Classified protection and China's Cybersecurity Law

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Compliance can be both an obligation and a privilege. Obligation means the basic requirements that have to be met, any shortcomings in which may subject you to punishment. Privilege means the extra benefits that are nice to have, a lack of which could make you less competitive.

Classified protection (“CP”) is an obligation and a privilege under China’s Cybersecurity Law (“CSL”). If certified under CP, a company has prima facie evidence that its network system meets some basic safety obligations under the CSL; any loopholes that are red flagged can then be plugged up. With the obligations satisfied, the company can fend off possible investigations or punishments resulting from the loopholes in cybersecurity. However, CP does not come without “shortcomings”, one of which is that you may need to store your data in China, which could be worrisome for non-Chinese enterprises.

How is CP conducted?

Under CP, network systems are graded from Level 1 to Level 5. The higher the level is, the more requirements are needed to be complied with. The certification entities (which need certification licenses) run the testing and decide which level a network system is at, and advise where there are vulnerabilities. However, a certification entity is not allowed to provide rectification services, just as a referee cannot simultaneously be a player – the rectification services will have to be provided by rectification entities, which tackle the vulnerabilities in IT, processes and control measures of the network system. Although a rectification entity does not need a license for its rectification services, the rectification entity has to have capacity in both IT and risk management.

Level Damaged objectives Extent of Damage Classification suggestions Nature of the Network
Level I  

Legitimate rights and interest of

relevant citizens, legal persons and other organizations
General Damage It is generally applicable to the information systems of townships, the general information systems of some country-level units, and the information systems of small private enterprises, individual enterprises and primary or secondary schools. General Network
Level II  

Legitimate rights and interest of

relevant citizens, legal persons and other organizations
Serious Damage It is generally applicable to the important information systems in some county-level units, and the general internal information systems of state organs, enterprises and institutions above the prefectural level, such as the office system and management, excluding sensitive information such as work secrets and trade secrets.
Social order and public interest General Damage
Level III  

Legitimate rights and interest of

relevant citizens, legal persons and other organizations
Extreme Damage It is generally applicable to the important internal information systems of important enterprises and public institutions above prefectural level, such as work involving commercial secrets, office systems and management systems of sensitive information, and important areas of important departments across the province, city or national (province), which is used in the networking operation of production, scheduling management, operation and command of important information systems, or provinces or nationwide networks running an important branch of the information system at the provincial cities of the system, the central ministries and provinces (city) portals and important sites, networks across the province, etc. Important Network
Social order and public interest Serious Damage
National security General Damage
Level IV National security and public interests Extreme Damage It is generally applicable to the especially important systems of important departments in important fields of the country, as well as the core systems such as the dispatching system of the national railway, civil aviation, electric power and other departments, and the core systems involving the national economy and people's livelihood in dozens of important industrial departments such as banks, securities, insurance, taxation and customs. Particularly Important
National security Serious Damage
Level V National security Extreme Damage It is generally applicable to the extremely important system in the important sectors of the country's important fields.  

Extremely

Important

Why is CP important?

Simply, CP can help plug loopholes and tackle vulnerabilities in network systems. We may learn the importance of CP from the cases below.

Case #1:

Code repository GitHub was hit by a distributed denial of service (DDoS) attack which peaked at 1.35 Tbps via 126.9 million packets per second. According to a statement the incident persisted for around nine minutes and originated from over a thousand different autonomous systems (ASNs) across tens of thousands of unique endpoints. 

The first portion of the attack peaked at 1.35 Tbps [between 17:21 and 17:30 UTC] and there was a second 400 Gbps spike a little after 18:00 UTC,” said Sam Kottler, manager of Site Reliability Engineering.
This attack registered even larger than the peak of the attack on Dyn in 2016, according to Wired. By the end of February of 2018, there were 25,000 Memcached servers in China exposed on the Internet.
If the systems in China in use of Memcached servers had gone through CP under CSL, the incidents could have been most probably avoided.

Case #2:

Fiat Chrysler issued a safety recall affecting 1.4 million vehicles in the US, after security researchers showed that one of its cars could be hacked. The hackers had taken control of a Jeep Cherokee via its internet-connected entertainment system. As a result, Chrysler issued a voluntary recall to update the software in affected vehicles. 

From the cases above, you may realize that CP or similar risk management system is not just something nice to have. It is an insurance or a golden shield to manage risks and fend off liabilities. CP is a compliance threshold for network safety. Different network systems may have some peculiar features. CP for a code repository like GitHub should be different from CP for autonomous driving in many dimensions, such as how to determine levels and how to deal with vulnerabilities.

Is CP compulsory?

The answer is yes for any network operator – basically every business operator with a network is a network operator, no matter whether it is a critical information infrastructure operator (“CIIO”) or not. CSL provides for a compulsory CP test for a CIIO once a year.

CSL defines CIIO as a network system in the sectors of public telecommunication and information services, energy, communication, water resources, finance, public services and electronic public services. Once sabotaged, the CIIO could cause great and irreparable damage to itself and the entities around. China is drafting implementation rules for CSL to give a clear definition and description of a CIIO.
CP is compulsory as well for non-CIIOs. If graded Level 3 or above, CP must be conducted at least once a year. Although many non-CIIOs did not undertake CP yet in spite of the legal requirements under the CSL, some did it to get the privilege of extra protection from being hacked and from being punished, especially for those that rely on the Internet for delivery of products and services. It should be expected that law enforcement will be tightened on non-CIIOs when law enforcers are more experienced and implementation rules are more sophisticated and practical.
In some industries such as hoteling and logistics, CP is compulsory on a de facto basis. CP certification is a prerequisite condition to obtain the business license in the industry of hoteling and logistics.

Case #3:

The website of a “teacher development platform” in Sichuan was hacked. A local cybersecurity department found that the website had not carried out CP compliance since it launched – obviously, the cybersecurity department thought that the hacking could have been stopped if the platform had adopted appropriate control measures. As such, the local authority issued an administrative punishment to the website operator with a fine of RMB 10,000. 

If the platform refuses to carry out the remedial actions as suggested by certification and rectification bodies, the refusal could bring criminal liabilities to the platform and its executives.

Where is the place to store data?

According to CSL, a CIIO must store its personal identifiable information (“PII”) and important data in China. CSL does not provide such a requirement for non-CIIOs. However, in order to get certified under CP, a company has to store its data in China, which seems bad news for MNCs. However, in practice, there could be some leeway, which mostly depends on how necessary the data is that has to be transferred and stored outside China. 

Case #4:

A global hotel group consisting of tens of thousands of hotels centralized the management of data in a headquarters that is not located in China. The concerned certification body still gave a green light to the CP certification of the hotels that are located in China. However, a company that is certified by the same certification body was requested to take back its data from a server located outside China because the company does not have to transfer and store its data outside China.

Therefore, a multinational company will have to manage well how and where to collect and store its data in order to get certified for classified protection under China’s Cybersecurity Law. What is more important, a multinational company should seriously consider getting classified protection to have its network vulnerabilities checked and plugged up. As such, the company could reduce the risk exposure and liabilities (which could be both administrative and criminal) under Cybersecurity Law and the Criminal Law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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