China Issues New Rules Strengthening Local Authorities’ Power to Enforce Cybersecurity and Data Privacy Laws

The Chinese Ministry of Public Security (MPS) on September 15, 2018, released the Provisions for the Supervision and Inspection of Network Security by Public Security Agencies, also known as “Circular 151.” This new regulation provides a legal basis and framework for wide-ranging authority for local law enforcement agencies (Public Security Bureau, or PSB) in China to enforce China’s cybersecurity and data privacy laws by conducting onsite or remote inspections of internet service providers, as well as any entities that use networks for their operations. Circular 151 will officially come into effect on November 1. Businesses operating in China should prepare for this new development and take note of the Chinese government’s enforcement priorities.

Circular 151 Applies to All Entities Using Network(s) for Their Business Operations

Circular 151 grants local PSBs supervisory authority over a wide range of entities, which are collectively described as “internet service providers and entities that use network(s) for their operations.” Circular 151 further defines “internet service providers” as businesses falling under one of the following four categories: 1) business operators that provide internet access, content distributors, domain name providers, data center service providers; 2) providers of internet information services; 3) public internet browser services; and 4) businesses providing other internet services. Circular 151 does not define “entities that use network(s) for their operations” specifically, and the exact scope of the covered entities remains to be determined; however, this term appears to be a “catch-all” designation and could apply to all entities that connect and use the internet for their own purposes or have an internet presence.

The broad applicability of Circular 151 is consistent with the Chinese government’s enforcement approach with respect to enforcing People’s Republic of China (PRC) Cybersecurity Law, which took effect on June 1, 2017, as well as other related data privacy laws and regulations (collectively, CSL). In effect, Circular 151 implements the CSL as network operators are subject to both the national law and this regulation, which aims to provide the procedural rules for enforcement of the CSL by the PSBs as well as empowering the local PSBs to enforce related provisions in PRC Counter-Terrorism Law and PRC Criminal Law (e.g., prohibiting unlawful collection or misappropriation of personal information) with the authority to impose administrative and criminal penalties.

Enforcement Authority and Procedural Rules

Circular 151 authorizes local PSBs to conduct remote or onsite inspections of the businesses under their supervision. Inspections must be for the purpose of ensuring compliance with

• general regulatory obligations on all businesses subject to the CSL, such as implementation of a tiered data protection system and technical measures to prevent hacking and data breach incidents, implementation of network security management protocols and breach response plan, appointment of a network security manager, maintenance of network activity records, registration of network with the local PSB, and submission of information regarding entities that have access to the network and users’ basic information within prescribed timeframe;[1] and/or
• specific obligations applicable to internet service providers, including, but not limited to, the implementation of technical measures for network security and data protection that comply with national standards.

Onsite Inspection: Pursuant to Circular 151, the PSB must dispatch at least two PSB officers to the premises of the entity to be inspected, where the officers shall present their police certificates and a “Notice of Supervisory Inspection,” issued by a PSB at the county level or above. During the inspection, officers are permitted to

• enter the premises of the entity being inspected, including any network equipment rooms and offices;
• require the person in charge or the network administrator to explain any and all items of interest identified during the inspection;
• review and copy any relevant documents and information; and
• assess the operational conditions and effectiveness of the technical measures taken by the company to safeguard the security of networks and information.

After the inspection is complete, the officers should prepare an “inspection record” to document observations or findings made during the enforcement action. The onsite representative of the company has the right to express the company’s objections to the inspection to the officers, and the representative may also choose to refuse to sign the inspection record. In this case, however, the officers would be required to make a note of the representative’s refusal in the record.

Remote Inspection: Local PSBs also have the authority to conduct remote inspections to assess the vulnerability of a company’s network and data security. Prior to such an inspection, the PSB must issue a notification to the company regarding the time, scope, and specific subjects of the inspection. The local PSB must also ensure that the inspection does not interfere with the company’s operations and networks. As in an onsite inspection, Circular 151 requires the local PSB to create an inspection record for any remote inspection, which should be signed by at least two PSB officers who were involved in conducting the remote inspection.

Penalties for Non-Cooperation or Obstruction of Justice During Inspection

Aside from any criminal or administrative penalties arising from the company’s noncompliance with the CSL or other data privacy laws, Circular 151 also sets forth specific penalties for failure to cooperate in an inspection or government investigation.

In the event that an entity refuses to cooperate with an inspection, the PSB will first order the entity to cease the noncompliance and cooperate fully. Where a company nonetheless refuses to cooperate or obstructs the inspection, it may be subject to fines ranging from RMB 50,000 ($7,200 or €6,315) to RMB 500,000 ($72,000 or €63,150), and any individuals found directly responsible for the noncompliance may be individually fined in an amount from RMB 10,000 ($1,440 or €1,263) to RMB 100,000 ($14,400 or €12,630).

Detention by Local PSB: Circular 151 also provides that, when an inspection reveals terrorism-related violations of the CSL, the PSB may detain the company’s person in charge, and/or impose financial penalties on the entity itself. Terrorism-related offenses include but are not limited to providing information, capital, or technology that supports, assists, or facilitates terrorist groups or their personnel, or acts of terrorism; or, failing to implement network security and content monitoring system and technical security measures that results in the dissemination of information related to terrorism or extremism. Notwithstanding the specific provisions of the Circular 151 with respect to the scope of the onsite or remote inspections, the PSBs may exercise general police power to carry out the enforcement action if there are suspected criminal activities or egregious acts of obstruction of justice.

Risks for Businesses Operating in China

In general, Circular 151 provides additional legal support for network security inspections by PSBs, and provides more clarity as to the procedural rules for these inspections. However, notwithstanding these rules, the PSBs retain general police power and broad discretion to pursue enforcement actions as, for example, Circular 151 does not provide detailed guidance as to how the PSBs must conduct remote inspections, nor as to what would be considered relevant documents or information that the PSBs may collect onsite in connection with an inspection. In any event, the release of Circular 151 signals that the Chinese government intends to step up the frequency and intensity of its enforcement actions related to cybersecurity and data protection.

Recommendations for Preparedness and Compliance

In light of the recent enactment of a multitude of new regulations related to cybersecurity and data privacy, businesses operating in China are advised to seek professional advice to prepare for and respond to cybersecurity-related government actions, since noncompliance under the CSL could lead to a government-mandated shut down of websites, suspension of business, or revocation of licenses, in addition to administrative fines. We recommend the following action steps:

• Assess Compliance Under the CSL and Conduct Security Self-Assessment: Companies should be prepared for inspections and actions taken under Circular 151. For example, an annual self-assessment is a general requirement for all network operators under the CSL. As the PSBs’ enforcement objectives will focus on a company’s network security, companies are advised to review and shore up their data protection measures and document all steps taken to comply with the applicable laws, as PSB officers are likely to request and verify cybersecurity-related records and documents (e.g., logs of network activities) during an inspection.
• Provide Trainings: To prepare for network security inspections, companies should provide (1) CSL training; and (2) dawn-raid training to their employees. CSL training is required for all personnel who handle and manage protected data (e.g., network administrators and HR personnel), and it should cover the company’s data protection obligations and liabilities, including the specific requirements of the CSL, Circular 151, related company rules, and information on the company’s cybersecurity measures. Dawn-raid training should be provided to all employees to ensure that they follow established protocols in responding to government enforcement actions, including requests for documents and information and interviews of personnel.
• Implement Dawn-Raid Guidelines: Companies should also develop and implement protocols and guidelines for employees responding to dawn raids. These guidelines should provide clear instructions for the initial responders who receive the PSB officers at the outset of an onsite inspection, including instructions to promptly notify company representatives, legal counsel, and/or external counsel, who will then coordinate the company’s responses to the enforcement action in a manner that protects the company’s rights and interests.

Companies should also consider the risks and liabilities they may incur in the event that their confidential and/or proprietary data is swept up in an investigation. Because there are few, if any, remedies available to individuals and businesses whose data is seized by the PSB, companies should take precautionary measures to clearly categorize and segregate confidential company documents and information that are unrelated to cybersecurity and data protection to minimize the risks of inadvertent seizure in an enforcement action. In the event where an inspection escalates to a formal government investigation, companies are advised to cooperate with the authorities and seek legal representation to assist in the legal proceedings that will ensue. Morgan Lewis is well positioned to provide guidance on cybersecurity and data privacy compliance in China and other jurisdictions.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Philadelphia
Gregory Parks

San Francisco
Reece Hirsch

Washington, DC
Ronald W. Del Sesto

Beijing
Lesli Ligorner

Frankfurt
Walter Ahrens

[1] In Beijing, for example, entities that use a network are required to register their network with the local PSB within 30 days from the date that the network is connected and in use.