United States: The Privacy Shield: September 30, 2016, Deadline For Early Self-Certification Offers Compliance Opportunity And Risk


The European Commission recently determined that the Privacy Shield Framework is adequate to legitimize data transfers under EU law, providing a replacement for the Safe Harbor program. The Privacy Shield is designed to provide organizations on both sides of the Atlantic with a mechanism to comply with EU data protection requirements when transferring personal data from the European Union to the United States. Organizations that apply for Privacy Shield self-certification by September 30, 2016, will be granted a nine-month grace period to conform their contracts with third-party processors to the Privacy Shield's new onward transfer requirements.

In Depth

After the European Court of Justice struck down the Safe Harbor program in October 2015 and declared the program to be inadequate, about 4,400 US-based multinational organizations faced regulatory uncertainty for their EU-to-US data transfers. Over the last 10 months, organizations have strategized how best to solve this problem. Their actions have ranged from implementing alternative mechanisms, such as EU Model Clauses; continuing their Safe Harbor certifications despite their invalidity for legitimate new data transfers; or simply taking a wait-and-see noncompliant posture, hoping for a viable Safe Harbor replacement.    

On July 12, 2016, the European Commission provided a Safe Harbor replacement when it determined that the Privacy Shield Framework is adequate to legitimize data transfers under EU law. The Privacy Shield is a program designed by the US Department of Commerce (DOC) and the European Commission to provide organizations on both sides of the Atlantic with a mechanism to comply with EU data protection requirements when transferring personal data from the EU to the US. The DOC announced that, as of August 1, 2016, organizations could submit applications for self-certification of compliance with the Privacy Shield.

To incentivize use of the new Privacy Shield, the program provides that if an organization files its self-certification by September 30, 2016, it will be granted a nine-month grace period to conform its contracts with third-party processors to the new onward transfer requirements under the Privacy Shield. The onward transfer principle governs transfers of EU personal data to a third party, such as an IT service provider. It requires Privacy Shield companies to enter into a contract that provides that such data may only be processed for limited and specified purposes consistent with the consent provided by the individual, and also requires the recipient to provide the same level of protection as required under the Privacy Shield Principles.

This opportunity to self-certify for the Privacy Shield may be critical for US-based multinationals' data protection compliance programs and may reduce the regulatory risks that arose from the invalidation of the Safe Harbor. Early self-certification by September 30, 2016, may enable certain organizations to be legally compliant with EU data protection requirements sooner than they may have anticipated. However, for those within these organizations tasked with EU data protection compliance—for example, general counsel, privacy officers and compliance officers—the early certification option may not only provide a not-to-be-missed opportunity, but also a compliance risk in and of itself. 

Safe Harbor – Privacy Shield Compliance Gaps

It is tempting to think of the Privacy Shield as a direct descendent of the Safe Harbor Program. Key differences exist between the two approaches, however, and the importance of these differences should not be underestimated. At first glance, the Privacy Shield strongly resembles the Safe Harbor in that it mirrors the same data protection principles as the Safe Harbor framework, including Notice; Choice; Accountability for Onward Transfer; Security; Data Integrity and Purpose Limitation; Access; and Recourse, Enforcement and Liability. Despite these shared principles, the Privacy Shield requirements surpass those under Safe Harbor and add substantive and procedural privacy protections for EU individuals.

Some of the key compliance gaps between the Safe Harbor and the Privacy Shield include the following:

  • New Notice Requirements. A Privacy-Shield-certified organization must include in its privacy policy a declaration of the organization's commitment to the Privacy Shield Principles, a link to the DOC's Privacy Shield website, and a link to the website or compliant submission form of the independent recourse mechanism that is available to investigate consumer complaints. In addition, consumers must be informed of their rights to access their personal data, the requirement to disclose personal data in response to a lawful request by public authorities, the identity of the enforcement authority with jurisdiction over the organization's compliance with the Privacy Shield, and the organization's liability in cases of onward transfer of personal data to third parties. Privacy Shield notice requirements are more specific and in line with the requirements under the forthcoming EU General Data Protection Regulation (GDPR).
  • Implementation of Redress Mechanisms. Any EU citizen who believes his or her personal data has been misused has a right to several redress mechanisms under the Privacy Shield. These redress mechanisms are fundamental to the Privacy Shield and include established timelines by which US companies must respond to complaints and the ability to report complaints directly to the local EU data protection authority. Privacy Shield participants must also commit to binding arbitration at the request of the individual to address any complaint not resolved by other redress mechanisms offered.
  • Heightened Onward Transfer Requirements. One of the most prominent changes implemented by the Privacy Shield is the treatment of onward transfers of EU personal information to third parties. Unlike under the Safe Harbor, companies certified to the Privacy Shield are required to enter into written contracts with all third parties that receive EU personal data. The Privacy Shield sets forth specific contractual requirements for transfers to third-party controllers (i.e., third parties that are authorized to use the information for their own purposes) and others for transfers to third parties acting on behalf of the Privacy Shield organization (i.e., agents). These obligations, triggered by transferring EU personal data to service providers, require active procurement service provider management, careful contracting and diligent oversight, all of which impose compliance costs on certified companies.
  • Increased Oversight and Enforcement. US organizations can expect the Federal Trade Commission and the DOC to play an active role in enforcement of data transfers under this framework, working closely with European counterparts to provide robust privacy and data security protections for consumers.

In order to rely on the Privacy Shield to effectuate transfers of personal data from the European Union, an organization must self-certify to the DOC its adherence to the Principles. While an organization's decision to self-certify is voluntary, effective compliance is compulsory. An organization that self-certifies and publicly declares its commitment to adhere to the Principles must comply with them. 

Benefits and Risks of Early Certification

A number of companies have already started the process of self-certification to take advantage of the grace period offered to early adopters of the Privacy Shield Principles.

The grace period works as follows: if a company self-certifies to the Privacy Shield within the first two months that the DOC accepts applications (August 1 to September 30, 2016), that company will be given an additional nine months to "bring existing commercial relationships with third parties into conformity with the Accountability for Onward Transfer Principle." The grace period starts from the date an organization certifies; therefore, if a company certifies to the Privacy Shield on September 15, 2016, it has an additional nine months from that date (i.e., until June 15, 2017) to update its third-party contracts. If an organization is unable to self-certify prior to the early deadline of September 30, 2016, it will not be able to move forward with the Privacy Shield until it can verify compliance with all of the Principles, including the onward transfer principle. 

Many US-based multinational organizations manage hundreds, even thousands, of service provider relationships in many jurisdictions. The procurement organization, with legal support, often has the responsibility of selecting, contracting with and monitoring these relationships to ensure that services are delivered appropriately, in a cost-efficient manner and consistent with the organization's compliance obligations. These relationships may involve the provision of IT services, e.g., for the HR organization, for multiple and differing business units, for multiple consumer-facing websites and more. The task of embedding Privacy Shield requirements in all agreements authorizing the service provider to receive Privacy Shield personal data can be complex, time consuming and costly. These agreements are no longer merely commercial agreements, but also are regulated agreements creating a demonstrable record of the organization's compliance to the Privacy Shield onward transfer obligations. This downstream data protection accountability puts significant pressure on service provider selection and monitoring practices. For many organizations, Privacy Shield service provider compliance will take time. 

It is critical, therefore, to factor the following requirements into the organization's timeline for its data transfer compliance strategy. To benefit from the early compliance opportunity, the organization (1) must be demonstrably compliant by September 30, 2016, with all of the Privacy Shield Principles other than the onward transfer principle, and (2) within nine months from the self-certification date, must have identified and contacted all service providers that will be receiving Privacy Shield personal data, and have negotiated the inclusion of the Privacy Shield requirements into those agreements, either by amendment or by new agreement. 

If an organization can accomplish these tasks, it will benefit from being able to time its compliance from the early self-certification date rather than delaying compliance further. If, on the other hand, the organization expects that it will be unable to complete its service provider onward transfer requirements within that nine-month period, it obviously should not pursue early self-certification, because it will not be compliant with the onward transfer principle. At that point, it would be vulnerable to a claim that it is misrepresenting its Privacy Shield compliance.   

Next Steps

Organizations that previously were Safe Harbor certified and that had adopted a wait-and-see approach to legitimizing EU-to-US data transfers following the Safe Harbor invalidation should consider the Privacy Shield as a possible compliance path forward in their global data protection strategy. Performing a gap analysis between an organization's current policies and practices and the heightened requirements of the Privacy Shield will help determine the specific compliance steps that must be taken prior to self-certifying.

Taking the necessary organizational and procedural steps to comply with the Privacy Shield has the added benefit of aligning an organization's practices more closely with the heightened requirements of the EU GDPR. The GDPR will become effective May 2018 and will apply to US companies providing services to the European market. As an organization performs its Privacy Shield gap analysis, it may make sense to conduct a snapshot assessment of the impact that the GDPR will have on the business, so that steps can be taken to identify and implement the necessary changes. This assessment should take into account the specific needs of the organization, focusing on key issues such as fair processing, privacy notices, information governance, privacy impact assessments, appointment of a data protection officer and data breach procedures.

The best course of action for an organization already in compliance with the Safe Harbor principles (particularly if such organization has not implemented the alternative mechanisms of EU Model Clauses or Binding Corporate Rules) is to evaluate the Privacy Shield Principles to see whether certification benefits the organization for current and future EU to US data transfers. If so, the organization can shorten its noncompliance period by self-certifying by the September 30 deadline and using the nine-month grace period to modify applicable service provider agreements to ensure onward transfer compliance. The DOC has issued a guide to self-certification that highlights five steps for organizations wishing to come into compliance and certify under the Privacy Shield.

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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