China: Impending Cyber Security Law: Cross-Border Data Transfer Will Be Restricted For The First Time

Although the legislative timetable for its dedicated Personal Data Protection Law remains undecided, China has promulgated several other laws and regulations for protecting personal data, in response to the booming network technology and Internet economy. Also, China has amended its Law on Protection of Consumer Rights and other relevant laws to meet the rapidly changing social needs. Among these various legislations, the Cyber Security Law attracts the most attention, as it is not only the first time that a fundamental law will provide systematic protection to personal data but also the first time that cross-border data transfer will be explicitly restricted, which will significantly impact corporations' business operation in China.

1. Legislative Background

The year of 2014 marks the 20th anniversary of China's gaining access to the Internet. Over years of development China has marched into an all-round Internet era. Various economic, social and cultural benefits notwithstanding, the Internet also poses potential risks and threats including cyber torts, unfair competition on the Internet, hacker attacks and data breaches, etc. to the well-functioning of the society. Among them the cyberspace security issue has become an increasingly crucial subject under discussion in various countries around the world.

China's top authorities attach great importance to the issue of cyberspace security. On 27 February 2014, the Central Leading Group for Cyberspace Affairs headed by President Xi Jinping was founded. However, up until this point China has yet to pass a law which specifically deals with cyberspace security issue. The relevant provisions are currently scattered among different laws and regulations.

The Standing Committee of National People's Congress is currently drafting the first fundamental law in the cyberspace area. Until 4 August 2016 the second draft of the Cyber Security Law of the People's Republic of China (hereinafter the "Second Draft") has finished soliciting public opinions. Should everything goes as planned the Cyber Security Law will be promulgated within this year. After its promulgation the law is believed to have a significant impact on corporations operating in China.

2. Current Situation of Cross-Border Data Transfer Regulation

In recent years the Chinese government has paid an increasing attention to the issue of cross-border data transfer. Nevertheless, the current regulations have not reached a comprehensive level of regulation in terms of categories of data and scope of application. For instance, Article 24 of the Regulation on the Administration of Credit Reporting Industry issued by the State Council on 21 January 2013 provides that "A credit reporting agency shall, within the territory of China, organize, store and process the information collected within the territory of China. A credit reporting agency shall provide information for an overseas organization or individual in compliance with laws, administrative regulations and relevant provisions of the Credit Reporting Industry Regulatory Department under the State Council." Article 6 of the Notice of the People's Bank of China on Improving Work Related to the Protection of Personal Financial Data by Financial Institutions of the Banking Industry issued on 21 January 2011 provides that "Personal financial data collected within the territory of China shall be stored, handled and analyzed within the territory of China. Unless otherwise stipulated by laws, regulations and provisions of the People's Bank of China, financial institutions of the banking industry shall not provide domestic personal financial data to overseas countries." It is clear that the above-mentioned regulations apply only specifically to credit reporting industry and banking financial institutions, with a relatively narrow range of protected data.

In addition, as the first national standard for personal data protection, Article 5.4.5 of the Information Security Technology - Guideline for Personal Data Protection within Information System for Public and Commercial Services provides that "Without the expressed consent of a subject of personal data, or in the absence of explicit provisions of laws and regulations, or without the approval of the relevant competent department, an administrator of personal data may not transfer personal data to an overseas receiver of personal data, including an individual located overseas or an overseas-registered organization or institution." It is obvious that this guideline provides a much broader definition of personal data and covers a much wider scope of application. However, as "guiding technical document" the guideline is not legally binding on relevant corporations or individuals.

Corporations operating in China should note that the Cyber Security Law under enactment will for the first time restrict cross-border data transfer on a national law level.

3. Specific Restrictive Regulations of Cross-Border Data Transfer in the Second Draft

With regard to the issue of cross-border data transfer, the Cyber Security Law under enactment poses an unprecedented comprehensive restriction in terms of the level of legislation, scope of application, category of data, procedural rules and legal liability.

3.1 Subject

According to Article 35 of the Second Draft, the regulated subjects of the cross-border data transfer shall be the "operators of critical information infrastructure". Article 29 provides that critical information infrastructure refers to infrastructures "damage, loss of function or data breach of which could severely endanger national security, national economy and the people's livelihood, or public interests"; the specific scope of such infrastructure and its security measures "are to be laid down by the State Council".

3.2 Category of Data

Article 35 of the Second Draft provides that "citizen's personal data and crucial business data collected and generated by operators of critical information infrastructure during their operation in the People's Republic of China shall be stored domestically." Hence the regulated data are limited to those collected or generated within China and mainly covers two categories: (1) citizen's personal data; (2) crucial business data. The Second Draft is unclear as to the definitions of these two categories, especially the definition and extension of the latter, which can be expected to be laid down in the subsequent legislation, law enforcement or judicial practices.

3.3 Regulation Methods and Requirements

The Second Draft provides that in principle the above-mentioned two categories of data shall be stored within China, however "where the cross-border data transfer is truly necessary for business operation, a security assessment shall be conducted in accordance with the measures jointly issued by the cyberspace information administrations and relevant departments of the State Council unless otherwise stipulated by laws or administrative regulations."

3.4 Legal Liabilities

Article 64 of the Second Draft provides that "Where an operator of critical information infrastructure, in violation of Article 35 of this law, stores network data overseas or provides network data to an overseas receiver, the competent authorities shall instruct the operator to correct illegal conducts, issue warnings, confiscate illegal gains and impose a fine between 50,000 and 500,000 yuan. The competent authority may in addition order the operator to cease relevant business, suspend operation for correction, close down websites, revoke relevant business permit or business license. Executive personnel or other personnel directly responsible shall be imposed with a fine between 10,000 and 100,000 yuan."

In summary, although the Cyber Security Law is still in the draft stage with possible future revisions and improvements, its provisions on the restriction of cross-border data transfer are likely to remain in the final version and should be heeded by corporations operating in China. In addition, the Second Draft is still not clear enough as to the scope of critical information infrastructure, security measures, security assessment, specific categories of data, etc. Hence to ensure compliance in every aspect including data collection, storage and cross-border transfer, it is also advisable for corporations operating in China to be kept informed of the legislative process and to pay close attention as to the subsequent regulations or measures issued by the State Council and relevant departments as well as the decisions made in law enforcement and judicial practices.

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