On 7 November 2016, the Cybersecurity Law of the People’s Republic of China was enacted and widely heralded as the first comprehensive law dealing specifically and exclusively with cybersecurity issues in China.

The law, which will take effect from 1 June 2017, was passed to promote two key objectives: 1) protect the state against cybersecurity attacks; and 2) protect the rights and interests of citizens from cybersecurity attacks and the misuse of personal information. In this article, five key questions about the law are answered.

1. Who does the law apply to?

The cybersecurity law applies to three types of entities:

  • Critical information infrastructure operators (CIIs)
  • Network operators
  • Providers of critical network equipment and specialised cyber security products (IT product suppliers).

“Critical information infrastructure” is defined as: “public communications and information services, energy, transport, water conservancy, finance, public services and e-government affairs and the critical information infrastructure that will result in serious damage to state security, the national economy and the people’s livelihood and public interest if it is destroyed, loses functions or encounters data leakage”.

On its face, this definition identifies two types of CII operators: 1) operators who operate networks used for critical public services; and 2) private sector operators who operate networks which, if breached, would cause serious damage to state security, the Chinese economy or the public at large.

“Network operators” are defined in the law as any owners and administrators of networks and network service providers. “Network” is defined as any system that is formed by computers or other information terminals used to collect, store, transmit, exchange and process information.

These definitions are very broad and potentially apply to any entity that conducts business in China using a computer network, website, app or other electronic platform where information collected from third-party users in China is stored, transmitted, exchanged or processed. Given the widespread use of computer networks and information technology in the commercial world, almost any business utilising such technology to store, process and transmit information collected from customers or clients in China could be covered by the law.

2. What are the key provisions?

The cybersecurity law imposes a number of arguably quite onerous obligations on CIIs, network operators and IT product suppliers.

Under the law, CIIs are required to:

  • Implement standards and procedures to ensure data security
  • Establish high level corporate oversight over internal security management systems and operating rules
  • Place responsibility on individuals to oversee security management systems and operating rules
  • Communicate security management systems and operating rules to the entire workforce within an organisation
  • Conduct periodic audits to ensure security management systems are properly implemented and operating rules followed
  • Establish a mechanism for reporting violations to the relevant authorities.

Network operators are required to keep users’ personal information confidential and establish systems to protect that information. In addition, network operators who provide network access, domain registration, fixed line and mobile services, instant messaging and related services are obliged to require users to provide true identity information when signing service agreements.

Network operators must also formulate contingency plans to deal with cybersecurity incidents and deal with system bugs, viruses, network attacks and network intrusions. Finally, network operators are required to provide technical support and assistance to state security services to safeguard state security and investigate crimes.

IT product suppliers are required to:

  • Ensure their products and services do not contain malicious programs
  • Take remedial action where defects and vulnerabilities are found and then report them to users and the relevant authorities
  • Provide security maintenance for their products and services irrespective of the contract term agreed with customers
  • Inform users and obtain their consent where products or services are used to collect information about the user
  • Obtain a security certification from the relevant authorities for the sale or use of key network equipment and specialised cybersecurity products.

Perhaps the most significant provision in the cybersecurity law is the requirement that data collected in China must be stored in China and may not be transferred and/or stored outside the jurisdiction. It is important to note here that this obligation cannot be waived by the customer. To transfer data out of the jurisdiction, a CII or network operator must obtain the consent of the National Cyberspace Administration and State Council, unless other PRC laws permit the overseas transfer.

3. What restrictions are placed on the collection, use and transmission of personal information?

The cybersecurity law imposes a number of positive and negative obligations on network operators in relation to the collection and use of “personal information”, which is defined in the law as including all kinds of information, recorded electronically or through other means which is sufficient to identify a natural person’s identity, including, but not limited to, natural persons’ full names, birth dates, identification numbers, personal biometric information, addresses, telephone numbers, and so on.

These include obligations:

  • To keep any personal information collected from users confidential
  • To disclose to users the rules implemented by the operator for the collection and use of personal information (including the means and scope of collection and use) and obtaining the user’s consent in relation to the same
  • Not to collect any personal information that is not relevant to the services provided by the operator
  • Not to divulge, tamper with or damage personal information
  • Not to provide personal information to any third party without the user’s consent unless the personal information has been processed in such a way that is impossible to distinguish a specific person and cannot be retraced
  • To take technical measures to ensure the security of personal information so as to prevent leakage, damage and loss and, where such leakage, damage or loss has occurred, take remedial measures and inform the relevant authorities.

Where a user discovers that a network operator has breached its obligations under the law, he or she has the right to request the network operator to delete the information or, in the case of an error in the information, correct the error.

4. Does the law impose penalties or sanctions in the case of breach?

Yes. The cybersecurity law includes a reasonably comprehensive regime of fines for breach of its provisions.

Those fines range from RMB10,000 to RMB50,000 for network operators, CIIs and providers of network products and services; and from RMB5,000 to RMB100,000 for individuals who are “directly responsible” for a breach of the law.

5. How could the law affect my business?

The cybersecurity law has the potential to affect businesses in some fundamental ways:

  • The obligation to take proactive steps to protect users’ personal information will most likely mean that businesses who fall into the category of CIIs, network operators or IT product suppliers will incur increased compliance costs associated with formulating policies and procedures and implementing systems for protecting personal information, protecting networks from cybersecurity breaches, employing and/or training staff to monitor and oversee compliance with the law and, in some cases, obtaining security certifications from the relevant authorities.
  • The requirement to preserve the sovereignty of information could potentially hamper the ability of multinational companies with a presence in China to operate efficiently. When the law comes into force, multinational companies will not be able to transmit and/or store data collected in China out of the jurisdiction and will have to find a way to continue operating without breaching the law. This may require businesses to back up data on local servers, store and access data from data centres located in China rather than offshore data centres, or sub-contract these services out to a third-party providers in China (which may or may not be an ideal solution).
  • The restrictions on how personal information may be collected, stored and used may make it more difficult and/or expensive for businesses to operate in China, particularly if those businesses sell their goods and services via an e-commerce platform.
  • The obligation to cooperate with state security services and other government authorities to investigate crimes and cybersecurity issues and, in the case of the sale of products or the transferring of data out of China, obtain security clearances, raises potentially difficult questions about trade secrets and intellectual property rights. Will a multinational company be comfortable disclosing details of its computer systems to the Chinese government? If the well-publicised spat between Google and the Chinese government some years ago is anything to go by, arguably not.

Since the first draft of the cybersecurity law was unveiled by the Chinese government, the law has received a fair amount of criticism for being overly vague, onerous and permitting the state to have too much access to commercial networks and data. To a certain extent, these criticisms are a little unfair.

China is not the first country to introduce strict cybersecurity laws and, if Edward Snowden is to be believed, those worried about government snooping arguably have more to fear from their own governments. That is not to say that concerns over how the cybersecurity law will be implemented are unwarranted. The law will almost certainly increase compliance costs and cause operational difficulties for many businesses operating in China.

The broad scope of the law is also a legitimate concern. Obviously, it applies to traditional IT based businesses such as e-retailers, social networking sites and app-based businesses. But what about more traditional businesses such as professional services firms, banks and retailers who use computer networks to collect personal information about clients and customers in China and then transmit it to or store it in other jurisdictions around the world? Will they be caught by the law?

At this stage, it is probably too early to say definitively who may or may not be caught by the law. It is expected that at some point, the legislature will issue regulations that will identify with a bit more precision which businesses are subject to the law. In the interim, those doing business in China that consider they might fall within the definition of a CII, network operator or IT products supplier would be well advised to take advice on whether they need to start thinking now about putting procedures and systems in place to ensure that they do not fall foul of the law come 1 June 2017.

Published in Commercial Risk Asia on 24th May 2017: http://www.commercialriskonline.com/introduction-chinas-new-cyber-security-law/