Global supply chains and secure technology are two of the pillars sustaining our fast-moving, interconnected world. As such, not only are they critical to global business operations, but they are also a high-value target for hacktivists and cyber criminals.

While cyber risk has been an area of focus for risk officers and general counsel for a long time, the scope is often limited to first-party exposure: attacks against a company's IT infrastructure, malware and data breaches are all viewed through a first-person lens. Nevertheless, four of the most highly publicised cyberattacks and data breaches of the past years have been perpetrated by infiltrating a supplier's network, and using it as a gateway to the target's systems. Retailers Home Depot and Target have been subjected to major data breaches as a result of hacks into third party systems, as were the U.S. Office of Personnel Management and security vendor RSA. More recently, the software update mechanism of a popular accounting software used in Ukraine is claimed to be the source that enabled the " NotPetya" malware to spread to users of the accounting software.

These high-profile cases underline the importance of viewing cyber risk holistically, rather than as an isolated event, and of integrating supply chain exposures into the overall risk management strategy.

Regulation is evolving in response to the increasingly complex cyber risk landscape, with Australia recently modifying the Privacy Act to add a mandatory obligation to notify affected parties in respect of certain data breaches, including data breaches in third party suppliers. Starting on 22 February 2018, companies active in the Australian market will need to enhance their scrutiny of suppliers' activities in order to mitigate the risk of cyberattacks and data breaches.

This is another reminder of the importance of managing supply chain risks smartly; similar legislation around the globe already addresses liability for acts of money laundering, terrorism financing, corruption and bribery and human rights abuse. Companies relying on complex, global supply chains should act sooner rather than later to manage cyber risk across their supply chain, and to thoroughly prepare for potential incidents and regulatory developments.

Food for thought: possible risk scenarios

Cyber incidents can occur at any point along the supply chain, and have multilayered consequences. Our legal and technology experts have put together four risk scenarios that are likely applicable to most companies reliant on global supply chains.

Every business can, and should, conduct a similar exercise in order to test its own, and its supply chain's, resilience to potential cyber incidents, and prepare their crisis management and recovery strategy accordingly.

  1. Cyberattack on upstream supplier causing supply chain failure
  2. Many supply chains rely on a variety of suppliers of different sizes across the world. Should one of the key suppliers' operations be compromised due to a cyberattack on its systems, rendering the supplier unable to perform its obligations (whether it is to supply components, or to provide logistic services), the delay caused by the breach and the ensuing business interruption would have a direct repercussion on the company's ability to deliver its final product, and to meet customer demand.

    The main consequences of this type of attack is delay cost (which may manifest itself in liquidated damages payable to customers), loss of revenue and profit, and potential reputational damage caused by the inability to deliver to meet customer requirements. In the case of prolonged disruption, downstream customers and distributors may also exercise their right to terminate their respective agreements with the company, and the ability of the company to recover from the incident may be called into question.

    Strategies to help mitigate this type of scenario turn around vendor management, and establishing contingency plans for critical vendors, including delivery times and minimum outputs required on short notice. Companies are increasingly applying the principle of redundancy when designing or adapting their supply chains, in order to identify vendors who can easily replace preferred providers should a crisis prevent them from delivering their usual output.

  1. Data breach enabled through system weaknesses in the supply chain
  2. Corporate systems between suppliers and customers are interconnected through different mechanisms. These interconnections enable close integration of the supply chain, enabling features such as automated ordering and automated invoice payment. However, each additional interface, if not properly secured, presents an additional attack surface for cyber-attackers. This hypothetical scenario turned into reality for Target and HomeDepot, where in both instances, the breach of the company's system was enabled through their suppliers. In Target's case, the attack was carried out using a connection established with one of Target's suppliers. And in the case of HomeDepot, the breach was enabled through credentials stolen from its suppliers.

    In addition to the threat of stolen records, security breaches through vendor systems can also result in significant loss of data, through intentional sabotage by the attacker or ransomware type malware. These forms of data breaches can be extremely disruptive to business operations, causing significant financial damage. For example, in the recent "NotPetya" cyberattack, the Australian operations of global pharmaceutical company Merck Sharp & Dohme was affected for almost a week as the malware crippled its IT systems, resulting in 'a very substantial effect' on its activities.

    In addition to the immediate financial damage related to a cyberattack, the medium to long-term consequences include litigation, potential class-action lawsuits, and reputational damage associated with the incident.

    Prevention remains key to this type of scenario. In particular, system interfaces with external suppliers should be implemented with security design in mind, allowing only the minimum amount of data exchange and system access privilege as required to carry out the underlying business functions, and keeping supply chain related network traffic separate from internal traffic. However, good crisis management and a well-honed business continuity plan can make a real difference to recovery. In this regard, IT disaster recovery plans (which traditionally have been focused on malice-free events such as hardware failures or natural disasters) should be reviewed and updated to specifically address systemic IT failures caused by malicious actors.

  1. Fraudulent transactions enabled through system weaknesses in the supply chain
  2. In addition to overt cyberattacks that are directed at either stealing corporate information or causing malicious damage, automation created by a tightly interconnected supply chain exposes companies to covert cyberattacks that mimic genuine transactions. For example, a cyber-attacker with access to the ordering and payment gateway may be able to create fake orders, redirect delivery or create new payment authorisations that are automatically processed. Discovery and tracing of these fraudulent transactions may be difficult, and recovery against the attacker even more so.

    Advanced analytics tools may be able to help identify and combat these advanced attacks (in a similar way to a financial institution detecting potentially fraudulent credit card transactions). However, the deployment and ongoing maintenance of these tools may be expensive and complex, and organisations will need to weigh up their potential risk exposure against the cost of such systems

  1. Corporate system weaknesses causing cybersecurity incidents in other parts of the supply chain
  2. The above scenarios are focused on security weaknesses in the supply chain that affect an organisation. Organisations also need to consider their own cybersecurity posture, and the potential impact that a cybersecurity incident affecting their own systems may have on other parts of the supply chain.

    As the threat of cyberattacks grows, supply agreements increasingly need to include contractual provisions relating to security (and cybersecurity in particular), requiring either or both parties to take steps to maintain security. It is also not uncommon for the breach of these provisions to be excluded from the agreed liability caps. As a result, a poorly managed information and communication technology (ICT) security system may expose a company not only to the losses that it suffers, but also to the losses that may be suffered by other participants of the supply chain (which may dwarf the losses suffered by the company itself). Conversely, such incidents may qualify as force majeure, often excusing a party from non-performance and insulating it from liability.

Managing cyber risk across supply chains: pain points and best practices

The lesson from the above scenarios is clear: the cybersecurity of a supply chain is only as strong as its weakest link, and a security breach in any part of the supply chain will likely have an adverse impact on the rest of the supply chain. It is therefore prudent to consider and manage cyber risk in a holistic manner, looking well beyond the boundaries of your own systems. It is also critically important to ensure that your organisation is not the weakest link in the supply chain.

Knowledge and preparation are key to protecting against cyber incidents and managing them successfully when they occur. Many businesses are already conducting audits of their supply chains, and tracking vendor data over the years. Amongst the key actions to take in order to identify cyber risk across your supply chain, quantify the potential consequences of an attack, and prepare for the possibility of an incident, are:

  1. Audit your existing supply chain, and prioritise the vendors in order of importance. The relative importance of vendors in this context should have regard to their commercial significance (e.g. strategic supply partners versus occasional suppliers) and the level of ICT integration (e.g. suppliers with real time integration and automation with the company's ICT systems, or which have broad system access).
  2. Create cyber risk management standards applicable to each tier of vendor. While you might want to negotiate joint protocols or the adoption and application of your cyber risk management policy and staff training program with first-tier vendors, managing risks associated to lower-tier ones could entail requirements for certifications and preliminary vetting.
  3. Do not forget that most vendors will also have a supply chain of their own. When vetting first-tier vendors it is important to audit their respective supply chain for any potential cyber security issues.
  4. Design audit and compliance processes that enhance resilience, and are rigorously applied. It is not sufficient to audit your supply chain once; monitoring exposures over time and building cyber security criteria into vendor selection and management processes will support long-term impact.
  5. Create a culture of cyber risk awareness within your business and your supply chain. Establishing clear policies and designing resilient processes is the first step; training your employees, and keeping cyber security on top of your vendors' minds will ensure long-term adoption of best practices.

Crisis management, business continuity, and the biginsurance question

Former FBI director, Robert S. Mueller, III, once said that there are only two types of companies: those that have been hacked and those that will be. Taking into account the magnitude of the global market for stolen credit card data, estimated at US$114 billion, the prospects of any company escaping the attention of hackers look bleak indeed.

However, businesses are taking a proactive stance, and building resiliency against the threat of cyberattacks. Well-established crisis management policies and processes, together with a tried and tested business continuity plan that addresses supply chain breaches and contingencies, can make the difference when facing a large-scale cyber incident.

Transferring risks through cyber insurance is another strategy employed by an increasing number of companies. Care should be taken with regard to the exact coverage supplied by policies, in order to ensure that extensions apply to breaches across the supply chain, rather than limiting coverage to first-party risks. Insurance can also be a useful tool in vetting suppliers, given that the application process for cyber coverage is usually thorough, and will provide an additional safety net in case of a breach. A significant challenge in arranging for cybersecurity insurance is to quantify the exposure and potential loss. Target in the US found this out the hard way, as a US$50 million cyber insurance policy was estimated to only cover 25 per cent of the cost of the data breach that it suffered in 2013.

Cyber risk is part of the new business reality, along with complex supply chains and an ever-expanding technology infrastructure. In order to manage cyber risk smartly companies need to keep the security of their supply chains in mind, and to ensure that at the very least they are not the weakest link in the chain.