In today's digital world, data is famously the new gold. Companies collect and process huge volumes of data every day to optimize their business processes and serve their customers better. But with this wealth of data comes great responsibility. Sharing data with third-party providers can carry significant risks that are often underestimated.

Recent data protection scandals and strict legal requirements such as the GDPR have sharpened awareness of the importance of data protection and compliance. Companies must be aware of their responsibility and ensure they meet legal requirements to avoid hefty fines and reputational damage.

What Does “Sharing Data With Third Parties” Actually Mean?

Sharing data with third parties refers to the process by which a company passes personal or sensitive data on to external service providers or business partners. This can take various forms, from processing customer data through cloud providers to sharing financial data with accounting firms.

It's important to understand that such data transfers involve not just the transfer of data itself, but also the associated processes and security measures. Without adequate safeguards, data sharing can lead to data protection breaches and significant legal consequences.

Why Compliance Is Critical for Data Sharing

At its core, compliance means that a company meets all applicable legal, regulatory, and contractual obligations. This is especially critical when it comes to sharing personal data with third-party providers — because the risks here include not just hefty fines, but also a loss of trust among customers, partners, and the public.

The Obligation to Ensure GDPR Compliance

Under Art. 5(1) GDPR, personal data must be processed lawfully, for a specific purpose, transparently, and securely. When working with external service providers, the responsible company retains data protection responsibility — even if processing is outsourced.

Also important here is Art. 28 GDPR, which clearly stipulates that data processing on behalf of a controller is only permissible if:

  • a written Data Processing Agreement (DPA) is in place,
  • the service provider is selected based on data protection criteria,
  • and technical and organizational measures (TOMs) to secure the data can be demonstrated (Art. 32 GDPR).

Trust as a Competitive Factor

Beyond the legal side, compliance is also a strategic issue: customers, investors, and partners increasingly value transparent and secure data processes. Companies that convince with structured policies, regular audits, and documented security measures build trust — a decisive competitive advantage in the digital age.

Legal Framework and Its Implications

The legal framework for data sharing varies by region and industry. In the European Union, the General Data Protection Regulation (GDPR) is the most important set of rules governing the processing of personal data.

Companies must ensure that they meet GDPR requirements, including obtaining consent from data subjects, implementing appropriate security measures, and reporting data breaches within 72 hours. Failure to comply with these rules can result in hefty fines and significant reputational damage.

Among other things, it obligates companies to:

  • obtain unambiguous consent from data subjects,
  • carefully select processors,
  • implement technical and organizational measures (TOMs),
  • document and report violations.

Violations can be penalized with fines of up to €20 million or 4% of global annual revenue — not to mention the damage to reputation.

Hidden Risks: Where the Real Danger Lurks

When it comes to sharing data with third-party providers, many people immediately think of obvious risks such as hacker attacks, data leaks, or the loss of sensitive information. But the real dangers often run deeper — in the details of the collaboration, which are easily overlooked in day-to-day business. This is exactly where the biggest vulnerabilities for compliance and data security arise.

1. Unclear or Missing Contract Terms

Many companies transfer data to service providers without entering into a legally valid, GDPR-compliant Data Processing Agreement (DPA) under Art. 28 GDPR — or they use outdated, unclear contract templates.

Example: A mid-sized online shop hires an external agency to send out newsletters. The agency gets access to the entire customer database — but there's no DPA in place regulating how this data should be handled, who's allowed to process it, or how long it's stored. If a data breach occurs, the commissioning company is liable, not the agency.

2. Lack of Control Over Subcontractors

Even when a service provider is contractually secured, many providers rely on additional subcontractors (sub-processors) — such as hosting providers, payment service providers, or external development teams. This “chain” of data sharing is often not fully transparent.

Example: A German company uses a US-based cloud service for CRM and support. This provider, in turn, hosts the data with a third-party provider in India — without this being disclosed in the contract or technically secured. As a result, the company loses control over the data flow and risks violating the GDPR, particularly regarding third-country transfers (Art. 44 et seq. GDPR).

3. Inadequate Technical and Organizational Measures (TOMs)

Data security stands or falls with the measures actually implemented. But not all third-party providers apply sufficiently high standards — for example, in encryption, access controls, or data deletion after a contract ends (Art. 32 GDPR).

Example: HR software stores application data on unencrypted servers. Unauthorized internal access initially goes unnoticed. Because the commissioning company never reviewed the security measures, it's considered jointly responsible.

4. Lack of Oversight and Audits

Many companies fail to regularly review their service providers — whether through audits, self-disclosures, or certifications (e.g., ISO 27001, SOC 2). Without clear control mechanisms, it remains unclear whether the provider is actually meeting the agreed data protection standards.

Example: A company outsources payroll accounting and relies on the provider's claim to “work in a data protection-compliant manner.” A later review reveals that sensitive employee data was stored unprotected on local servers — a clear violation made possible by a lack of oversight.

Legal Pitfalls: GDPR, Data Processing & More

The GDPR is clear: anyone who shares personal data with third parties remains responsible for it — and must secure the collaboration properly under the law. Nevertheless, critical oversights keep creeping in here, which can lead to hefty penalties.

1. Missing or Defective Data Processing Agreements (Art. 28 GDPR)

A widespread mistake is working together without a written DPA or with incomplete contract clauses. According to Art. 28(3) GDPR, a DPA must bindingly regulate, among other things:

  • The subject matter and duration of the processing
  • The nature and purpose of the processing
  • The categories of data subjects and data
  • The processor's obligation to confidentiality and security
  • Clear instructions and the controller's audit rights

Practical example: A SaaS tool for marketing automation is commissioned, but the DPA is merely an appendix in the terms and conditions with no provisions on deletion periods or subcontractors. During a review, the data protection authority doesn't recognize this contract as valid — with consequences for the commissioning company.

2. Impermissible Data Transfers to Third Countries (Art. 44 et seq. GDPR)

If a third-party provider outside the EU is involved, Chapter V of the GDPR applies. Without an adequacy decision or suitable standard contractual clauses (SCCs), the data transfer is unlawful — even with large providers.

Example: A German company uses a US-based analytics tool. The data is stored on servers in the US without any additional safeguards or SCCs. Since the “Schrems II” ruling (CJEU 2020), this is no longer permissible — and constitutes a GDPR violation.

3. Missing Documentation and Accountability (Art. 5(2) & Art. 30 GDPR)

A common pitfall is insufficient record-keeping: companies must be able to prove when, how, and with whom they shared personal data — including the purpose, legal basis, and security measures taken.

Example: During a data protection audit, a company can't prove which provider processed applicant data or whether a DPA is in place. The absence of this documentation counts as a violation of the accountability principle under Art. 5(2) GDPR.

4. Missing Consent or Incorrect Legal Basis (Art. 6 GDPR)

Especially with third-party providers in marketing or tracking contexts, companies mistakenly rely on “legitimate interest” when explicit consent would actually be required — particularly when sharing sensitive or personal user data with third parties.

Example: A website uses a chat widget that transmits IP addresses and behavioral data to a third-party provider — without cookie consent or a notice in the privacy policy. This can be classified as unauthorized data processing.

Best Practices for Secure Data Sharing

The risks of working with third-party providers can't be eliminated entirely — but they can be significantly reduced. What matters is a structured approach that combines legal, technical, and organizational measures. The following best practices help you make data sharing secure and GDPR-compliant:

1. Carefully Select and Vet Third-Party Providers

  • Shortlist only providers who can demonstrate GDPR-compliant data processing (e.g., through certifications such as ISO 27001, SOC 2, TISAX).
  • Use data protection checklists or self-disclosures to assess risk before signing a contract.
  • Reject providers who don't give clear information about sub-processors, storage duration, or data flow.

Tip: Introduce an internal “privacy due diligence” process before commissioning a provider.

2. Sign GDPR-Compliant Contracts (Including a DPA)

  • Always sign a written Data Processing Agreement (DPA) under Art. 28 GDPR — with individual provisions, not just generic ones.
  • Regularly review contracts to keep them up to date (e.g., when sub-processors change).
  • Clearly regulate a ban on transferring data to third countries without additional safeguards.

Tip: Use your own DPA templates, or critically review a provider's DPA before signing.

3. Ensure Technical and Organizational Measures (TOMs)

  • Make minimum standards such as end-to-end encryption, two-factor authentication, and access rights management mandatory.
  • Data minimization: only transfer as much data as is absolutely necessary.
  • Include requirements on deletion periods, backups, and access controls in the contract.

Tip: Require a list of TOMs within the DPA — including regular proof or audit rights.


4. Introduce Regular Audits and Monitoring

  • Review third-party providers annually or on an as-needed basis: e.g., through data protection evaluations, technical tests, or certification checks.
  • Watch for changes in the provider's network (e.g., new sub-processors).
  • Clearly define violations or security incidents and back them up with escalation plans.

Tip: Define fixed review intervals and responsibilities in your data protection strategy.

5. Establish Clear Internal Processes and Responsibilities

  • Create a central register of all third-party providers with DPAs, purposes, deletion periods, and contact persons.
  • Set binding policies for data sharing — including review obligations before a contract begins.
  • Define roles: who is even authorized to approve data sharing? Who documents it?

Tip: Use a data protection management tool for structured control.

6. Train and Raise Employee Awareness

  • Regular training on data protection, third-country risks, secure tools, and GDPR obligations.
  • Walk through concrete use cases (e.g., “Am I allowed to use this tool?”).
  • Communicate clear reporting channels for data protection violations and uncertainties.

Tip: Build data protection into onboarding processes and mandatory annual training.

The Role of Technology in Ensuring Compliance

Technology can play a decisive role in ensuring compliance. By using data protection management software, companies can automate and monitor their data processing workflows to ensure that all legal requirements are met.

In addition, modern encryption technologies and access management systems provide extra protection for sensitive data and help minimize the risk of data breaches.
 

Conclusion: Regaining Control Through Deliberate Processes

Secure data sharing and compliance with regulatory guidelines are essential for protecting companies and their customers. By implementing deliberate processes and using suitable technologies, companies can regain control over their data and minimize the associated risks.

Ultimately, a strong compliance culture doesn't just help meet legal requirements — it also strengthens the trust of customers and partners and fosters long-term business success.