United States: The Schrems Decision: How The End Of Safe Harbor Affects Your FCPA Compliance Plan

Article by Lisa Mays and Scott Maberry

Like a needle to a balloon, the Schrems decision has drastically altered the data privacy landscape. Who is affected? Everyone – consumers, corporations, employees. But who needs to take action? Any company with offices in the European Union and the United States, any European company that outsources work to the United States (do you know where your cloud is?), and any company that sends information from the EU to the United States.

The European Court of Justice's Decision in Schrems v. Data Protection Commissioner

Maximillian Schrems

Before diving into the meat of the Schrems case, you may be asking yourself – who is Schrems? Who is behind this monumental shift in privacy law affecting businesses across the globe? Maximillian Schrems is an Austrian law student (never underestimate the power of a motivated law student), who is completing his Ph.D in law at Vienna University.

Also never underestimate the impact of some Silicon Valley exposure. Schrems' interest in privacy law developed while spending a semester abroad at Santa Clara University in California. Concerned about the privacy of social media users messaging online, Schrems filed 23 complaints against Facebook in Ireland, targeting the activities of the company's European headquarters. While the Irish Data Protection Commissioner wrote off the first 22 complaints, the 23rd complaint reached the European Court of Justice, which gave us the Schrems decision.

The Schrems Decision

On October 6, 2015, the European Court of Justice issued the Schrems decision declaring the European Commission's 15-year-old "U.S. Safe Harbor decision" invalid. That earlier decision enabled U.S. companies to self-certify that company practices ensured an adequate level of protection for personal data under the EU Data Protection Directive, thus permitting the company to transfer data from the EU to the United States. The ECJ's Schrems decision holds that U.S. law does not afford adequate protection to personal data. As a result, the safeguards of the U.S. Safe Harbor have been thrown to the wayside.1

The Effect of the Schrems Case on Business Transactions

Where does this leave us?

First, it is necessary to determine where your company stores, transmits, and uses its data. Any company that has offices in both the EU and United States, any European company that outsources work to the United States, and any company that sends information from the EU to the United States, must reevaluate its policies and make necessary adjustments. Data transfers from the EU to the United States trigger the provisions of the EU Data Protection Directive and may come under scrutiny. Many companies utilize U.S.-based cloud services, so although you may assume that your company keeps all personal data outside of U.S. jurisdiction, now is the time to double-check.

Second, companies can no longer rely on Safe Harbor self-certification. Now companies need to independently verify that company transfers of personal data from the EU to the United States meet the level of data privacy protection considered adequate by the EU Data Protection Directive.

Solutions in a Post-Schrems Landscape

There are a variety of customizable solutions to fill the void created by the Schrems decision ranging from implementation of contract clauses, to adding encryption to data, to moving data centers to the EU. In a November 6, 2015 press release, the European Commission recommends that companies consider using the EU-approved standard contractual clauses, the EU-approved Binding Corporate Rules, or the enumerated derogations under which data can be transferred. While there are several possible solutions, what is certain is that immediate action is necessary as data regulators have indicated that we should expect more investigations in a post-Schrems world.2

Enter: The Foreign Corrupt Practices Act (FCPA)

Complicating matters further, we must consider the impact of the Schrems decision on FCPA compliance and investigations. In broad summary, the FCPA comprises two components. First, the anti-bribery provisions prohibit paying foreign officials to obtain or retain business. Second, the recordkeeping and internal control provisions require accurate accounting and adequate internal controls. The jurisdiction of the FCPA is far-reaching and hinges on the use of interstate commerce by a U.S. or foreign person. As a result of the broad reach of the FCPA and its recent aggressive enforcement, companies need compliance policies to maintain watch over company actors to avoid inadvertently violating the FCPA.

The Effect of the Schrems Case On FCPA Compliance and Investigations

The Schrems ripple effect reaches both FCPA compliance plans and FCPA investigations. In regard to compliance, use of a run-of-the-mill compliance hotline could result in the transfer of personal data from the EU to the United States. Similarly in a standard internal investigation, relevant documents and emails may be transferred from the EU to the United States for analysis.

In a pre-Schrems world, self-certification by a company that it complied with the requirements of the Safe Harbor might have enabled the data transfers for the hotline or the internal investigation. Now, by contrast, a company must affirmatively ensure that the transfer and use of the data meet the requirements of the EU Data Protection Directive. One solution may be to keep the data in the EU. However, for companies that span continents, quarantining data in order to conduct a document review on site may not be feasible. Alternatively, some companies may be able to remove personal data from the records prior to transfer. Another option may be to use a set of EU-approved Corporate Binding Rules, which are a set of intra-company policies and procedures, designed to meet EU privacy standards. But authorization of Corporate Binding Rules is governed at the EU member state level, and must be in place before an investigation commences to be permissible.

Prepare Now, Comply Now; Avoid a Disaster Later

Despite the void created by the Schrems decision, there may be multiple solutions available to fill the gap. While negotiations for a new Safe Harbor are in the works, affected companies must take proactive steps now in order to address any potential exposure. Moreover, in the absence of a new Safe Harbor agreement, the EU has been threatening to veto future trade agreements and has indicated it will ramp up data privacy enforcement actions if a new Safe Harbor agreement is not reached by January of 2016.

In the meantime, companies need to proceed with caution when tending to FCPA compliance under the Schrems decision. You should revisit your compliance strategy, so as not to have the rug pulled out from under you if the DOJ comes knocking. Your Sheppard Mullin International Trade team located in Washington, D.C. and Brussels, Belgium is keeping an eye on these developments and is available to help.

Footnotes

1 For a more detailed summary of the Schrems case, consult the Eye on Privacy article U.S. Safe Harbor Regime Invalidated by Europe's Highest Court.

2 To add further kindle to the fire, the Schrems decision authorizes individual EU member state data protection authorities to investigate and suspend data transfers to third countries where they deem the protections inadequate.

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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