Cybersecurity and international data transfer

by Dentons

In 2016, cybersecurity will dominate the agenda of the C-Suite. However, that will not be the only data governance concern for organizations. Re-tooling how organizations move data internationally will also be a major pre-occupation of general counsel and privacy officers.

Focus on the US

International data transfers will dominate the agendas of global businesses headquartered in the US in the wake of the Schrems decision by the European Union Court of Justice. On October 6, 2015, the EU Court declared that personal data cannot be transferred from the EU to the US in reliance on the recipient organization’s Safe Harbor certification. The US Safe Harbor program allowed organizations to certify compliance with the Safe Harbor Principles and to voluntarily bring themselves within the jurisdiction of the Federal Trade Commission if they fail to comply with the Safe Harbor Principles. Although the European Commission has been working on a potential Safe Harbor 2.0, a US law that would grant Europeans the right to sue over data privacy violations in the US has been delayed in the US Senate. This delay complicated negotiations, since this has been a major political sticking point. However, as of the time of writing this article, political agreement had been reached on a so-called “EU-US Privacy Shield”, which, according to the European Commission press release, “will protect the fundamental rights of Europeans where their data is transferred to the United States and ensure legal certainty for businesses.” For further details and updates on this rapidly evolving story, please follow our blog.

For now, organizations moving data from Europe to the US—including within a company or between companies in the same corporate group—should be working on mapping data flows and aligning those data flows with EU Standard Contractual Clauses (also known as Model Clauses), through which the transferor and transferee make binding commitments about handling the data that is the subject of the transfer. These clauses provide EU residents with third-party beneficiary rights to enforce these commitments and have been endorsed by the European Commission as still being viable methods by which to transfer data.

On the data security front, the Cybersecurity Information Sharing Act (CISA) was signed into law by President Obama on December 18, 2015, keeping cybersecurity high on the agenda as the year ended. The statute is intended to facilitate information sharing with the government about cybersecurity threats. The statute is not without its critics. Technology companies and civil libertarian groups have warned that the legislation is a major threat to privacy by allowing organizations to monitor all information on their systems without regard to whether it is personal information. Although personal information is supposed to be removed (if it is not relevant) when disclosing cybersecurity threat information to the government, there are questions about whether and how this will be done.

CISA was not the only regulatory initiative in the US in 2015. The Securities and Exchange Commission announced that its Office of Compliance Inspections and Examinations will continue to focus on cybersecurity controls at broker-dealers in 2016. The Food and Drug Administration has identified cybersecurity as a major threat to medical devices and has issued draft guidance to manufacturers. The National Highway Traffic Safety Administration has also put cybersecurity on the agenda, beginning with a roundtable held in Washington in January. There have also been several bills before Congress to enshrine vehicle cybersecurity into law.

Focus on Europe

In what may prove to be the biggest privacy development in 2016, the European Commission released its draft European General Data Protection Regulation (GDPR). The GDPR is an ambitious revamping of privacy law for EU members, which could come into effect in 2018 if approved by the EU Parliament. However, it has major implications for organizations operating outside of Europe. The GDPR would apply to the processing of personal data of individuals who are located in the EU even if the entity that has collected or is processing the personal information is not located in the EU. The effect of this clause is to sweep in cloud services and online retailers that do not otherwise have any connection to the EU. Many organizations, such as those processing sensitive data, must designate a data protection officer and develop compliance programs. Fines for violating the GDPR could reach 4 percent of a company’s annual worldwide turnover. Breach reporting to the appropriate national supervisory authority and individual notifications will be required. In addition, the GDPR provides individuals with greater rights to control their data. Among other things, individuals have a “right to erasure” when the data is no longer necessary to be used for the purposes for which it was collected or the data subject withdraws consent.

On the heels of the GDPR, the European Commission has announced agreement on the Network and Information Systems Directive (NISD) which, if approved by the European Parliament and the European Council, will impose significant cybersecurity obligations on operators of essential services and digital service providers (such as online e-commerce platforms and cloud service providers), who offer services in the EU. The NISD requires Member States to implement legislation that meets the minimum standards to manage cybersecurity risk in the NISD. The NISD will require organizations to take appropriate technical and organizational measures to manage cybersecurity risks and will require significant cybersecurity incidents to be reported to regulators.

Focus on Canada

Canada’s position as an “adequate jurisdiction” for the purposes of international data transfers from Europe may come under closer scrutiny if the GDPR is enacted (see Focus on Europe). An “adequate jurisdiction” is a designation that allows for the free flow of personal data to Canada. In the wake of the international turmoil created by the Schrems decision (see Focus on the US), certain gaps have come to light. In particular, businesses are beginning to recognize that Canada is not an adequate jurisdiction in relation to the movement of employee data, except employee data used in connection with a federal work, undertaking or business (e.g., airlines, railways, and banks). Organizations that move human resources data between Europe and Canada urgently need to put into place contractual clauses to protect that information.

In 2014, Canada’s Anti-Spam Legislation came into force and has had unexpected effects on Canada's participation in e-commerce channels. This draconian law requires opt-in express consent by recipients to commercial electronic messages unless certain exceptions apply. The law is out-of-step with anti-spam legislation with the US, which is, from an e-commerce perspective, Canada’s most integrated trading partner. Unlike the US law, Canada does not exempt messages that are predominantly transactional and does not permit pre-checked, opt-out consent. Organizations are now finding that they have difficulties in conducting unified marketing programs. Worse, many US-based organizations have failed to appreciate that they need to comply with this legislation. In 2015, the Canadian Radio-television and Telecommunications Commission launched an aggressive enforcement campaign, which is not expected to abate in 2016. If that is not enough incentive for organizations to comply, the prospect of class actions should be; these are on the horizon as of July 1, 2017. Organizations would do well to get their compliance programs in order as soon as possible.

Cybersecurity also finds center stage in 2016 in Canada. The breach of security safeguards provisions in Canada’s Digital Privacy Act are likely to come into force in 2016. Organizations will be required to log data breaches. Failing to do so will be an offence with the potential for a CA$100,000 fine. In addition, organizations will be required to report data breaches to the Office of the Privacy Commissioner of Canada and to make individual breach notifications if there is a real risk of significant harm. Importantly, the harms that are recognized are not limited to financial harms. They include embarrassment and reputational harm.

One uncertain development is whether Canada will enact legislation like CISA (see Focus on the US), or legislation similar to what is proposed in NISD (see Focus on Europe). The Protection of Canada’s Vital Cyber Systems Act was being developed by the previous government and was intended to require companies operating vital systems to safeguard security and report hacking incidents to government agencies. Will that effort be shelved by the new Liberal government? Probably not; at least not completely. Cybersecurity was recently on the agenda of a meeting of justice and safety ministers from across the country. Our bet is that the new Liberal government will be compelled to do something on this topic, given the developments in Europe and in the US.

Focus on China

Organizations using encryption technology in China should take note of the recent Counter-Terrorism Law of China. This law contains obligations that require telecommunications operators and internet service providers to assist Chinese law enforcement conducting terrorism prevention or investigation activities by, among other things, providing access to decryption keys. Organizations are also required to implement systems to conduct surveillance of information systems for terrorist activities and to delete terrorism-related information. If you have not done so already, we recommend reviewing the application of this law as soon as possible.

Focus on data transfers and the Trans-Pacific Partnership (TPP)

The TPP has implications for international data transfers. In particular, signatories must not impede the international transfer of data or require that data be localized within their territory, subject to exceptions. For more on the TPP and Privacy, see our recent post.

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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