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China Data Transfer Mechanisms And Requirements Come Into View As Security Assessment And Technical Certification Measures Finalized; Standard Contract Measures Proposed – Privacy Protection


The transfer mechanisms drive home China’s focus on data
localization, as the measures all set forth cumbersome procedures
and requirements, including security assessments and required
contractual considerations.

Despite going into effect last year on Nov. 1, 2021, China’s
sweeping data protection law, the Personal Information Protection Law
(“PIPL“), did not clearly set forth
specific cross-border data transfer requirements for entities
transferring personal data from China, to a location outside of
China.

PIPL heavily restricts cross-border data transfers. In almost
all cases, entities are required to obtain consent from a data
subject prior to transferring data to a foreign jurisdiction.

Additionally, an entity must ensure the data transferred is
sufficiently protected. To meet this requirement, PIPL set forth
three expressed options: (1) passing a Cyberspace
Administration of China (“CAC“) security
assessment; (2) receiving certification from
CAC-certified professional organizations; or (3)
entering into standard contractual clauses. The foregoing options
are finally coming into focus.

Pursuant to the first option, the CAC published the draft
Outbound Data Transfer and Security Assessment
Measures
” (“Security Assessment
Measures
“) in Oct. 2021. The CAC finalized the
Security Assessment Measures on July 7, 2022; effective in less
than three months?—September 1, 2022.

As for the second cross-border data transfer option, China’s
National Information Security Standardization Technical committee
(“TC260“) published the “Technical Specification for Certification of
Personal Information Cross-Border Processing Activities

(“Technical Certification Measures“).
The Technical Certification Measures are limited in applicability
and requires a security assessment, among other requirements.

Finally, as to the third cross-border data transfer option, the
CAC published “Regulations on Personal Information Export Standard
Contractual Clauses
” (“Draft Contractual
Measures
“). These measures are still out for comment.
As drafted, the scope of the Draft Contractual Measures is limited
to only provide a transfer mechanism to those entities that are not
critical information operators and only process small amounts of
information.

It is important to note that all three of data transfer
mechanism require some level of interaction with the Chinese
government, with the Draft Contractual Measures requiring the
lowest amount of interaction (filing the applicable contract and a
data protection impact assessment).

See below for further insight and analysis into the various
cross-border data transfer mechanisms.

Standard Contractual Measures

The Draft Contractual Measures provide standard contractual
clauses that can be copy and pasted into applicable agreements
between parties, in a similar method as many entities use for the
European Union Standard Contractual Clauses
(“EU SCCs“). The same standard
contractual clauses can be used for both controller-controller
transfers and controller-processor transfers.

According to the Draft Contractual Measures, the transfer
mechanism can only be relied on by entities that
(1) are not considered critical information
infrastructure operators (e.g., internet providers, financial
service providers, transportation providers, utility providers,
etc.); (2) process the personal data of less than
one million individuals; (3) have only transferred
the personal data of 100,000 individuals since Jan. 1 of the
preceding year; and (4) have only transferred the
sensitive personal data of 10,000 since Jan. 1 of the preceding
year.

Entities whose business model is reliant on the collection, use,
and transfer of personal data will likely not be able to use the
Draft Contact Measures to transfer personal data to a location
outside of China.

Under the Draft Contractual Measures, the applicable contract
itself must include and address six main concepts, all of which are
familiar under similar cross-border data transfer regimes (such as
under the EU SCCs).

The applicable contract must contemplate: (1)
identification of, and contact information for, the relevant
controller and processor; (2) the purpose, scope,
type, sensitivity, quantity, method, storage period, and storage
location of the personal data; (3) the
responsibilities and obligations that the non-China recipient is
contracting to and whether proper technical and organizational
measures are in place to ensure the personal data’s protection;
(4) the laws and regulations of the jurisdiction
the personal data is being transferred to; (5) the
rights of individual data subjects; and (6) contractual remedies,
allocation of liability in the event of a breach, and dispute
resolution provisions.

Even if an entity is relying on the Draft Contractual Measures,
a data impact assessment must be conducted prior to the transfer of
personal data.

The assessment must analyze (essentially the same topics as
needed in the applicable contract: (1) the
legitimacy and necessity of the processing; (2)
the quantity, scope, type, and sensitivity of the personal data and
the risks the cross-border transfer create with respect to a data
subject’s privacy interests and rights; (3)
the responsibilities and obligations that the non-China recipient
is contracting to and whether proper technical and organizational
measures are in place to ensure the personal data’s protection;
(4) risk of personal data breach and the ability
for a data subject to seek recourse or control over their personal
data; (5) the laws and regulations of the
jurisdiction the personal data is being transferred to; and
(6) any other applicable matters.

Once agreed to by the contracting parties, the applicable
processor must?—within 10 business days? from the effective
date of the applicable contact?—file the contract and the
data impact assessment with the local cybersecurity government
entity or agency.

Technical Specification Certification

The Technical Certification Measures only apply in two
instances and require entities to jump through a multitude of hoops
to transfer personal data to a location outside of China.

The first instance is where a multinational company conducting
internal data transfers within the same company or
business entity (i.e., “Internal Company
Transfers
“). The second instance is where there is a
cross-border transfer conducted by a non-China-based entity who is
subject to PIPL’s extraterritorial jurisdiction (i.e., the
entity (1) intends to provide products or services
to individuals in China; (2) is analyzing
activities of individual in China; or (3) other
circumstances as determined by applicable law and regulation)
(i.e., “Extraterritorial Transfer“).

An entity falling within either category, as described above,
can apply for certification under the Technical Certification
Measures. If pursuant to an Internal Company Transfer, the
China-based affiliate must apply for certification and bear the
legal liability. If pursuant to an Extraterritorial Transfer, the
non-China-based entity must appoint a designated representative in
China to apply and bear legal liability.

  1. Contractual Considerations

The main requirement under the Technical Certification Measures
is for there to be a legally binding agreement between the involved
parties. Such an agreement must contemplate the following:
(1) the parties involved in the cross-border
transfer and processing of the personal data; (2)
the purpose of the transfer; (3) categories of
personal data involved; (4) measures in place to
protect the rights and interests of the data subjects;
(5) specify the entity bearing legal liability in
China; and (6) any other obligations required by
law.

Further, all parties must agree to (1)
implement and maintain those measures necessary to process and
protect the personal data equivalent to those set forth in PIPL;
(2) be subject to the supervision of the
applicable certification body; and (3) comply with
Chinese data protection laws and accept Chinese jurisdiction.

While not required in the specific contract, the Technical
Measures also require the parties to agree to certain data
processing rules: (1) the context of the transfer
(i.e., categories of data, sensitivity, amount, etc.);
(2) the purpose, method, and scope of the transfer
and processing; (3) the duration of the
processing; (4) the location the personal data is
being transferred; (5) the measures taken to
protect the rights of data subjects; and (6) the
measures to be taken in the event of a personal data breach.

The most efficient way to address the data processing rules
would be to include them in the contract as a number of the topics
overlap with the contractual requirements discussed at the
beginning of this section.

  1. Organizational Management

The Technical Certification Measures also requires all parties
involved in the cross-border data transfer to designate a data
protection officer who would take on the function and role that is
now familiar under similar data protection regimes.

However, the Technical Certification Measures are silent on
whether or not an entity making a transfer pursuant to an Internal
Company Transfer can rely on the same data protection officer. If
separate data protection officers are necessary, entities may need
to appoint a China-specific data protection officer to fulfill the
Technical Certification Measure’s requirements.

  1. Data Protection Impact Assessment

Similar to the Draft Standard Contractual Measures, the
Technical Certification requires a data protection impact
assessment.

The data protection impact assessment required under the
Technical Certification requires the parties to address
(1) whether the cross-border data transfer
complies with all applicable laws and regulations;
(2) the impact the cross-border data transfer will
have on data subjects; (3) the potential impact of
the destination jurisdiction’s applicable laws; and
(4) other matters needed to safeguard the rights
of data subjects.

  1. Data Subject Rights and Protections

Data subjects have numerous rights under the Technical
Certification Measures (similar to and in line with those set forth
in the Standard Contractual Measures). Data subjects are made
third-party beneficiaries of the personal data portions of the
applicable agreement and has a right to request a copy of such
agreement at any time.

Even further, the data subject has the right to restrict or
refuse the transfer of their personal data, even if all
requirements are met by the applicable parties under the Technical
Certification Measures.

Security Assessment Measures

The Security Assessment Measures require both assessments
and contractual considerations. Except in this case, the
Security Assessment Measures require both a self-assessment and a
CAC assessment.

An entity must conduct a CAC security assessment if it
(1) transfers important data collected or produced
by critical infrastructure operators; (2)
transfers “important data;” (3) collects
personal information of over 1 million individuals;
(4) transfers personal information of over 100,000
individuals; (5) transfers sensitive information
of over 10,000 individuals; or (6) if other
circumstances as stipulated by CAC apply.

Critically, the finalized Security Assessment Measures provided
a definition for “important data”, which includes any
data that could endanger national security, economic operation,
social stability, or public health and safety” if breached. In
contrast, critical infrastructure is defined within other Chinese
laws and regulations and includes, among other things service
providers in the following industries or fields: communication,
energy, transport, water, finance, public services, E-government
services, and national defense.

  1. Security Assessment

The self-assessment must focus on (1) the
legality, necessity, purpose, scope, and method of the cross-border
transfer; (2) the quantity, scope, categories, and
degree of sensitivity of the data involved; (3)
risks the cross-border transfer poses to China’s national
security; (4) any pertinent individual rights at
issue; (5) whether there are proper safeguards in
place to mitigate risks of breach during the transfer;
(6) the obligations the receiving, foreign party
is under and whether there are processes to enforce such
obligations; (7) the risks of data breach once the
data has been transferred and whether individuals will be able to
exercise their rights; and (8) whether the
pertinent contract between the parties fully stipulates data
security protection responsibilities and duties.

Under the Draft Measures, an entity that meets the Draft
Measure’s criteria must submit their self-assessment, an
application letter, a copy of the contract between the parties, and
any other materials required for a full review as determined by the
CAC.

Within 7 days of submitting the self-assessment and the above
documents to the CAC, the entity will receive notice that the CAC
is conducting a security assessment. Within 45 business days, the
CAC will complete the security assessment (unless extended by the
agency due to the complexity of the transfer).

If the CAC denies the security assessment and does not allow the
cross-border data transfer, the applicable controller can request
re-assessment so long as such a request is made within 15 days of
receiving the initial result.

The security assessment will largely focus on the topics covered
in an entity’s self-assessment (as outlined above),
specifically determining whether the contemplated cross-border data
transfer complies with applicable Chinese law and whether the
receiving, foreign party’s data protection standards and
obligations reach the level required by applicable laws and
regulations. The CAC will also look to ensure individual privacy
rights are fully and effectively ensured and whether there are
restrictions on re-transfer of the data.

If the CAC approves a security assessment and the cross-border
data transfer, it is valid for 2 years. Entities must reapply for a
new security assessment if (1) the purpose,
method, scope, retention period, or type of data being transferred
changes; (2) relevant foreign laws or regulations
change; (3) control over the data being
transferred changes; or (4) other circumstances
that the CAC may stipulate.

If the cross-border data transfer contemplated under a valid
security assessment is required to go beyond 2 years, an entity
must reapply for a security assessment at least 60 days prior to
expiration of the security assessment. Further, entities have a
continuing duty to assess whether a valid security assessment
properly covers ongoing data transfers and must cease transfers
that are no longer covered.

  1. Contractual Provisions

Beyond laying out the scope of the CAC security assessments, the
Draft Measures describe what a DPA must address to be valid.

Under PIPL, entities must have an agreement in place with the
receiving, foreign party. The Draft Measures specify certain
privacy and data protection provisions that must be in that
agreement.

Specifically, any contract between the parties of a cross-border
data transfer must include provisions that specify
(1) the purpose, method, and scope of the outbound
transfer; (2) the purpose and method of the
receiving party’s handling and processing of the data;
(3) the location and retention period of the
foreign data storage and the subsequent controls to handle the data
once the retention period is reached, the agreed purpose is
completed, or the contract is terminated; (4)
safeguards and security measures that must be adopted when changes
occur in the control and scope of the transfer services
contemplated in the contract or when local laws change;
(5) distribution of liability for violating and
breaching the data security provisions within the contract;
(6) enforceable dispute resolution procedures that
do not include actual restraining force; and (7)
data breach requirements including but not limited to the launching
of emergency measures and opening of avenues for individuals to
enforce their privacy rights.

Practical Takeaways

The data transfer mechanisms set forth by Chinese authorities
under PIPL have thus far driven home their focus on data
localization?—heavily favoring and incentivizing businesses
to store Chinese personal data in China.

At a minimum, all three transfer mechanisms require
(1) some form of a security or data impact
assessment; (2) filing with a Chinese government
authority or agency; and (3) necessary topics and
provisions for the applicable contract between the relevant
parties.

Entities who collect, use, or otherwise process Chinese personal
data will now face the choice of investing time and resources into
creating separate systems in China to locally store the personal
data, or undergo cumbersome processes and security assessments.

As compliance with PIPL comes into effect and as Data
Transfer requirements in China are adopted or amended, the Benesch
Data Protection and Privacy team is committed to staying at the
forefront of knowledge and experience to assist our clients in
compliance efforts. We are available to assist you with any
compliance needs.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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