5 Vendor Risk Red Flags: A Practical Checklist for Protecting Your Business

You can outsource the work, but you cannot outsource the risk.

When a third-party vendor suffers a data breach, violates labor laws, or fails a regulatory audit, the headlines rarely blame the vendor. They blame you. The reputational damage, the regulatory fines, and the operational chaos fall squarely on your shoulders.

Third parties are responsible for 53% of data breaches. Trusting vendors without verifying their security posture is a risk organizations can no longer justify.

Vendor Risk Management (VRM) goes beyond signing contracts. It requires continuous oversight. To help you distinguish secure partners from potential liabilities, we have compiled a practical checklist of five critical red flags to watch for during the assessment process.

Red Flag #1: The “Black Box” Approach to Transparency

Trustworthy vendors understand that compliance is a shared responsibility. They know you have regulatory obligations to meet, and they should be willing to prove they are safe partners.

If a vendor hesitates to complete a due diligence questionnaire, refuses to share their business continuity plans, or pushes back on standard “right to audit” clauses in your contract, consider this an immediate stop sign.

Here’s what you need to look for:

• Refusal of On-Site Visits: Are they hiding unsafe working conditions or disorganized operations?
• Vague Documentation: Do they provide generic policy summaries instead of actual procedure documents?
• Silence on Subcontractors: A refusal to disclose who they outsource to (your fourth parties) implies a lack of control over their own supply chain.

Refusal to share this information is rarely a matter of “proprietary secrets.” More often, it is an admission that their internal controls are disorganized or non-existent. Without visibility into their operations, you are effectively operating blind, hoping that their standards match yours—a strategy that often ends in disaster.

Red Flag #2: Missing or Outdated Certifications

In regulated industries like healthcare, finance, and manufacturing, “taking their word for it” is not a compliance strategy. You need proof.

A vendor might claim they have “bank-grade security,” but without independent verification, that claim is marketing, not fact. If a vendor cannot produce current, valid certifications, it suggests they do not invest in the rigorous internal controls necessary to protect your data.

Here’s your essential checklist:

• SOC 2 Type II Report: This verifies that their security controls actually work over a period of time, not just on a single day.
• ISO 27001: The gold standard for information security management.
• Industry Specifics: Look for HIPAA compliance in healthcare or PCI DSS if they handle payments.

If their last audit report is three years old, treat it as a red flag. Security landscapes change monthly; their defenses must keep pace.

Red Flag #3: Weak Cyber Hygiene and Access Controls

You are likely sharing sensitive IP or customer data with your vendors. If their digital front door is left unlocked, attackers will walk right through it to get to you.

During your technical assessment, look beyond the high-level policies. Dig into the operational realities of how they handle access. A vendor that relies on outdated software or fails to patch known vulnerabilities is a ticking time bomb.

If they have these gaps, it’s a clear red flag:

• No Multi-Factor Authentication (MFA): If they don’t require MFA for remote access, their network is vulnerable to simple credential theft.
• Overly Broad Access Permissions: Employees who have access to systems or data they do not need for their role increase the blast radius of any breach.
• Poor Patch and Update Practices: Vendors that cannot explain how quickly they patch critical vulnerabilities are leaving known doors open to attackers.
• Shared or Untracked Credentials: Shared logins or the absence of individual user accounts make accountability and incident investigation nearly impossible.
• Lack of Access Reviews: If the vendor does not regularly review who has access, former employees and unused accounts may still be active.
• Poor Incident Response: Ask them about their last security incident. If they say “we’ve never had one,” they likely aren’t looking hard enough. If they can’t explain their response plan, they won’t know what to do when your data is at risk.

These technical gaps are often precursors to ransomware attacks or data exfiltration. If a vendor cannot demonstrate basic cyber hygiene, they do not respect the value of the data you are entrusting to them.

Red Flag #4: A History of Regulatory Friction

Past behavior is the single best predictor of future performance. A vendor with a track record of cutting corners is unlikely to change their culture just because they signed a contract with you. Conduct a thorough background check. You aren’t just looking for criminal convictions; you are looking for signs of operational negligence.

Here are warning signs you should look out for:

• Regulatory Fines: Have they been penalized for GDPR violations, environmental breaches, or labor disputes?
• Litigation History: Frequent lawsuits from former partners or employees often indicate systemic governance issues.
• Sanctions Lists: Ensure they do not appear on any OIG, SAM, or international sanctions lists.

While companies can improve, a pattern of non-compliance usually indicates a deep-seated cultural issue. Partnering with a vendor that has a history of legal trouble invites those same troubles into your organization.

Red Flag #5: The Fourth-Party Blind Spot

Your vendor might be secure, but what about their vendors? Fourth-party risk is a growing concern. If your cloud provider outsources their server maintenance to a budget contractor with poor security, your data is exposed. If a vendor cannot identify their own critical suppliers, they cannot manage the risks those suppliers introduce.

You must:

• Ask your vendor to map their critical dependencies.
• Identify who has physical access to their facilities or servers.
• Figure out if they rely on a single cloud provider without a failover plan

You must understand the full chain of custody for your data. If your vendor cannot identify who they rely on, you are accepting a risk you cannot measure. Visibility must extend beyond the first tier to ensure true resilience.

Centralize Your Control to Mitigate Risk with SAI360

Detecting these red flags early is far cheaper than remediating a breach later. By incorporating these checks into your onboarding and continuous monitoring processes, you protect your revenue, your reputation, and your customers. Don’t let a third party be the weak link in your defense.

Fortunately, our Third-Party & Vendor Risk Management solution centralizes your entire vendor lifecycle on a single GRC platform. Instead of chasing down documents, you can automate due diligence, integrate real-time risk intelligence, and receive instant alerts when a vendor’s security score drops.

You get the visibility you need to spot risks before they become breaches. See how SAI360 brings clarity, control, and automation to your entire third-party risk lifecycle. Request a demo with us today!