Jurisdiction - China
Reports and Analysis
China – New Draft Implementing Regulation For The Law On Guarding State Secrets Released For Discussion.

9 June, 2012

 

Legal News & Analysis – Asia Pacific – China – Dispute Resolution – Regulatory & Compliance

 
The Legislative Affairs Office of the State Council of the PRC published recently the draft Implementing Regulation for the PRC Law on Guarding State Secrets (the "Regulation") for public comment. The period for public comment closes on 15 June 2012. (A copy of the draft Regulation released on 15 May 2012 can be found here).
 
Via the Regulation, the PRC Government continues its focus on protecting State secrets. Although not related, the release of this draft Regulation follows closely the recent convictions of State officials and commercial analysts for State secret offences relating to the unauthorised release of PRC macroeconomic data (our e-bulletins released on 9 May 2012 and 16 November 2011 on this topic can be found here and here respectively).
 
Background
 
The PRC Law on Guarding State Secrets was adopted on 29 April 2010 and came into force on 1 October 2010. It has taken two years for the draft Regulation to be published for comment. The Regulation is intended to provide detailed and practical provisions to fill in some gaps left in the primary law.
 
When it comes into force, it will replace the Implementing Regulation for the PRC State Secrets Law published in 1990. The new Regulation does not depart significantly from the 1990 Regulation, save for putting more emphasis on efficient internal management of State secrets (which was first introduced in the 2010 revisions to the Law).
 
What is the main purpose of the Regulation?
 
The Regulation's principal focus is to provide mechanisms for the efficient internal management and protection of the PRC's State secrets by advocating strict controls on the classification, declassification, custody and control of all State secrets, in line with revisions to the PRC State Secrets Law. 
 
The Regulation is intended to apply to all levels of the PRC Government (Central, Provincial and Local) and Organs or Units authorised to classify and declassify State secrets.  This includes State Owned Enterprises ("SOEs").1
 
Vetting procedures for State secret related work
 
Although State secrets are generally held and managed by Organs and Units of the PRC Government, the Regulation allows enterprises and public institutions2 to engage in certain types of business involving State secrets (including accounting, legal, valuing and other intermediary businesses) provided that certain safeguards are met.  Whilst it is clear that the Regulation is directed towards PRC entities, wholly-owned foreign enterprises ("WOFEs") and other foreign invested enterprises ("FIEs") should also be cautious when dealing with any potentially secret information as they are Chinese corporate entities.  Nothing in the Regulation expressly excludes its application towards foreign companies doing business in China.  
 
The onus of deciding whether enterprises are undertaking business involving State secrets and ensuring that such enterprises comply with procedures to protect such secrets should fall on the relevant PRC Organ or Unit whose responsibility it is to manage the State secret or secrets in question.
 
The current draft refers to intervention by State secret administrative guarding departments and confiscation of profits as penalties for failing to comply with the Regulation.
  
Scope of the Regulation
 
The Regulation largely follows the structure of the State Secrets Law:
 
  • Chapter I (General Provisions) sets out (i) the functions and responsibilities of the central, provincial and local secret-guarding administrative departments and (ii) the requirements for Organs and Units to establish an internal individual accountability system and awarding system for secret-guarding work.
  • Chapter II (Scope and Classification of State Secrets) (i) further defines "State secrets" and (ii) provides the specific procedures and personnel for determining the scope, classification and period of classification of State secrets.  (iii) It also provides the requirements for marking State secrets and procedures to declassifying and reclassifying State secrets.
  • Chapter III (Secret Guarding System) sets out (i) the internal management system that is required before enterprises can engage in business relating to State secrets and (ii) the qualifications that must be met before enterprises and personnel can engage in certain types of business relating to State secrets and the vetting procedures on whether such qualifications are met.
  • Chapter IV (Supervision and Administration) provides (i) the requirements for the secret-guarding administrative departments to supervise the relevant work and (ii) the procedural requirements to deal with State secrets leaking cases.
  • Chapter V (Legal Liabilities) and Chapter VI (Supplemental Provisions) provide (i) the administrative and criminal liabilities for non-compliance and (ii) the date for the Regulation to come into force.
 
Qualifications and Vetting Procedure for State Secrets related Work
 
Articles 36 and 37 set out the criteria that must be met before an enterprise can be involved in "Business involving State Secrets".  These requirements include that the entity must be a PRC entity; have appropriate good standing and have internal confidentiality systems in place.
 
Where an Organ or Unit engages an enterprise or public institution to engage in work "involving State secrets (涉及国家秘密)", Article 39 provides that an investigation according to the conditions in Articles 36 and 37 must be conducted and a confidentiality agreement entered into.  Work involving State secrets can include:
 
  • the surveying, designing, construction and supervision of engineering projects;
  • conferences or other event services;
  • accounting, legal, valuing and other intermediary services.
 
It is not stated expressly in Article 39 who is required to undertake the investigation of compliance with the conditions in Articles 36 and 37, but it would appear that it is the Organ or Unit who intends to engage the enterprise or public institution. It is also apparent that the investigation needs to be undertaken as a pre-condition to the engagement of the enterprise or public institution to undertake work "involving State secrets."
 
Penalties
 
Article 75 provides that where "units"3 are engaged in business related to State secrets in violation of the Regulation, the relevant secret guarding administrative departments are entitled to order them to cease conducting such business and the Administrative Department for Industry and Commerce  will confiscate the income gained from the violation. The application of this Article is potentially problematic because the penalties could conceivably apply to units who are engaged in this work but without knowledge that they are dealing with State secrets and were not responsible for undertaking their own vetting procedure.
 
Conclusion
 
In summary, it would appear that:
 
  • it is up to the Organ or Unit to protect and manage State secrets including, when engaging a third party enterprise to: (i) decide whether the scope of the relevant enterprise's business or services will be "involving State secrets"; (ii) if yes, conduct an investigation to determine whether that enterprise meets the requirements in the Regulation; and (iii) require the enterprise to enter into a suitable confidentiality agreement.
  • The scope of the obligations on the enterprise doing business involving State secrets, however, is less certain.  What is clear is that the enterprise should cooperate with any investigation by an Organ or Unit into their compliance with Articles 36 and 37. 
 
While the Regulation is fundamentally an internal facing regulation, there may be implications for foreign businesses in China. It is important therefore to continue to follow the basic risk management tips set out in previous bulletins4. A Quick Guide to State Secrets and managing the risk is this area release in October 2011 can also be found here.
 
 
For further information, please contact:

 

May Tai, Partner, Herbert Smith
may.tai@herbertsmith.com
 
Jessica Fei, Partner, Herbert Smith 
jessica.fei@herbertsmith.com
 
Kyle Wombolt, Partner, Herbert Smith    
kyle.wombolt@herbertsmith.com
 
Brenda Horrigan, Partner, Herbert Smith   
brenda.horrigan@herbertsmith.com
 
Sarah Munro, Herbert Smith   
sarah.munro@herbertsmith.com
 
Damien McDonald, Herbert Smith  
damien.mcdonald@herbertsmith.com

 

 

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