Tag Archive: China

CHINA: PRC Cybersecurity Law – take action and monitor developments to avoid losing your China business

The PRC Cybersecurity Law is three weeks old, and non-compliant international businesses are already facing severe consequences. Since 1 June, twenty-two people engaged by a global technology giant have been arrested, and sixty online entertainment news sites have been shut down.

The law continues to evolve. The latest guidance provides practical answers to previous areas of uncertainty. Whilst some questions remain, the key message is: do not ignore the PRC Cybersecurity Law. It is now in force and organisations must comply with it.

Read on if you:

  • Transfer personal information and important data out of China
  • Are concerned your organisation may be a key information infrastructure operator
  • Supply network and cybersecurity products and services to China
  • Are unsure if you handle “important data” in or from China

Five key developments that you need to know

1. What is now in force?

2. Are the new overseas data transfer rules in force?

Not yet. The draft measures proposing conditions/restrictions on overseas transfers of personal data and important data by network operators including KIIOs (Draft Measures) did not come into force on 1 June 2017, surprising commentators. Unofficial sources indicate the lead regulator (CAC) discussed a revised draft of the Draft Measures with key stakeholders and proposed toning down some of the more onerous obligations. For now, we await official announcements from CAC.

If and when the Draft Measures come into force, organisations should follow the newly-published Draft Guidelines for Data Cross-Border Transfer Security Assessment (Draft Guidelines). These set out detailed guidance on the security self-assessments for cross-border transfers. They include practical tips on how and when to conduct a self-assessment, including key factors to consider (legality, legitimacy, control of risks, technical and management skills, the recipient’s capability to protect data, and the recipient countries’ political and legal environment), and a rating system to apply. Practical examples are also given on how to assess the sensitivity and level of influence of personal/important data, and solutions to minimise the risks.

3. Am I a KIIO?

We still don’t have a definitive answer, but previously unofficial guidance has now been formally published. The National Internet Security Check Operational Guideline is primarily a guideline for Government agencies. A key infrastructure protection regulation is being prepared by the Chinese authorities (which may or may not refer to this guideline) and (according to CAC) is expected to be published for public comment soon. It is hoped this regulation will provide greater certainty. For now, who does the guideline indicate will be deemed a KIIO?

  • Websites: operators of:
    • Party/Government websites
    • Key news websites
    • Websites with more than one million visits per day
    • Websites where a network security incident would have a significant impact (i.e. on work/lives of over one million individuals or 30% of a district; disclosure of personal information of over one million individuals; disclosure of large volumes of sensitive corporate information or “national basic data” (relating to resources, mapping); or damage to/endanger government image, social order or national security)
  • Platforms: operators of platforms:
    • With registered users over ten million, or with over one million active users (with a login frequency of at least once a day)
    • With average daily orders or transactions over RMB 10 million
    • Where a network security incident would have a significant impact (i.e. direct economic loss of RMB 10 million or above; on work/lives of over ten million individuals; disclosure of personal information of over one million individuals; disclosure of large volumes of sensitive corporate information or “national basic data” (see above); or damage to/endanger government image, social order or national security)
  • Production Businesses:
    • Operators of systems for public/government/cities such as healthcare, security, fire service, emergency management, production scheduling, traffic control
    • Operators of data centres with over 1,500 standard servers
    • Businesses where a network security incident would have a significant impact (i.e. on work/lives of 30% of a district; affect the utilities or transport of at least 100,000 individuals; death of five or more individuals, or serious injuries to fifty or more individuals; direct economic loss of RMB 50 million or above; disclosure of personal information of over one million individuals; disclosure of large volumes of sensitive corporate information or “national basic data” (see above); or damage to/endanger government image, social order or national security)

4. Can I still sell my technology products in China?

Yes, but you now need to consider the supervisory assessment/certification scheme for suppliers of critical network and cybersecurity products and services to KIIOs or to be used for other networks and information systems that relate to national security. We now have an initial catalogue of those caught by the new scheme:

Critical network equipment Specialised cybersecurity products
Routers All-In-One data backup
Switches Firewall (hardware)
Servers (rack-mounted) Web application firewall
Programmable logic controllers Intrusion detection system
Intrusion defence system
Security isolation and information exchange products (gatekeeper)
Anti-spam mail products
Network integrated audit system
Network vulnerability scanning product
Security data system
Website recovery products (hardware)

The new Trial Measures for Security Review of Network Products and Services (Trial Measures) provide practical guidance on how the scheme will be implemented. Whilst uncertainties remain, the Trial Measures clarify that:

  • Reviews will focus on “security and controllability” risks of products and key components, from manufacture through to sale, implementation and maintenance/support. Initially TC260 standards have been released for evaluating security and controllability of central processing units, operating systems and office software
  • Competition impact is a lesser concern, but reviews will look at dependence on certain providers
  • Reviews will also consider risks of providers accessing data and user information through their products/services
  • Reviews may be conducted in a lab, onsite, remotely or through background investigations. While some technical documentation must be provided, it is not yet clear whether source code must be disclosed; and what sort of test environment providers may need to make available to the authorities

5. What is “important data”?

“Important data” is broadly defined to include information that relates to national security, economic development, or social or public interest. Appendix A of the Draft Guidelines sets out an 11-page list of examples in key sectors such as utilities, telecommunications, geographical information, finance and e-commerce. The coverage is very broad, and is a useful reminder to organisations that the PRC Cybersecurity Law does not just affect personal data and has a very wide reach.

What other developments are anticipated?

Issue Development Impact
General personal data protection Draft Information Security TechniquesPersonal Information Security Specifications, published for public consultation and, according to reports, expected to be implemented soon.

This is in effect an update to the 2013 general data protection guidelines governing personal data, which is the current persuasive best practice, and practical guidance, on how to handle personal data in China

High: first statement of key data protection principles in China; significant changes to key terms such as “sensitive personal data” and “data controller”; greater clarity on privacy notices and terms to be included; additional security measures; and new DPO requirements
Minors’ data Draft Regulations on the Protection of the Use of Internet by Minors, published for public consultation in January 2017 Medium: additional protections for minors’ online, including safeguards for collection, use and disclosure of minors’ personal data by “network information service providers”
Encryption Draft PRC Encryption Law, published for public consultation in April 2017 High: more standardised approach to encryption and IT security in China (including mandatory national standards); use of encryption would be mandatory for some networks and data; encryption will remain heavily regulated; requirement for suppliers to provide decryption support
Consumer data Draft Regulations on the Implementation of the Law on the Protection of the Rights and Interests of Consumers, published in Summer 2016 High: strengthening of consumer personal data protection, including consent, mandatory data breach notification and record retention requirements
E-commerce data Draft E-commerce Law High: new data protection obligations including prior notice consent; explicit consent for subsequent changes of scope/purpose; data retention, use and security obligations: immediate data breach notifications: and irretrievable anonymisation of e-commerce data before disclosure

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CHINA: PRC Cybersecurity Law – one week to go, and there are still new developments

The final countdown is on. The PRC Cybersecurity Law comes into force on 1 June 2017. This date marks a significant evolution in both the legal and enforcement environment for data protection in China, and organisations can no longer afford to ignore it.

Indeed, there have been important new developments in the last few weeks and days:

  • If you breach or ignore data protection laws: new criminal sanctions have been introduced. In early May, the Chinese authorities made clear that unauthorised collection, disclosure and receipt of “citizen’s personal information” now constitutes a criminal offence under the PRC Criminal Law, with a range of sanctions taking into account (amongst other things) the degree of harm, amount of illegal gains and repeat offences, including fines of up to five times the amount of any illegal gains. This is according to the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Citizens’ Personal Information. This should act as a further incentive to organisations to get their house in order prior to 1 June 2017.
  • If you use cookies in China: notice and consent requirements apply. Separately, the above mentioned interpretations clarify that information reflecting an individual’s activities, but which does not necessarily identify an individual, constitutes “citizen’s personal information”, which appears to indicate that collection of information via cookies in China does require notice/consent. This has not always been standard practice in China, so organisations are advised to review and update online privacy policies.
  • If your organisation provides “important network products and services” to KIIOs or other networks and information systems that relate to national security in China: the new supervisory assessment regime will also come into force on 1 June 2017. It was confirmed earlier this month that the new security and controllability assessments scheme for network products and services purchased by KIIOs that may impact national security, or other networks and information systems that relate to national security, will come into force on the same date as the PRC Cybersecurity Law. For further information, see our update: New Cybersecurity watchdog suggests greater compliance challenges ahead for overseas companies in China. It has also been suggested that products and services that fail these assessments will be blacklisted from future procurement by KIIOs. Therefore, it is important for suppliers of such products/services to be addressing compliance issues now, and factoring in potential delays in procurement processes in the coming months. If your organisation is a KIIO, you need to plan ahead and consider how to source replacements if any of your existing products/services fail the assessments.
  • If your organisation is regulated by the securities regulator: you may have keep certain data within China. The CSRC has recently published for public consultation the draft Measures for the Information Technology Management of Securities and Funds Operators (Draft Measures) which, if implemented propose introducing data localisation rules for securities and funds operators (Operators) as regards: (i) “Important Information Systems” (i.e. systems that support an Operator’s key business functions which, if breached, would have a significant impact on the securities market and investors, such as trading systems, sales and account opening systems/sites and clearing and audit systems); (ii) “important data” (currently undefined); and (iii) “Customer Information” (which includes customer’s name, ID number, bank account number, contact information, transaction password, transaction history, commission and inquiry records, transaction terminal information and transaction-related customer behaviour information), in each case collected and generated from business activities of securities and funds, subject to certain exemptions (including transactions with foreign counterparties or on foreign trading platforms (where permitted) and currency exchange transactions). These are wider restrictions than the existing data localisation rules imposed on the banking industry in China by the CBRC. The Draft Measures also propose (amongst other measures): specific data protection and data security obligations on Customer Information, including apparent restrictions on data sharing “to other organisations and individuals”; and regular (at least annual, and in some cases quarterly) IT management internal audits.
  • If your organisation uses or provides encrypted products and encryption-related services in China: a proposed new encryption law may impose additional obligations. A new Draft Encryption Law was published for public consultation by the Chinese authorities in April 2017, proposing a more standardised approach to encryption and IT security, with different national standards applying to “core encryption” and “common encryption” (for state secrets) and “commercial encryption”. While use of encryption would now be mandatory for some networks and data, it appears encryption will remain a heavily regulated area in China and the requirement for licences for encryption technologies will remain. A likely source of concern to some international businesses operating in China is the requirement for decryption support: for national security reasons or for criminal investigations, certain Government bodies would be legally entitled to require telecommunication operators and internet service providers to provide “decryption technology support”. In practice, if passed this will increase the compliance obligations on those providing and using encryption technologies in China.

What should I do?

For those organisations who have not yet done anything about updating their China data protection compliance programme, now is the time to do it. Our overview of the key requirements under the PRC Cybersecurity Law is here: see Significant changes to data and cybersecurity practices in China and China Data Protection Update (January 2017)

For those who have started work on complying with the PRC Cybersecurity Law, you are strongly advised to monitor and act on the latest developments mentioned above as well.

Don’t forget that other draft regulations are still under consideration by the Chinese Government, so yet more changes may be on the way. These include: the Draft E-Commerce Law and proposed changes to consumer protection laws, both of which would impose additional data protection obligations; draft regulations regarding the handling of minors’ data; and proposed changes to guidance in China on the definition of “sensitive personal information”

What about overseas data transfers?

Finally, we recently reported on the draft measures proposing conditions, restrictions and, in some cases, absolute prohibitions on transfers of certain data outside of China: see China’s new cyber security law is only 6 weeks away. We see this as being one of the most potentially disruptive and involved aspects of the new China data protection/security environment, particularly on international organisations operating in China. The consultation period has now closed, and early indications are that the authorities propose to bring the measures into force on 1 June as well, but are now considering an 18 month grace period. We understand a revised draft of the measures are now under consideration, with some amendments proposed as a result of feedback during the consultation, including some more practical guidance on what organisations may have to do, particularly regarding the scope and form of security assessments and how to obtain consent, and as regards the thresholds for regulatory assessments. We will provide another update on progress of the draft measures as details further unfold.

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CHINA: significant changes to data and cybersecurity practices under PRC Cybersecurity Law

After a third deliberation, the Chinese government passed the new PRC Cybersecurity Law on 7 November 2016. The new law will come into force on 1 June 2017 and has significant implications for the data privacy and cybersecurity practices of both Chinese companies and international organisations doing business in China.

The new PRC Cybersecurity Law intends to combat online fraud and protect China against Internet security risks. In short, it imposes new security and data protection obligations on “network operators”; puts restrictions on transfers of data outside China by “key information infrastructure operators”; and introduces new restrictions on critical network and cybersecurity products.

The new law has been widely reported in both the local and international press. While Chinese officials maintain that China is not closing the door on foreign companies with the introduction of this new law, there has been widespread international unease since the first reading. Commentators have expressed concern that competition will be stifled; regarding the handover of intellectual property, source codes and security keys to the Chinese government; as to perceived increased surveillance and controls over the Internet in China; and in relation to the data localisation requirements. Other new obligations, including increased personal data protections, have been less controversial, but are a clear indicator of the increased focus within the Chinese authorities on data protection, and could signal a change to the data protection enforcement environment in China.

Some of the key provisions of the final law (which contains some changes to earlier drafts of the law) include (inter alia):

  • Chinese citizen’s personal information and “important data” gathered and produced by “key information infrastructure operators” (“KIIO”) during operations in China must be kept within the borders of the PRC. If it is “necessary” for the KIIO to transfer such data outside of China, a security assessment must be conducted pursuant to the measures jointly formulated by the National Cyberspace Administration and State Council unless other PRC laws permit the overseas transfer. While the final version of the law provides some guidance as to the industry fields that will be ascribed greater protection, such as public communications and information service, energy, transportation, water conservancy, finance, public service and e-government, the definition of KIIO remains vague and could potentially be interpreted to cover a broader range of companies and industry sectors. “Personal information” is defined as including all kinds of information, recorded electronically or through other means, that taken alone or together with other information, 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 forth. However, the types of information that might constitute “important data” is currently unclear. In any case, these data localisation rules are likely to create practical issues for international businesses operating in China.
  • A range of new obligations apply to organisations that are “network operators” (i.e. network owners, network administrators and network service providers). A “network” means any system comprising computers or other information terminals and related equipment for collection, storage, transmission, exchange and processing of information. Some commentators are suggesting that these broad definitions could catch any business that owns and operates IT networks/infrastructure or even just websites in China.
    • In terms of data protection, network operators must make publicly available data privacy notices (explicitly stating purposes, means and scope of personal information to be collected and used); and obtain individuals’ consent when collecting, using and disclosing their personal information. Network operators must adopt technical measures to ensure the security of personal information against loss, destruction or leaks, and in the event of a data security breach must take immediate remedial action and promptly notify users and the relevant authorities. They must also comply with principles of legality, propriety and necessity in their data handling, and not be excessive; not provide an individual’s personal information to others without the individual’s consent; nor illegally sell an individual’s personal data to others. The rules do not apply to truly anonymised data. There are also general obligations to keep user information confidential and to establish and maintain data protection systems. Data subject rights to correction of their data, as well as a right to request deletion of data in the event of a data breach, are also provided. While an earlier draft specifically provided protection to personal information of “citizens”, the final law does not make this distinction, and so seemingly offers a broader protection to all personal information. These requirements formalise as binding legal obligations some data protection safeguards that were previously only perceived as best practice guidance in China.
    • As regards network security, network operators must fulfil certain tiered security obligations according to the requirements of the classified protection system for cybersecurity, which includes (amongst other things): formulating internal security management systems and operating instructions; appointing dedicated cybersecurity personnel; taking technological measures to prevent computer viruses and other similar threats and attacks, and formulating plans to monitor and respond to network security incidents; retaining network logs for at least six months; undertaking prescribed data classification, back up, encryption and similar activities; complying with national and mandatory security standards; reporting incidents to users and the authorities; and establishing complaints systems.
    • Network operators must also provide technical support and assistance to state security bodies safeguarding national security and investigating crimes, and will be subject to government and public supervision. The form and extent of such co-operation is not currently clear, and international businesses have expressed concerns over the extent to which this may require them to disclose their IP, proprietary and confidential information to the Chinese authorities.
    • More general conditions on network operators carrying out business and service activities include: obeying all laws and regulations, mandatory and industry national standards, social mores and commercial ethics; being honest and credible; and bearing social responsibility. There are also requirements on network operators to block, delete and report to the authorities prohibited information and malicious programmes published or installed by users.
    • Network operators handling “network access and domain registration services” for users, including mobile phone and instant message service providers, are required to comply with “real identity” rules when signing up or providing service confirmation to users, or else may not provide the service.
  • Additional security safeguards apply to KIIOs, including: security background checks on key managers; staff training obligations; disaster recovery back ups; emergency response planning; and annual inspections and assessments. Further, strict procurement procedures will apply to KIIOs buying network products and services.
  • Providers of “network products and services” must comply with national and mandatory standards; their products and services must not contain malicious programs; must take remedial action against security issues and report them to users and relevant authorities; and must provide security maintenance for their products and services which cannot be terminated within the contract term agreed with customers. These new conditions will require providers of technology products and services to review and update their product and related maintenance offerings and, in particular, the contractual terms on which they are offered to customers.
  • Critical network equipment and specialised cybersecurity products must obtain government certification or meet prescribed safety inspection requirements before being sold or provided. This potentially catches a wide range of software, hardware and other technologies being sold – or proposed to be sold – by international companies in the China, since the definitions used in the law are drafted very broadly. Further guidance by way of a catalogue of key network products is expected in due course. There are concerns that this may create barriers to international businesses looking to enter the Chinese market.
  • Each individual and organisation shall be responsible for its own use of websites, and may not set up websites or communication groups for the purpose of committing fraud, imparting criminal methods, producing or selling prohibited items, or engaging in other unlawful activities. Again, there is scope for this to be interpreted and applied broadly.
  • Institutions, organisations and individuals outside China that cause serious consequences by attacking, interfering or destructing key information infrastructure of China shall be responsible for any damage, and the relevant public security department of the State Council may freeze assets and impose other sanctions against them. While these provisions would appear to have an extra-territorial effect, and could be interpreted very broadly, it is unclear what sanctions could in practice be enforced against organisations without a presence in China.
  • Other new rules relate to: network/online protections for minors; the establishment of schemes for network security monitoring, early warning and breach notification to relevant authorities and the public, as well as rights for individuals and organisations to report conduct endangering network security; opening of public data resources; and prohibitions on hacking and supporting activities.

While criminal sanctions, administrative penalties and civil liabilities potentially await those (both organisations and, in some circumstances, individual employees and officers) who violate the new law, unfortunately great uncertainties remain as to how the new legislation will be enforced, who exactly is caught by the various new rules, and the precise steps that organisations must take to comply with them. It is hoped that the Chinese authorities will publish more detailed, practical guidance in the coming months. In the meantime, organisations are strongly advised to review their data privacy and cybersecurity practices in China to ensure compliance with the new law before it comes into force on 1 June 2017, and to keep these under review as further guidance becomes available.

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CHINA: data localisation – a growing trend?

Foreign companies operating in China, or looking to enter the Chinese market, are increasingly concerned as to whether Chinese law restricts cross-border transfers of personal data collected in China. In light of recent developments, is there a growing trend in China towards data localisation?

As is generally the case with China’s data privacy framework, there is not one comprehensive law in China that regulates cross-border data transfers. Instead, the current legal landscape comprises a mixture of different laws, regulations and guidelines. Therefore, the compliance obligations involved – and the approach to enforcement – vary depending on the industry or the type of data involved.

Consent

As a starting point, personal data of Chinese citizens that is handled in information systems by private sector organisations can be transferred outside of China provided that explicit consent is obtained from data subjects (or if express authorisation from relevant authorities is obtained, or specific laws permit the transfer). This is set out in a guideline drafted under the guidance of the Ministry of Industry and Information Technology so that, while not legally binding, it may be used as a base standard for compliance, and the Chinese authorities encourage compliance with it.

Other rules and regulations require organisations more generally to obtain consent from individuals before their personal data is handled and disclosed (within and outside China). These include rules relating to personal data of consumers (under consumer rights laws); Internet users (under telecoms and Internet laws); and employees (under employment laws, by which employers must get employees’ written consent to disclose their personal information to third parties).

But some prohibitions

However, for some industries and some data there are specific requirements to keep the data on servers within the People’s Republic of China. For example:

  • Some Chinese industry regulators prohibit the offshore transfer of certain personal data. For example, transfers of “personal financial information” by banks, and of “personal health information” by certain organisations within the healthcare sector, are not permitted.
  • Personal data constituting “state secrets” should not be transferred outside of China.
  • The draft PRC Cyber Security Law, issued in July 2015, requires “key information infrastructure operators” to store Chinese citizens’ personal information and other important data gathered and produced during operations within the territory of the People’s Republic of China. The draft law suggests cross-border transfers of such data may be permitted if required for operational reasons, provided the organisation complies with security measures (to be) formulated by the relevant authorities. Detailed guidance is awaited as to how this would be interpreted in practice.

Practical steps

In light of uncertainty over the legal environment in China, foreign organisations should consider the following:

  • Identify the personal data within your China operations that you would like to transfer outside of China, and ascertain whether it falls within the classes of data that should not leave China. If appropriate, consider data segregation.
  • For personal data not subject to absolute prohibitions on data transfer, obtain explicit consent from data subjects before transferring the data.
  • For data that is required by law or regulations to stay in the People’s Republic of China, server localisation may be the only practical solution, whether by establishing local data infrastructure or via third party solutions.
  • According to some regulators, encryption and anonymisation are currently not considered to be adequate practical workarounds to the data transfer rules, because of the risk of de-encryption or re-identification. This may change, but for now do not assume you can rely on these.
  • Put in place appropriate data security safeguards and data use and retention policies to ensure that personal data transferred overseas remains compliant with relevant Chinese data protection rules.

Conclusion

There is a growing body of regulations requiring certain data within specific industries/organisations to be retained within the borders of the People’s Republic of China. However, this must be assessed on a case by case basis, as in many circumstances obtaining individuals consent may well be sufficient provided that the data does not involve national secrets or violate national security. Where transfer prohibitions apply, compliance strategies should be carefully considered in light of potential enforcement activities and sanctions. Unfortunately there is not always clear guidance on how the rules will be interpreted and enforced in practice, and so any compliance programme in China should be kept under regular review.

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CHINA – China adopts the new National Security Law – A top legislative effort to control cyber security

On 1 July, 2015, the Standing Committee of the National People’s Congress, China’s top legislature, approved the new National Security Law of the People’s Republic of China (中华人民共和国国家安全法, the “New Law”) which became effective on the same day. This New Law is very high-level in its nature covering a wide range of areas from the military, wider economy and natural resources to environment, religion, food security, cyber security and space exploration. The most significant aspect of this New Law in relation to cyber security is the fact that it was issued by China’s top legislature, indicating the importance being placed on cyber security at the highest level of China’s legislative system.

Highlights
The New Law provides for a general legislative framework to control cyber security which includes the following:

  • The state should develop its ability to protect against cyber and information security risks, and to ensure that the core cyber and information technology, key infrastructure, information system and data in important sectors are secure and controllable.
  • The state should set up a national security review and supervision system and should conduct national security reviews of any foreign investment, key technologies, internet and information technology products and services and other important matters and activities that impact or are likely to impact national security.
  • The state should actively develop independent controllable key technologies in important sectors and strengthen the application of intellectual property.

Our Observations
As this New Law is newly promulgated and is very general in its nature, there is considerable ambiguity which will may be clarified by subsequent guidance. In particular:-

  • The New Law does not provide specific requirements as to how to ensure that IT systems are secure and controllable. The term “secure and controllable” is also used in the CBRC Guidelines that DLA Piper reported on earlier this year. Although the CBRC Guidelines set out specific requirements to implement “secure and controllable” information technology products in the banking sector, we understand that the implementation of such rules are still pending.
  • Although the New Law requires a national security review system, it does not provide any details of the practical implementation of such rules. For example, which authority will conduct such a review, what are the specific criteria to determine whether a technology product will impact or is likely to impact national security, and what the review process will be etc.

Due to the above ambiguity, we believe that more specific implantation rules, and a possible update of the CBRC Guidelines will be issued in the near future.

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China Issues New CBRC Guidelines – Is China putting the squeeze on foreign investment in its banking industry?

A new set of regulations issued by the China Banking Regulatory Commission has fuelled concerns that China intends to squeeze foreign investment in its banking industry.

The Guidelines on Banks Using Secure and Controllable Information Technology 2014-2015 (《银行业应用安全可控信息技术推进指南(2014—2015年度)》), hereafter referred to as the “CBRC Guidelines”, were promulgated and became effective on 26 December 2014 (Yin Jian Ban Fa [2014] No. 317)).

Key Requirements

The CBRC Guidelines require banks to implement “secure and controllable” information technology products within a specific timeframe. Key stipulations are as follows:

Source Code Filing

Bank-owned software source codes must be filed with the Technology and Information Department of CBRC for recording purposes.

Independent IP Right

The software attached to an IT product and certain hardware (e.g. chips) should have independent IP rights,  which we understand to mean that such IP rights should be registered (if possible) with the relevant authority in China.

Localisation of Supply Chain

The supply chain must be controllable, meaning the supply chain must be localised, with all IT products manufactured within China. In addition, certain components of IT products that contain encryption functions are required to obtain an encryption certificate (Commercial Encryption Code Product Model Certificate). However, our understanding is that encryption certificates will only be issued to domestic companies on encryption products produced and sold in China.

Local R&D Centre

All IP suppliers are required to establish an R&D centre in China.

Although the new guidelines do not expressly preclude foreign IT suppliers from operating a business in China, the CBRC Guidelines stipulate that they are required to disclose sensitive and proprietary information to the Chinese government.

Impact of the CBRC Guidelines

For IT suppliers:

IT suppliers are now faced with the choice of whether or not to stay in China.

Staying would entail (i) complying with the requirements of disclosure to Chinese authorities and registering their technology as visible IP rights in China; (ii) localising their product supply chain by setting one up in China or cooperating with a local partner; and (iii) establishing an R&D centre in China (if there isn’t one already).

Leaving would mean losing their foothold in one of the world’s largest markets and necessitate the development of a comprehensive exit strategy that considers all of the relevant deregistration rules.

For foreign banks:

Foreign banks also face tough challenges as a result of the CBRC Guidelines. Not only must they source a local IT supplier who meets their high IT standards, but that locally-supplied system will need to be compatible with their global IT infrastructure.

In any event, foreign banks need to conduct due diligence on the qualifications of their current IT suppliers to determine whether they can comply with the current statutory requirements. If their current supplier is unable to comply, they will need to consider changing IT suppliers, which involves terminating existing supplier agreements and conducting due diligence on potential new suppliers.

Uncertain Issues and Possible Actions

At this stage, there is still a lot of uncertainty and ambiguity relating to the implementation of the CBRC Guidelines. The key areas of ambiguity we have identified include the following:

  1. The CBRC Guidelines set out specific requirements for 2015, meaning the requirements for  2016 and subsequent years are still not yet clear.
  2. The CBRC Guidelines do not indicate how the new rules will be implemented, and procedural details are yet to be published. For example, the CBRC Guidelines require that new source codes must be recorded, however,  they do not indicate what documents need to be submitted and what the submission procedures will be.
  3. The CBRC has set a deadline of 15 March 2015 for banks to submit plans for change. Our understanding is that a number of banks are currently preparing written statements explaining the future increase in costs relating to these procedures and their difficulties in finding a local supplier who is capable of meeting their security and global compatibility standards.

In addition, IT suppliers are preparing to submit their statements through associations, including the American Chamber of Commerce, to the CBRC.

We have made it a priority to continually monitor the development of this situation. At present, the complete guidelines have only been made available to banks, but if you would like further information, please contact us for assistance.

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