fraud, and financial loss
GDPR/CCPA compliance statements: Compliance with these two regulations shows third parties handle personal data responsibly, are transparent about data collection and usage, and respect user rights
Auditing reports: These provide a detailed assessment of a third party’s security posture and show if they comply with security standards and regulations. The primary organization understands the vendor’s security strengths and weaknesses
Business continuity and disaster recovery plan: This proves that a third party is prepared for cyber incidents or outages. It shows they have a good strategy for minimizing the impact of cyberattacks and ensuring business continuity
Incident response plan: The vendor must have a structured approach for detecting, responding to, and recovering from cyber incidents to minimize damage and business disruption. Without a plan, a single incident can quickly spiral out of control
Penetration test reports: These reports are crucial because they provide a detailed analysis of vulnerabilities. The primary organization can assess how good the service provider is at mitigating risks before they are exploited

How to Prevent a Third-Party Data Breach: Mitigation Strategies

It’s become the norm to outsource business functions to vendors specializing in each particular function. But a single vendor lacking good risk management practices can spell doom for your business. Here are some mitigation strategies to help you steer clear of third-party data breaches.

1. Prioritize vendor assessments

“To be forewarned is to be forearmed.” The best approach is to avoid contracting with third-party vendors with security loopholes, not trying to manage a breach after it happens. During the vendor selection process, do your due diligence and only onboard vendors who pass your security and risk assessments.

You can quickly assess potential vendors without introducing operational overhead by using security ratings. ComplyScore’s security ratings provide deeper insight into vendors’ security postures and the cyber threats they may be susceptible to. It does away with time-consuming and resource-intensive vendor risk assessment techniques like on-site visits.

2. Ensure vendor contracts cover risk management

While this may not prevent third-party data breaches, it holds vendors accountable if their security postures weaken. Add provisions for cybersecurity practices, vendor cyber insurance, and indemnification clauses. Require vendors to communicate or remediate security issues within a certain time frame. When you have a say about your vendors’ cybersecurity postures, you reduce your cybersecurity risk.

3. Keep a vendor inventory

It’s not enough to sign contracts with vendors; keep an inventory of all your third parties to know the data your company is sharing with each of them. Without it, you won't know the level of risk each vendor introduces. Tools like ComplyScore® help companies maintain a centralized repository of all third-party vendors for proactive risk identification and mitigation.

4. Continuous monitoring is critical

Many organizations don’t perform continuous vendor assessments but rely on audits or security questionnaires, which only give a snapshot of a vendor’s posture. Having real-time insights into a vendor's security posture is critical in helping you identify potential risks. You can quickly respond to security incidents and avoid regulatory violations and costly fines.

5. Collaborate with your vendors

Collaborating with vendors promotes transparency and accountability, ensuring security practices are aligned. Engage vendors from the get-go to ensure they share risk management responsibilities and follow your strict security standards. Work closely with your vendors to identify and patch vulnerabilities early and avoid violations and costly breaches.

6. Say goodbye to risky vendors

Cut ties with vendors who don’t meet your security standards. Have a detailed process in place for successfully offboarding vendors without affecting business operations. Efficient offboarding is a key part of third-party risk management because it ensures all obligations are met and potential risks are addressed.

7. Apply the Principle of Least Privilege (POLP)

Don’t give third parties more privileges than they need to do their job. If a vendor's credentials get compromised, the attacker won’t be able to access your company’s sensitive data. Grant the least privileges required to minimize the risk of intentional data breaches and unintentional data leaks.

8. Track fourth-party risks

Fourth parties, your vendor’s vendors, play a vital role in third-party data breach management. While they have an indirect role in the supply chain, their actions can trigger vulnerabilities that can impact your organization if exploited. Contractually require your vendors to notify you about any data they share with fourth or nth parties. You’ll have a better understanding of who has access to what information.

Boost Your Third-Party Data Breach with Atlas Systems

Even your most reliable vendor can have a single vulnerability that cybercriminals can exploit and use to launch an attack on your organization, bringing it to its knees. Don’t wait till hackers strike; be prepared by assessing and mitigating third-party risks. Implement proactive measures such as continuous vendor assessments to stop threats before they impact your organization.

Third-party data breaches can happen at any time, so you must be prepared against these attacks. ComplyScore® offers an end-to-end third-party risk management platform to prevent third-party data breaches. Our platform identifies and mitigates vendor risks before they become security incidents.

Get ComplyScore today and secure your third parties before they become your weakest link.

FAQs on Third-Party Data Breach

Who is legally responsible when a third-party vendor is breached?

The organization that collected the data is legally responsible for potentially facing penalties and notifying affected parties. This applies even if the vendor was processing or storing data on behalf of the company. Regulators expect organizations to perform proper due diligence before contracting with third-party vendors.

How often should third-party security assessments be conducted?

The frequency of third-party security assessments depends on the vendor's risk level, industry regulations, and the business impact. High-risk vendors who handle critical services or sensitive data require more frequent assessments (quarterly or after serious incidents), while low-risk vendors require fewer assessments (every 1-2 years). Assessments are also necessary whenever there are changes in vendor services, contracts, or regulations.

Can cybersecurity insurance cover third-party data breaches?

Yes, but the policy must be structured properly to include third-party liability provisions. The cover protects a business from being held liable or sued due to a vendor’s breach that affects its customers. But it’s worth noting that the coverage offered depends on the policy terms, if the organization performed proper vendor due diligence, and the nature of the breach.

Do I need to report a third-party data breach under GDPR?

Yes, reporting a third-party data breach is necessary, so long as it involves personal data your organization controls. The breach must be reported within 72 hours of discovery if it puts individuals' rights and freedoms at risk. If the risk is high and involves potential financial loss or identity theft, the affected individuals must be informed immediately.