On June 1, 2017, China debuted its first comprehensive cybersecurity law (the “PRC Cybersecurity Law”).¹ This Law effectively consolidates and expands many of China’s existing laws and regulations that touch on cyber activities, with a stated goal of safeguarding Chinese “cyberspace sovereignty.” Notably, the PRC Cybersecurity Law may also reach the informational and security practices of many multinational corporations, to unexpected result. For example, multinationals that currently avoid storing data in China may now have to seriously consider paying for cloud-sharing and other services within the country in order to avoid the stiff penalties for noncompliance.  

Notably, a recent report by the consulting firm Consilio found that among 118 legal technology professionals surveyed, only 25% claimed familiarity with the PRC Cybersecurity Law. It is therefore critical for multinational companies to begin to understand their potential liability under this framework and its immediate practical effect. This article provides a brief overview of the PRC Cybersecurity Law and highlights some of the key requirements that foreign companies doing business in China should be considering.  

Brief Overview

The PRC Cybersecurity Law is one of a series of laws and regulations published in an effort to establish and protect China’s sovereignty over cyberspace. It aims to protect the rights and interests of citizens, safeguard national security, and promote economic development through heightened network security.

To achieve network security, the Law requires computer network owners, managers, and service providers (“Network Operators”) to adopt certain data security measures, such as computer virus prevention and security incident recording. Any company that operates a network related to services needed for public communication, utilities, and finance, as well as any infrastructure that would endanger national security if compromised (“Critical Information Infrastructure Operators” or “CII Operators”) must adhere to an additional set of stringent requirements, such as setting up specialized security management bodies and conducting disaster recovery backups. Additionally, companies providing network products and services in China must comply with relevant national security maintenance requirements.

Companies that fail to comply with the PRC Cybersecurity Law can be subject to fines up to RMB 1,000,000 ($146,923 USD), suspension of operations, or cancellation of business licenses.

The Law, as it was approved in November 2016, “left many of the details regarding rules and implementation to regulators like the Cyber Administration of China,” tasked with the formulation and timely revision of relevant national and industry standards for network security.²

Types of Foreign Companies That Might be Impacted

Any company that maintains a computer network in China, that uses a network in China, that has collected or stored data in China, or provides network services and products to China should give serious attention to the requirements of the PRC Cybersecurity Law.³ If a company has conducted a business transaction in China, it is likely that they will be subject to at least some requirements under the Law. For multinational companies, the Law makes cross-border data transfers more burdensome, as the Chinese government has aimed to ensure that a company’s network is adequately secure before allowing it transfer data outside of China.

As the Law imposes different sets of requirements for three categories of companies, the first question a foreign company should ask is “Are we a Network Operator, a CII Operator, or a Network Product & Service Provider?” Much will depend on how precisely the Chinese government defines these terms and conducts enforcement actions.  

Thus, if the Chinese government takes a a broad definition of “Network Operator,” then this PRC Cybersecurity Law “could theoretically cover every organization or business with a linked computer system.”⁴  Currently, the government has broad discretion over what may endanger national security or public interest, so it is possible that even companies with the slightest ties to public infrastructure will fall into the category of CII Operators and will be subject to additional requirements. Implementing rules regarding CII Operators have not yet been released. Even if a company is not a Network or CII Operator, the Law also sets out cybersecurity requirements that apply to other types of entities, including suppliers of network products and services.⁵

Requirements Under the Law 

Network Operators: Basic cybersecurity measures, such as implementing security management systems and monitoring operational statuses, and that companies make public their rules for collection of personal data collected and inform users of any leak or loss of personal information.

CII Operators: All of the basic cybersecurity measures taken by network operators plus specialized security protections.⁶ Most notably, Article 37 requires CII operators to store personal information collected in China on servers physically located within mainland China. In response to fierce lobbying efforts, the Cyberspace Administration of China has delayed implementation of regulations governing cross-border data flow until the end of 2018.⁷

Network Product & Service Providers: Security management duties and safety certification or inspection by a qualified establishment before network security products can be sold in China.

Potential Next Steps for Risk Management

Until the scope of the PRC Cybersecurity Law becomes clear through enforcement and additional guidance, non-Chinese companies may want to avoid data collection, storage, and transfers beyond what is necessary to conduct business. In addition to minimizing data transfers to and from China, companies can take the following steps to manage the risk of liability under this new Law:

• Employ secure file transfer practices, such as encryption and data loss prevention.

• Adopt measures to prevent viruses and to record network security incidents.

• Create a plan for how to respond to a security breach.

• Ensure that their rules for collecting, storing, and using personal information are publicly available and that they obtain consent from individuals providing such information.

We note that many US and EU companies, for example, have implemented policies and practices that address these matters. They should vet these policies and practices to ensure that the policies reflect the new requirements.

Conclusion

The PRC Cybersecurity Law maintains the trend from elective regimes toward mandatory cybersecurity standards and requirements. As seen in the EU, with the recently adopted General Data Protection Regulation framework, and in the US, with proposed federal regulations of financial institutions to address the risk of “cyber contagion,” global actors are flexing their regulatory and national security powers to address the threat of cyber-attacks in an increasingly interconnected world. While the PRC Cybersecurity Law has yet to take shape, navigating its potential liabilities now, rather than later, could relieve the regulatory burden of complying with similar mandates that could soon find international support. 

_{1. Current PRC Cybersecurity Law only provides very general provisions. As usual, China probably will issue some subsequent detailed implementations with respect to the Cybersecurity Law as well as other relevant supporting rules, judicial explanations, which will provide detailed provisions and guidance in relation to the implementation of the Cybersecurity Law. Andrews Kurth Kenyon may keep an eye on this and may provide updates with the assistance of our Beijing office.}

_{2. Sherisse Pham, China’s New Cyber Law Just Kicked in and Nobody’s Sure How it Works, CNN Tech (June 1, 2017).}

_{3. Article 2 states that the PRC Cybersecurity Law applies “with respect to the construction, operation, maintenance and usage of networks.” (emphasis added). Additionally, “Network Operators” could mean “any company who operates any type of network – even a small office LAN.” John Carl Villanueva, How Does China’s Cybersecurity Law Impact Data Transfers?, Jscape: Managed File Transfer and Network Solutions (May 29, 2017, 8:59 AM).} 

_{4. Ron Cheng, China Passes Long-Awaited Cyber Security Law, Forbes (Nov. 9, 2016).}

_5. Id.

_{6. The special protections include, but are not limited to, requiring a yearly inspection of network security and a security review when CII Operators want to purchase network products or services that may impact national security. See Morgan Chalfant, New Cyber Law in China Stirs Alarm, The Hill (June 1, 2017).}

_{7. Sui-Lee Wee, China’s New Cybersecurity Law Leaves Foreign Firms Guessing, NY Times (May 31, 2017).}