The China State Secret Law has been a source of continuing controversy for foreign investors. The Rio Tinto case is but the most recent example of China’s potential foreign business partners finding themselves embroiled in a national security information controversy over what, to most people, would appear to be normal commercial information. Because the State Secret Law potentially concerns parties performing even the most basic due diligence on Chinese State owned businesses, potential investors must ask themselves if they risk running afoul of the State Secret Law.

While China does not often publicly acknowledge paying the slightest attention to the concerns of foreigners over what China regards as domestic legal matters, China nonetheless sometimes takes foreign suggestions into account. China has been quietly reviewing the State Secret Law and various potential amendments are under considering.

The Standing Committee of the National People’s Congress (“NPC”) has resumed deliberations on draft amendments to the State Secret Law. The draft received a first reading in June 2009 and its full text was subsequently published to universities, research institutions, and the public via the Internet for comments. During the comment period, it was determined that a substantial number of documents were marked top secret without containing actual sensitive information and that township level government offices were, in large part, responsible for this phenomenon.

Proposed amendments seek to streamline the existing law, which took effect in 1989, while also boosting awareness of the importance of safeguarding State secrets. According to a State Secret Bureau statement, the State Secret Law should “not only protect national information security, but also promote information openness and the rational use of information resources in order to protect the people’s right to information and participation in government.”

The draft amendments include:

The Scope of State Secrets is Clarified

The draft amendments limit the scope of the state secrets to those secrets which involve state safety and interests, and could damage the state’s safety and interests in politics, economy, military, and other areas. At least some Chinese experts have also suggested that business secrets be distinguished from state secrets, and protected in a different way.

Only Central and Provincial Government may Classify a Secret as “Top Secret”

Under the proposed amendments, only the central government and provincial governments and their authorized departments will be permitted to classify documents as top secret, confidential secret, and ordinary secret2. Governments at the city level and their authorized departments will be permitted to classify documents only as confidential or ordinary state secrets. In addition, the draft amendments call for subordinate agencies to present documents to superior agencies in order to determine the appropriate level of confidentiality. Superiors are to consider the practical concerns of the subordinate, the prescribed limitations, and the greater security interests of the country.

The Draft Amendments Set Time Limits for Protecting State Secrets

The draft amendments seek to limit the time for protecting state secrets. Top secret documents may remain secrets for 30 years, confidential secret documents for 20 years, and 10 years for ordinary secrets or confidential materials. At the expiration of the protection term, the relevant agency may reassess the classification of the document. Interestingly, the draft calls for the formal announcement of declassifications as they occur and seeks to discourage officials from releasing materials secretly. As explained by the drafters, if the state keeps things confidential after publication, it is not conducive to the goal of public openness and understanding.

The Control Over Personnel With Access to State Secrets is Strengthened

The draft amendments also provide for better oversight and management of personnel with access to classified materials. Standards for employment are to focus on “good political qualities and character” and the selection of supervisory personnel is to be limited to persons who have come up through the ranks of internal management. Confidentiality agreements, exit examinations, and phase out periods are to be implemented for employees leaving positions with access to classified materials.

Punishments on Infringements Will be Enhanced

Finally, the drafters emphasize that “state secrets are protected by law and any acts that endanger national security secrets, must be subject to legal action.” Standing Committee member Zhang Xuezhong stated that the previous approach “was not serious enough,” noting that certain security violations were subject to nominal fines of less than 1,000 RMB. It is unclear what the enhanced penalties will be under the amended State Secrecy Law.

Although the amendments to the State Secret Law are still in draft form, and it is often difficult to predict the timing of Chinese legislative action, the current effort with respect to State Secret Law reform has at least the potential for improvement. The current discussion indicates that some Chinese State actors are aware that China’s expansive definition of state secrets to include all business information is not necessarily consisted with international norms. On the other hand, state secrets are at the very heart of national security concerns and it is often difficult for any government to make substantial changes in this area.

Foreign companies doing business in China should continue to pay attention to developments under the State of Secret Law since “mistakes” can have serious consequences.