China: China's New Cybersecurity Law Imposes Heightened Restrictions On Company Computer Networks

On June 1, 2017, China's new Cyber Security Law (CSL) took effect. The CSL and implementing regulations cast a wide net that will likely require compliance by, and in some cases pose risks to, multinational companies operating in China. Our analysis suggests that the CSL will affect the following business sectors:

  • Owners and administrators of computer networks, to include network service providers.
  • Businesses that collect personal information data in China.
  • Those classified as businesses supporting critical information infrastructure. Such critical sectors include public communication and information services, energy, transportation, financial, and other sectors where damage to its information network could seriously endanger China's national security, economy, people's livelihood, and public interests.
  • Businesses that transfer and/or store data collected in China in places other than mainland China.
  • Information technology companies that sell network hardware and software items.

It is widely reported that two major components of the CSL—a requirement that all data generated in China remain in China and a prohibition against transferring data across China's border—may be delayed until December 2018.

Introduction

The CSL expressly states it applies to the "construction, operation, maintenance and use of networks, as well as supervision and management of cybersecurity within" China. The CSL also adopts EU-like (i.e., Data Protection Directive plus GDPR) data security, consent, and breach notification requirements for all 'network operators'—that is, all entities that own and administer networks in China. The definition of 'personal information' subject to obligations and duties, like the EU, is extremely broad. Further, there are enumerated fines for violations of each of the different types of duties and obligations contained in the CSL. In addition, the CSL has to be read in context and in coordination with other laws, for example the National Security Law of the People's Republic of China of 2015, the existing regulations requiring companies to file under and follow the Multi-Level Protection Scheme network security requirements, past and present product certification proposals (CCCi) and requirements (MPS and amended CCCi), and the licensing requirements for the enterprise use or product sale of encryption in China. Despite its scope, the CSL is vague and ambiguous in many regards and may create significant risks and substantial costs for multinational businesses operating in China. Accordingly, the purpose of this Advisory is to highlight the most significant aspects of the CSL that may be cause for concern.

Key Terms

  • Network Operators. The CSL imposes a variety of legal requirements on "network operators" and "network products and services." The CSL defines a "network operator" as a network owner and administrator, and network service providers. Currently, the Cyberspace Administration of China (CAC) has published its Draft Measures for the Security Assessment of Personal Information and Important Data to be Transmitted Abroad (Draft Measures) in which it mirrors the CSL's definition of "network operators" as "owners, managers and network service providers of network[s]." This broad definition could include any person or entity in China who is the owner and administrator of a network, seemingly including all multinational corporations that have any network infrastructure in China.
  • Critical Information Infrastructure. Many of the CSL's requirements apply to networks that support critical information infrastructure (CII). The CSL defines CII sectors as public communication and information service, energy, transportation, water conservancy, finance, public services and e-government, and other CII which, once damaged, may seriously endanger national security, national economy, and people's livelihood or public interests. This general definition gives a lot of latitude for the government to bring most state-owned enterprises, commercial multinational corporations, and businesses that would be in the United States' 16 critical infrastructure sectors operating in China within the scope of the CSL's CII mandates. The CSL states that the State Council will further develop the scope of CII and the required protective measures for such sectors. Businesses should monitor developments in this area to determine whether China places their industry within the parameters of CII and its corresponding mandates. Further, the CSL imposes additional requirements on network operators supporting CII, which we outline below.

Local Data Storage Requirement

The CSL requires that businesses engaged in CII "shall store" personal and important business data generated during business operations within China. Originally, the Draft Measures expanded this data localization requirement to all network operations. However, the Amended Draft Measures, published on May 19, 2017, removed this reference, thereby suggesting that data localization only applies to CII networks. It has been widely reported that this portion of the CSL has been delayed for 18 months.

CII Hardware and Software Review

Under the CSL all CII network operators must obtain official clearance before introducing network products and services that may possibly affect national security by subjecting such products and services to a national security review conducted by the Chinese state-level cybersecurity authority. Further, notwithstanding the CII network national security review, the CSL also requires that "critical equipment" for networks and dedicated products for cybersecurity receive official accreditation from "qualified institutions." Finally, the CSL orders the Cyberspace Administration of China (CAC) to develop a catalog of network-critical equipment and dedicated products for cybersecurity. The catalogue took effect on June 1, 2017, and includes critical equipment for networks including "routers, switches, servers (rack-mounted), and the dedicated products for cybersecurity include integrated data backup, firewall (hardware), web application firewall, intrusion detection system, intrusion defense system, security isolation and information exchange products (gatekeepers), anti-spam mail products, network audit systems, network vulnerability scanning product, security data system, and website recovery products (hardware)."

These requirements bring to the forefront certain longstanding trade disagreement issues that include (1) the extent to which information technology (hardware and software) products must be "certified" for security by the Chinese government before they are sold in China; (2) whether the certification would require companies to provide the source code of their products, and other intellectual property related to their products; (3) whether China would follow the global Common Criteria standard (which undertakes evaluations without giving code or IPR to governments) or create its own system; (4) whether these requirements would create market barriers to entry for non-Chinese products; and (5) otherwise be consistent with obligations pursuant to World Trade Organization commitments. The CSL does not, by itself, answer these critical questions, but instead provides the means for the government to create a system that could potentially meet the worst fears of global IT companies. Given that the certification (and related catalog) concept is embedded in the CSL, and the contentious history, there are and will be nontrivial issues around interpretation and implementation.

The May 2, 2017 Measures on Security Examination for Online Products and Services (Examination Measures) reinforce this perspective. Promulgated pursuant to the 2015 National Security Law and the CSL, the Examination Measures' stated purpose is to promote controllable online products and services. To achieve this purpose, the Examination Measures require that important online products and services purchased by network and information systems involving national security "shall be subject to cyber security examination." Since national security in China refers to the welfare of its people and sustainable economic and social development, nearly every company's network may be subject to "examination." These "examinations" shall focus on the "security and controllability" of cyber products and services, which include any inherent risks found within the products and services, the supply chain, and the collection, storage, processing, and use of user-related information illegally. Taken together, the CSL, National Security Law, and the Examination Measures significantly raise the historical concern that disclosure of proprietary information in certain circumstances may be a condition precedent to selling into the Chinese market.

Consent Requirements to Collect Personal Information

Another focus of the CSL is the protection of personal information collected in cyberspace. The definition of 'personal information' is very broad and includes information that can be used to identify a person, including without limitation, name, date of birth, identification numbers, personal biometric information, address, and telephone number. One way the CSL accomplishes this effort is by requiring a user's consent before a network can collect user information. Compliance with this mandate likely means that companies operating in China will need to include consent clauses in Terms of Service agreements that govern networks and websites. Importantly, network operators are prohibited from collecting personal information "irrelevant" to the services provided, and may only collect such information on a legitimate, justified, and necessary basis. The CSL also requires security measures to protect personal information, and notification of consumers and the government if there has been a breach. Further, the government has the right to investigate a breach, and the company must provide technical support and assistance when the public security or national security departments conduct activities to safeguard national security and investigate crimes. The nature and extent of the technical support companies must provide is not defined.

Third-Party Data Transfers and Cross-Border

As noted above, the CSL prohibits the transfer of lawfully collected user data to others without the user's consent. While a Terms of Service agreement may provide the requisite consent to transfer, if a business lacks user consent, then the CSL only permits the sharing of personally identifiable information to third parties so long as each user's identity is protected and incapable of being restored. It has been widely reported that the cross-border data transfer provisions are on hold for 18 months.

As currently drafted, these transfer requirements prohibit cross-border data transfers outside of mainland China for businesses supporting CII. Instead, cross-border data transfers for companies operating CII networks requires a security assessment prior to the transfer. In most instances, a cross-border data transfer can occur after the network operator conducts its own security assessment. A self-assessment requires that a network operator review the necessity of the transmission, whether all users have consented to the transfer, the quantity, scope, and type of any important data, the security of the transferee's network, and other related risks. After this self-assessment, a CII company may only conduct a cross-border data transfer if all users consent and the data does not jeopardize personal interests, the transfer does not cause security risks related to China's politics, economy, technology, or defense, and the data transfer is not prohibited by any other official agency.These requirements may leave multinational corporations at a practical impasse arising out of their inability to ensure exportable data meets Chinese requirements.

Indeed, in some instances a self-assessment is insufficient. In those cases, a company must seek an assessment from the CAC or its sector's regulatory agency. Such official security assessments are required where the cross-border data transfer involves (1) personal information related to over 500,000 users; (2) the data involves information about nuclear facilities, chemicals, the defense industry, population and health, large scale projects, the environment and marine life, and sensitive geographic information; (3) the date relates to CII system vulnerabilities, security protection, and other network security information; (4) and other data relating to national security.

Multi-Level Protection Scheme

The CSL also references the Multi-Level Protection Scheme for Network Security (MLPS-NS). This phrase is similar, but not identical, to the current Multi-Level Protection Scheme (MLPS) which requires every business in China to determine how important it is to society (from level 1-5), file that determination with the local Ministry of Public Security (MPS) office, and then follow the cybersecurity requirements for that level. Under the CSL, all "network operators" will have to follow the MLPS-NS, and specifies a number of requirements including logging, data classification, backup, and use of encryption for "key data."The MLPS-NS is further enforced by the requirement in the Critical Infrastructure section for sector 'departments' to create sector specific requirements as well. It is not clear how the MPLS-NS and the sector specific measures will be rationalized or de-conflicted.

Legal Liabilities

China imposes fines on "network operators" who fail to comply with the CSL. Generally, liability exists for failure to comply with each of the substantive provisions in the CSL. However, prior to issuance of a fine, most liability provisions allow a company and network operator to first rectify the issue of non-compliance. Upon a failure to bring a network into compliance, the fine range fluctuates based on the substantive violations. Further, in some cases network supervisors may also be personally liable. Conduct that could give rise to a fine includes, but is not limited to, (1) failing to comply with the MLPS-NS and to develop a cyber-attack emergency response plan; (2) failure to have hardware and software certified by the relevant Chinese agency; (3) failure to implement required employee training, create an oversight body, maintain disaster recovery plans, annually test and assess the integrity of the network, actively update security patches, and remedy measures in the event of a data breach; (4) storing network data outside of mainland China or conducting cross-border data transfers; (5) failure to require "real ID information" for its users. China may also close the business or shutdown the website if a company fails to comply.

Criminal penalties are also authorized. Imprisonment between 5–15 days may result for network operators and supervisors who engage in activities that endanger cybersecurity, or provide programs or tools used solely to endanger cybersecurity.' Further, where a CSL violation causes harm to a person, the violator may be subject to criminal liability under the Public Security Administration Law.

Conclusion

The CSL and its implementing regulations continue to evolve. As they do, companies should be on alert for new network compliance requirements necessary to do business in China.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions