Draft rules ‘inform’ foreign companies about state secrets

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China’s State Council Legislative Affairs Office released on 15 May a draft of the Protection of State Secrets Law Implementing Regulations, which was open for public comment until 15 June. The draft regulations provide guidance for the implementation of the Protection of State Secrets Law (State Secrets Law), which superceded an earlier 1988 law and came into force on 1 October 2010.

Just before the recent changes to China’s State Secrets Law in 2010, there were two prominent cases with state secrets implications involving foreigners of Chinese origin working for foreign companies who were arrested, tried secretly and given long jail terms and fines.

  1. US geologist Xue Feng was arrested in 2007 and in July 2010 sentenced to eight more years in jail and fined RMB200,000 (US$31,700) for negotiating the sale of a PRC industry database to his US employer, IHS Energy. The National State Secrets Bureau did eventually declare this information protected, but not until several years after he had acquired it, and seven weeks after he had been arrested and jailed.
  2. Stern Hu, an Australian employee of British-Australian mining company Rio Tinto, was arrested in 2009, initially for stealing state secrets, and in March 2010 sentenced to 10 years in jail and fined RMB500,000 for accepting bribes and stealing trade secrets on iron ore bid prices, negotiation information and output production plans.

bld_leadpicA major issue with these two cases, which the new 2010 State Secrets Law did not resolve, is the broad and unclear definition of “state secrets”.

Thus, enforcement will be heavily reliant on opaque administrative decisions and therefore still subject to longstanding concerns in an area of law fraught with sensitivities and pitfalls.

The draft regulations (article 2) allay these concerns only to a limited extent, while authorising the State Secrets Bureau to “implement the state’s secrecy policies” and issue still more regulations and definitions.

Accordingly, foreign companies and businesspeople will still need to be very cautious and take legal advice as required when seeking to collect data in China. Especially in this area they ignore PRC law and China’s criminal justice system at their peril.

The draft regulations contain the same five main sections as the State Secrets Law: general (departments protecting secrets); scope and level of state secrets; system for protection of secrets; supervision and administration; and legal responsibility for leakage of state secrets. Here we describe some of the main provisions relevant for foreign enterprises in China and the possible implications for various business sectors.

Defining harmful disclosure

Article 9 of the State Secrets Law categorises state secrets as information in any of seven broad categories “whose disclosure could harm national security and national interests in the field of politics, economics, defence or foreign affairs”.

The draft regulations do not further address the seven categories of information, but they do try to further define this harmful disclosure language by providing the following list of circumstances in which it applies:

  1. endangering state sovereignty or security, territorial integrity, political stability and also defensive capability;
  2. endangering national unity, ethnic solidarity and social stability;
  3. impeding the state’s foreign affairs and international activities;
  4. weakening the state’s economic, and scientific and technological strength;
  5. impeding or endangering the security of important recipients or targets of the state’s protection;
  6. impeding effective implementation of the state’s anti-terrorism and emergency response methods and measures;
  7. impeding protection of the state’s intelligence sources and activities;
  8. impeding the legal investigation of activities that harm national security, and other grave criminal activities;
  9. causing measures for the protection of state secrets to become less reliable, or ineffective.

State secret classification

The draft regulations (articles 4 and 5) require all organs and entities involved with state secrets to establish a secrecy protection system or designate specific personnel to take charge of daily secrecy protection work. The National Administration for the Protection of State Secrets (NAPSS) determines and authorises organs and entities and their personnel to do state secret classification (articles 13 and 14 of the draft regulations). Within the limits of their authority, designated state secret personnel within these organs and entities are responsible for the daily work of classifying, modifying and declassifying state secrets (articles 11, 12 and 15).

Information classified as a state secret is to be clearly marked as a state secret, along with its category and protection period. If such marking is impossible, the organisation responsible for the secret information shall notify in writing all those to whom the state secret designation may become known (article 18).

Disclosure to foreign entities

An organ or entity disclosing a state secret to foreign organisations requires approval of the relevant government department (article 33). In principle, the Tier One state secrets (top secret) must not be provided to any foreign country, organisation or individual. Tier Two state secrets (secret) require the relevant central government department’s approval, and Tier Three state secrets (confidential) require the relevant local or central government department approval.

bldsecretspicForeign individuals may take a classified post or confidential post only after the authorisation of the relevant central government department or the relevant department of the local government (article 41). In addition, state secret-related personnel must not work for or provide part-time services to an overseas organisation or wholly foreign invested enterprise (article 53). Intermediaries providing accounting, legal and other services to projects involving state secrets must conclude a confidentiality agreement and satisfy requirements in article 36 and article 37 of the draft regulations.

Article 36 basic requirements:

  • a legal person registered within the territory of the PRC;
  • legally established for three years or more, with a good record for integrity;
  • personnel engaging in secrets-related operations are Chinese citizens within the territory of the PRC;
  • have the professional capabilities to carry out secret-related operations.

Article 37 confidentiality requirements:

  • a sound confidentiality system;
  • a special body or personnel in charge of protection of secrets work;
  • the venues, facilities and equipment used for secrets-related operations meet the state’s protection of secrets regulations and standards;
  • has thorough procedures for examining and assessing personnel engaging in secrets-related operations.

Foreign intermediaries

The draft regulations, if implemented, could present significant problems for foreign intermediaries such as investment banks, accountants and lawyers providing services to Chinese organs and state-owned enterprises (SOEs) on projects involving state secrets, because under article 36, the foreign intermediaries would have to ensure that the secrets-related work was done by personnel who are “Chinese citizens within the territory of the PRC”. This requirement will be difficult for foreign intermediaries to satisfy, considering the diversity of nationalities and requirements for cross-border cooperation between the various offices of the foreign intermediary.

As with any new regulation, it is not clear how strictly article 36 of the draft regulations would be enforced.

Pitfalls for foreign companies

Foreign companies’ business interactions or negotiations with SOEs may be complicated by implementation of the draft regulations, especially during the due diligence process. Within sensitive industries relating to infrastructure, natural resources, financial services or defence, where state secrets are prevalent, the SOE may have an internal quasi-government department regulating state secrets whose approval the foreign companies will have to obtain in order to have access to sensitive or state secret information.

Foreign companies need to exercise caution when accessing data in China.
Foreign companies need to exercise caution when accessing data in China.

Further, either as a negotiation or delaying tactic, or out of nervousness about the possible repercussions of allowing foreign parties and individuals access to certain information, SOE counter parties may invoke state secret concerns to deny information to the foreign company. The foreign company can be disadvantaged, especially when it does not know for certain whether such information is properly categorised as a state secret.

The draft regulations, however, would tend to decrease the risk of a foreign company being unaware that it is handling, transmitting or in possession of information that may be deemed a state secret, because under article 18 such information is to be marked “state secret” and the period of secrecy indicated, or for information impossible to mark, the disclosing party is to notify parties with access to it that it is a state secret. However, it does not follow that information not so marked is not a state secret. To be safe, foreign companies should consult with and receive written confirmation from the SOE’s state secret personnel or the relevant NAPSS body as to the nature of the sensitive information.

Conclusion

According the draft regulations, China is implementing a system where sensitive information will be classified by a vast array of authorised organs and entities. The effect on foreign enterprises in China will depend largely on the actual scope of the various classifications. The more concrete definition of “harmful disclosure” in article 9 of the draft regulations could narrow the scope to some extent, but the listed categories are still broad and fairly general. It is also not clear whether non-SOEs such as private enterprises or even foreign enterprises have an obligation to participate in the classification of state secrets. Ultimately, if only the most sensitive pieces of information are classified as state secrets, the draft regulations would not affect most foreign enterprises. However, if it is applied more generally, then the draft regulations could cause significant red-tape and compliance issues for business transactions in China.

Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mail at: Zhang Danian (Shanghai) danian.zhang@bakermckenzie.com