Legal Issues Associated with Third-Party Cyber Risk

Shawn E. Tuma, Cybersecurity & Data Privacy Attorney

Partner, Scheef & Stone, LLP

Legal Issues Associated with Third-Party Risk

Copyright © 2017 Information Systems Audit and Control Association, Inc. All rights reserved.

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Why a Lawyer?


Why a Lawyer?

“Cybersecurity is no longer just an IT

issue—it is an overall business risk issue.”


Why a Lawyer?

“Security and IT protect companies’ data;

Legal protects companies from their data.”


Legal Foundations for Third-Party Risk


Lesson: Evaluate and audit third-parties’ security.• In re GMR Transcription Svcs., Inc., Consent Order (Aug. 14,

2014).

• FTC’s Order requires business to follow 3 steps when working

with third-party service providers:

• Investigate before hiring data service providers

• Obligate data service providers to adhere to the appropriate

level of data security protections

• Verify that the data service providers are complying with

obligations (contracts)

Legal Foundations


Lesson: Know your contractual obligations.• Addendum to business contracts

• Common names: Data Security & Privacy Agreement; Data

Privacy; Cybersecurity; Privacy; Information Security

• Common features:

• Defines subject “Data” being protected in categories

• Describes acceptable and prohibited uses for Data

• Describes standards for protecting Data

• Describes obligations and responsibility for breach of Data

• Requires binding third-parties to similar provisions

Legal Foundations

New York Department of Financial Services Cybersecurity (NYDFS) Requirements for Financial Services Companies + [fill in]• All NY “financial institutions” + third party service providers.

• Third party service providers – examine, obligate, audit.

• Establish Cybersecurity Program (w/ specifics):• Logging, Data Classification, IDS, IPS;• Pen Testing, Vulnerability Assessments, Risk Assessment; and

• Encryption, Access Controls.

• Adopt Cybersecurity Policies.

• Designate qualified CISO to be responsible.

• Adequate cybersecurity personnel and intelligence.

• Personnel Policies & Procedures, Training, Written IRP.

• Chairman or Senior Officer Certify Compliance.

Third Party Service Provider Security PolicySection 500.11

“Each Covered Entity shall implement written policies and procedures designed to ensure the security of Information Systems and Nonpublic Information that are accessible to, or held by, Third Party Service Providers.”

• P&P should be based on CE’s Risk Assessment and address the following, as applicable:

• The identification and risk assessment of TPSPs;

• Minimum CP required by TPSP to do business with CE;

• Due diligence process used to evaluate the adequacy of CP by such TPSP;

• Periodic assessment of such TPSP based on risk they present and continued adequacy of their CP.

• P&P shall include relevant guidelines for due diligence and/or contractual protections relating to TPSP and applicable guidelines addressing:

• TPSP’s P&P for access controls and MFA to IS / NPI

• TPSP’s P&P for use of encryption in transit and at rest;

• Notice to be provided to CE for Cybersecurity Event; and

• Reps and warranties addressing TPSP’s cybersecurity P&P

NEW YORK DEPARTMENT OF FINANCIAL SERVICES

CYBERSECURITY REGULATIONS

EU – General Data Protection Regulation (GDPR)• Goal: Protect all EU citizens from privacy and data breaches.

• When: May 25, 2018.

• Reach: Applies to all companies (controllers and processors): • Processing data of EU residents (regardless of where processing), • In the EU (regardless of where processing), or• Offering goods or services to EU citizens or monitoring behavior in EU.

• Penalties: up to 4% global turnover or €20 Million (whichever is greater).

• Remedies: data subjects have judicial remedies, right to damages.

• Data subject rights:• Breach notification – 72 hrs to DPA; “without undue delay” to data subjects.• Right to access – provide confirmation of processing and electronic copy (free).• Data erasure – right to be forgotten, erase, cease dissemination or processing.• Data portability – receive previously provided data in common elect. format.• Privacy by design – include data protection from the onset of designing systems.

Third Party Processing and Risk Under the

GDPR

• Controller, individually or with other controllers (jointly and severally), is responsible to the data subjects. Art. 26

• Processor only process on controller’s instructions. Art. 29

• Using a risk assessment, the controller must implement appropriate technical and organizational safeguards (incl. P&P) to ensure personal data is processed lawfully. Reassessment and maturation is required. Art. 24(1)

• Controller shall use only processors providing sufficient guarantees to implement appropriate technical and organizational measures to satisfy GDPR. Art. 28

• Processor must have controller’s written authorization to engage another sub-processor;

• Processor must have binding contract with controllerspecifying particulars of processing;

• Processor must be bound to confidentiality;

• Processor must demonstrate compliance and agree to audits and inspections;

• Nth processors liable to upstream processor, which is liable to the controller, which is ultimately liable.

• Non-regulated controllers and processors can contractually agree to be bound. Art. 42

EUROPEAN UNION

GENERAL DATA PROTECTION REGS.


Example Scenarios


• Private security firm’s job applicants’ personal data (including

identification of those with Top Secret security clearances) is

exposed on an unsecured Amazon server.

• Firm says it wasn’t its fault, it was fault of its third-party vendor

that processed new job applications that left the data exposed.

– Former CIA, NSA, Secret Service

– Names, home addresses, telephone numbers, email addresses

– Applicant transported nuclear activation codes

– Applicant was “warden advisor” at Abu Ghraib black site

• Who do you think is responsible?

• Do you think a better contract would have helped?

• What would have helped prevent this?

Example Scenarios – “It’s Not Our Fault!”


• MegaCorp is a global leader in biotechnology and one of the

world’s wealthiest companies. MegaCorp developed new highly

confidential and proprietary bio-authentication technology that

could solve the world’s cybersecurity problem by setting access

rights to data based on users’ unique DNA.

• MegaCorp recognizes the cyber threat and has state-of-the-art

cybersecurity for its network, having a larger cybersecurity

budget than the revenue of many biotech companies.

• For testing to prove the technology works, MegaCorp turns to

the 4 best biotech research facilities, known for the quality and

integrity of their research, not their profitability.

• MegaCorp’s contracts with the facilities requires they maintain

security and confidentiality of its intellectual property (IP).

Example Scenarios – “We Can’t Afford It”


• During testing for MegaCorp, Research1 discovers an intrusion

in its network. Due to budget limitations, its “IT guy” calls his

buddy to do “forensics” and discover Research1’s network was

being used to mine Bitcoin. They block the hacker and

conclude “no problem.”

• Two weeks later Research1 gets hit with ransomware and a

demand for $100,000 paid in Bitcoin. IT guy was able to restore

the network from backups so he sent a taunting email to the

hacker, just for fun. He also ignored that lawyer who warns of

possible persistent attack and said it may be a legal breach.

• One week later the hacker emails Research1’s Board of

Directors saying they have MegaCorp’s data, demand $1million

which it can’t afford to pay.



• Larger enterprises have a better appreciation of cyber risk and

spend more resources on it. SMBs are not there … yet … still

thinking, “we can’t afford it,” is justifiable.

• Does the harm to MegaCorp’s IP change depending on

whether taken from it or Research1?

• MegaCorp would crush Research1 in a lawsuit … so what?

• MegaCorp would have gladly paid the $1million ransom to try

and protect its IP, even with no guarantee.

• What contractual terms would have helped MegaCorp?

• What practical discussions would have helped MegaCorp?

• What risk transfer devices would have helped?

• What technology would have helped?



✓ Focus on the objective: protecting your data/network

✓ Staff Appropriately

✓ Understand facts of relationship/transaction

✓ Understand risks by thinking worst case scenario from outset

✓ Minimalize risks: do not risk it if you do not have to

✓ Discuss objective, facts, risks, protection with those responsible

✓ Assess third-party’s sophistication and commitment

✓ Agree upon appropriate protections

✓ Investigate ability to comply

✓ Obligate compliance, notification (to you), responsibility

✓ Include in incident response planning

✓ Cyber Insurance: transfer risk where possible

Checklist: Process for Managing Third-Party Risk


• Board of Directors & General Counsel, Cyber Future Foundation

• Board of Directors, North Texas Cyber Forensics Lab

• Policy Council, National Technology Security Coalition

• Cybersecurity Task Force, Intelligent Transportation Society of America

• Cybersecurity & Data Privacy Law Trailblazers, National Law Journal (2016)

• SuperLawyers Top 100 Lawyers in Dallas (2016)

• SuperLawyers 2015-16 (IP Litigation)

• Best Lawyers in Dallas 2014-16, D Magazine (Digital Information Law)

• Council, Computer & Technology Section, State Bar of Texas

• Privacy and Data Security Committee of the State Bar of Texas

• College of the State Bar of Texas

• Board of Directors, Collin County Bench Bar Foundation

• Past Chair, Civil Litigation & Appellate Section, Collin County Bar Association

• Information Security Committee of the Section on Science & Technology Committee of the American Bar Association

• North Texas Crime Commission, Cybercrime Committee

• Infragard (FBI)

• International Association of Privacy Professionals (IAPP)

The End – Thank You!

Shawn Tuma

Cybersecurity Partner

Scheef & Stone, L.L.P.

214.472.2135

[email protected]

@shawnetuma

blog: www.shawnetuma.com

web: www.solidcounsel.com