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.

© 2017 Arnold & Porter Kaye Scholer LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.