China: The EU General Data Protection Regulation: How It May Affect Chinese Clients

Last Updated: 7 June 2018
Article by Frank Fine

On 25 May 2018, the long-awaited EU General Data Protection Regulation ("GDPR")1will enter into force, ushering in the most severe data privacy regime in the world. The GDPR is the first EU "regulation" on data privacy and will be automatically applicable in all 28 EU Member States. Unlike the previous 1995 Directive, it will not be necessary for national legislatures to adopt it.2The Regulation imposes strict rules on the collection, use and storage of personal data, meaning data such as a person's national identification number, address, bank information, race, gender etc.

Although the national data protection authorities (DPAs)3are responsible for the enforcement of the GDPR, the GDPR establishes the rules relating to the assessment of fines for infringements. As discussed below, the powers of DPAs include investigations/audits of companies and the imposition of fines of up to 4% of the company's worldwide group sales, to be collected if necessary in the national courts.4 This implies that Chinese companies who fail to defend an EU Member State enforcement action could be subject to a default judgment and all this this entails.

The GDPR is a long,detailed document consisting of 99 articles.In addition, the Article 29 Working Party ("WP"), which is the advisory data protection organization established by the EU,has already published (and continues to publish) a significant body of guidelines explaining and delineating various aspects of the GDPR.It is very much a work in progress with many questions still to be answered.

DeHeng is well-placed to assist the client determine whether and how the GDPR applies to it,and how to achieve compliance.We have decades of experience in advising and defending companies in EU investigations and in providing advisory/compliance services.In the event that a DeHeng client were to be investigated, we are in an ideal situation to minimize the fine and other exposure.

I.TYPES OF CLIENTS AT GREATEST RISK

All Chinese companies with an EU presence who process personal data (whether the processing takes place within or outside the EU) or which, from outside the EU process the personal data of EU residents, are at risk.This being said, the companies most at risk are those below:

  • Banks, insurers, investment funds
  • Industrial companies
  • Airlines and hotel chains that use personal data for marketing purposes
  • Telcos that monitor individuals within the EU
  • Real estate developers
  • Retail e-platforms

II.THE TERRITORIAL SCOPE OF THE GDPR

According to Article 3 of the GDPR, the Regulation applies in two broad sets of circumstances.

First, "this Regulation applies to the processing of personal data in the context of the activities of an establishment of a controller or processor in the Union, regardless of whether the processing takes place in the Union or not."5

For the above purposes, it is critical to understand that an "establishment" under EU law may consist of a mere sales office. It is not necessary for the Chinese company to have a subsidiary within the EU.6Once it is clear that the Chinese company has "established" within the EU, all that is required for jurisdiction to apply is that the processing of personal data take place "within the context" of said EU establishment's "activities." It is not required that data pertains to an EU resident or national, nor that the processing take place by the EU establishment—the processing may take place in China or elsewhere and jurisdiction would still apply.

Examples:

Banking.A Chinese bank has a subsidiary in Frankfurt which lends money to and accepts deposits from individuals, some of whom are non-EU residents/citizens. In the course of these activities, the bank collects personal data both directly and via third party processors (the latter to ascertain credit risk). All such individuals are protected by the GDPR and the bank, as a controller, has a duty to comply with the GDPR.

Manufacturing.A Chinese chemicals manufacturer with facilities throughout the EU processes the data of employees and job applicants, and monitors employees in their work place. The company is obliged to ensure that the data privacy requirements of GDPR are met.

Second,"this Regulation applies to the processing of personal data of data subjects who are in the Union by a controller or processor not established in the Union, where the processing activities are related to: (a) the offering of goods or services. . .to such data subjects in the Union, or (b) the monitoring of their behavior as far as their behavior takes place within the Union."

For the above purposes, if the Chinese client has no EU-establishment, it may nevertheless be subject to the GDPR if its collection of data of EU-based individuals is related to the offer of goods or services directly to EU-based individuals or to the monitoring of their behavior (i.e. tracking of online behavior).

An important question is whether this second basis for jurisdiction applies to Chinese manufacturers and service providers (without an EU presence) who sell their products and services globally on their own website. It is clear that simply maintaining a sales website is not,standing alone, tantamount to "offering" products to EU consumers. But Recital 24 of the GDPR and ECJ precedents make clear that one or more of the following illustrative factors are tantamount to offering products and services to EU consumers:if the company includes on its website international contacts for client services,offers products in the local currency (or enables conversion),provides for automatic translation from one language to another,provides testimonials/reviews from EU consumers as an enticement to procure sales of other EU residents, or uses one or EU top level domains.

Examples:

Investment fund. A Chinese investment fund with no offices in the EU attracts EU investors by placing ads in financial newspapers and magazines, by having its executives speak at EU investment seminars and functions and by providing guidance to potential EU investors on its own website.This fund is probably at risk under the GDPR if it collects the personal data of EU individuals (which it probably does).

Retail website. A luxury Chinese cosmetics brand (with no EU presence) maintains a retailing website which can be accessed by consumers worldwide.When clicked on by EU residents,the person is directed to the company's UK website, where everything is in English, prices are in UK Pounds, reviews by EU purchasers are listed, and both a UK telephone number and email address are provided for customer service.This company processes the data of purchasers and monitors visitors to its website. It will most likely be subject to the GDPR.

III.SCOPE OF APPLICATION

The GDPR includes "principles" that apply to the processing of personal data, such as the principle that it must be collected lawfully (usually by obtaining the consent of the data subject, but other means are possible), for "specified, explicit and legitimate purposes," limited to what is necessary to achieve those purposes, kept no longer than necessary to achieve these purposes, and the data must be accurate. Each of these requirements are elaborated upon in detail and require and analysis. The Article 29 WP has published dense guidelines solely covering the issue of "consent."

The GDPR also contains various obligations of controllers and processors, and rights of data subjects. For instance, the "controller" must convey to the data subject a fair amount of information relating to the data that has been collected, rights of redress etc., and the individual has a right of access to the data itself, and "processors" must, among other things, implement appropriate technical and organizational measures to ensure that processing meets the requirements of the GDPR. For Chinese clients in particular, there are certain personal rights that may be somewhat surprising. Article 16 contains a "right of rectification" and Article 17 provides a right of erasure known popularly as the "right to be forgotten," i.e. even when the information is accurate and truthful. Again, each of these rights and obligations are dealt with in a detailed way that must be analyzed in each case.

Data Protection Officers.Companies engaged in "large scale" personal data processing operations are required to designate a Data Protection Officer ("DPO"), who maintains a defined role within the company and must act accordingly.7The applicable Article 29 WP guidelines confirm that banks and insurance companies fall into this category. But of course, large Internet such as Tencent and Ali-Baba will be required to appoint a DPO.

Data Protection Impact Assessments.Article 35 of the GPDR introduces the concept of a Data Protection Impact Assessment ("DPIA"). A DPIA may be legally required when a company carries out data processing operations "likely to result in a high risk to the rights and freedoms of national persons." The relevant Article 29 WP guidelines confirm specifically that such a high risk is likely if the Chinese company "systematically" monitors its employees' behavior, such as by tracking the employee's Internet activity, monitoring his work station etc.

IV.SCOPE OF RISK/EXPOSURE

As noted earlier, the GDPR provides for a ceiling fine of up to 4% of the company's group worldwide turnover. But in practice, there will be various factors considered by the DPA concerned, and these factors are spelled out in guidelines produced by the Article 29 WP. In fact, the criteria applied closely follow those applied in EU antitrust cases.The DPA will consider the nature, gravity and duration of the infringement, along with mitigating and aggravating circumstances.

One important factor in determining the amount of the fine is whether the controller with due regard to the state-of-the-art and costs, has implemented at the outset appropriate technical and organizational measures and procedures to ensure compliance with the GDPR (known as "privacy by design"), as opposed to corrective action later on.Another factor is whether the controller has taken appropriate measure to ensure that only personal data which is necessary for a specific purpose has been processed.

Apart from an administrative fine, infringers face the possibility of civil litigation (Arts. 79-82), including class actions, brought by consumer groups, associations etc.

V.ACHIEVING COMPLIANCE

At the outset, it must be emphasized that despite the technicalities of the GDPR and supporting guidelines,the approach taken in these regulatory instruments is surprisingly legal in tone and content.So,there are ample opportunities for counsel to take issue with whether the GDPR is applicable to a company or to a set of circumstances. There might also be instances in which the DPA concerned permits informal consultations to help facilitate compliance.

Nevertheless, once it is clear that the GDPR is applicable to a given DeHeng client, he should be informed of the requirements of the GDPR and the risks it poses.The client may need to review its systems for the collection and storage of data, its methods for obtaining the consent of the data subject (i.e. are they sufficiently clear, transparent and precise), its systems for providing access to data as well as their erasure, and much more.

Footnotes

1 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R0679&from=NL

2 This being said, it is legally permissible for the Member States to adopt national legislation which is even stricter than the GDPR. This is what has happened in Germany in the case of its new Federal Data Protection Act, which was adopted last year and will enter into force on 25 May 2018. For example, under Section 38 of the FDPA, companies operating in Germany must designate a data protection officer if they employ at least 10 people dealing with the automated processing of data. Under the EU, a higher threshold must be established, as will be seen below.

3 For example, in the UK, this would be the Information Commissioner's Office, https://ico.org.uk/. In Germany, there are 17 data protection authorities, one at Federal level covering only telecoms and postal services and one in each of the 16 states ("Lander").

4 GDPR, art. 58(5).

5 A "controller" determines the purposes and means of processing personal data. A "processor" processes personal data on behalf of the controller. A controller is often, but not necessarily, the same legal person as a processor. Under the GDPR, there are separate responsibilities for controllers and processors. A controller is not relieved of its responsibilities under the GDPR if it has outsourced the processing to a third party.

6 Indeed, in one judgment of the EU Court of Justice, the presence of a single company representative was deemed sufficient, where the individual in question, who resided in Hungary, had advertised Hungarian real estate, had a local postal address and bank account, and other factors indicating he had a "real and effective activity" in Hungary. Weltimmo v. NAIH, C-230/14 (2015).

7 GDPR, arts. 37-38.

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.

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