New Laws in China Regarding “State Secrets”1 and Related Issues:
Uncertainties, obstacles, and the need to strengthen internal
compliance procedures2
April 2011
This memorandum presents an introduction to China’s new state secrets law and other related
laws with respect to trade secrets and bribery. This new law is significant, as it impacts the
day-to-day operations of all foreign companies operating in China. As a result:
 A foreign company may be unaware that it is handling, transmitting, or in possession of
information that may be deemed a state secret. Such information could appear innocuous
to an uninitiated foreign company, since it could include information that is crucial to the
foreign company’s day-to-day operations, and even information that may seem mundane
and/or “industry standard”;
 A foreign company must take precautions to identify information that may be considered
sensitive under this new law and institute internal compliance procedures to ensure that it
will not be subject to potentially severe administrative and criminal liability, which may
include imprisonment of its officers and directors.
This memorandum includes a summary of events in the highly publicized Rio Tinto case, and the
subsequent overhaul of the existing state secrets law, and highlights related laws and issues
regarding trade secrets and bribery. Foreign companies must review and update their internal
compliance procedures especially when dealing with state-owned enterprises to prevent
criminal and administrative liability. This is especially true now that the trade secrets of
state-owned enterprises may be classified as state secrets.
1
The term “state secrets” is specifically defined in the new Law on Guarding State Secrets (2010 revision), which
became effective on 1 October 2010. However, for the purposes of this memorandum, this term will just be used
generically.
2
References throughout this memorandum to “internal compliance procedures” refers to the internal compliance
procedures of a foreign company operating in China which are implemented in order to reduce the risk and likelihood of
the company contravening any state secrets laws.
* Note that pursuant to the rules and regulations of the People’s Republic of China (PRC), Cadwalader, as an international
law firm, is not permitted to practice PRC law.
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relationship.
RIO TINTO AND THE LAW ON GUARDING STATE SECRETS
The Law on Guarding State Secrets3 (“Revised State Secrets Law”), effective 1 October
2010, is largely a byproduct of the arrest, detention and sentencing of certain employees of the
British-Australian mining conglomerate Rio Tinto Group (“Rio Tinto”) by a Chinese court in
2010 (the “Rio Tinto Case”), and the ensuing international public scrutiny and outcry. Key
background information regarding the Rio Tinto Case is as follows.
On 29 March 2010, a Shanghai court found four (4) Rio Tinto employees guilty of accepting
bribes and stealing trade secrets. The court ruled that Rio Tinto’s general manager of China
sales, an Australian national, would be subject to a ten (10) year prison sentence, and his three
(3) Chinese-national colleagues subject to sentences ranging from seven (7) to fourteen (14)
years.
The court alleged that these Rio Tinto employees took bribes from private (non-China
state-owned) Chinese steelmakers in exchange for supplying them with iron ore at better prices
than those offered by state-owned steel mills. The court also held that these employees illegally
obtained confidential information from executives of a major Chinese steelmaker4 which they
then passed on to Rio Tinto.
The employees were initially arrested on charges of espionage and stealing state secrets. It is
of note that these charges arose during sensitive negotiations between Rio Tinto and the
Chinese government in connection with the prices of iron ore. Some have speculated that
these arrests were an act of reprisal for Rio Tinto’s rejection of an investment of US $19.5
billion by one of China’s largest state-owned mining companies just one month prior to the
court’s judgment in the Rio Tinto Case.
The Rio Tinto Case highlights the extremely delicate issues that foreign companies must face
when operating in China. This is particularly relevant for foreign companies that may work or
compete with state-owned enterprises (each, an “SOE”), or whose work may involve key
industries in China.
3
Law on Guarding State Secrets (2010 revision).
4
The information detailed China’s negotiating strategy in its iron ore price negotiations and also contained the production
plans of key Chinese steelmakers.
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POST RIO TINTO CASE LEGISLATION
Revised State Secrets Law
The Revised State Secrets Law was promulgated just one month following the judgment in the
Rio Tinto Case. The timing of the Revised State Secrets Law is significant because it is widely
believed that the Chinese government would have been unable to charge the three (3) Rio Tinto
employees under the then existing state secrets legal regime.5 The Revised State Secrets Law
attempts to clarify the definition of state secrets and introduces new provisions requiring
internet service providers to cooperate with authorities in any investigations relating to the
dissemination and potential leakage of state secrets.
Broader Scope of Application
China’s previous state secrets laws defined state secrets as matters relating to “national
security and interests as determined under statutory procedures and to which access is vested
in a limited scope of persons during a given period of time.”6 However, according to the
Revised State Secrets Law, state secrets are “matters which, if divulged, would harm national
security and interests in the areas of politics, economics, national defense, and diplomacy.”7
What constitutes “harm” remains vague and undefined, and the types of information that may
qualify as a state secret under the new definition remain unclear.
Implications
When examining the Rio Tinto Case facts and applying the Revised State Secrets Law,
confidential information detailing China’s position in connection with its iron ore price
negotiations and the production plans of key Chinese steelmakers, if divulged, would qualify as
harming China’s economic interests. Iron ore is one of China’s key resource components
because it is needed for sustained economic development, and the disclosure of such
confidential information would result in an inferior negotiating position for Chinese steelmakers
and may lead to higher iron ore prices.
Given the broad definition and categories of state secrets under the Revised State Secrets
Law, many commentators contend that Chinese regulators have too much discretion in
classifying information as state secrets. This increases the need for foreign companies to
exercise caution when in possession (whether intentional or unintentional) of information that
could be construed as a state secret, especially if the information is even tangentially related to
the Chinese government or to an SOE.
5
This old regime includes the Law on Guarding State Secrets [1988] and its implementing rules: Implementing Rules on
Guarding State Secrets [1990].
6
Article 2, Law on Guarding State Secrets [1988].
7
Article 9, Law on Guarding State Secrets (2010 Revision).
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STATE SECRETS AUTHORITIES
The State Administration for the Protection of State Secrets (the “SAPSS”) is generally
responsible for determining the scope and categories of state secrets. The SAPSS has wide
reaching powers to protect national interests since it determines what information is deemed a
state secret and whether a party has breached the relevant law and regulations. Violation of
China’s state secrets law may result in criminal or administrative liability.8
Since the SAPSS is the initial authority in determining whether information may constitute a
state secret, it should be consulted by a foreign company prior to handling potentially sensitive
information. Regular dialogue with the SAPSS, or at the very least, consultation with the
SAPSS before potentially sensitive information is handled should form part of every foreign
company’s internal compliance procedures.
TRADE SECRETS MAY CONSTITUTE STATE SECRETS
Trade Secrets
The Criminal Law of the Peoples Republic of China9 and the Anti-Unfair Competition Law of
the People’s Republic of China10 (the “AUCL”) define trade secrets or commercial secrets as
“technical information and operational information that are unknown to the public, bring
economic benefits to their rightful owner, are functional, and are kept as secrets by their rightful
owner”. Trade secrets have the following characteristics:
1.
the information must be unknown to the public, meaning that it cannot be obtained
through public channels or from public sources;
2.
the information may bring economic benefits, which usually refers to technical and/or
operational information, including designs, processes, formulas, manufacturing
methods, management know-how, customer data, marketing strategies and information
regarding bidding; and
3.
certain measures were taken to keep such information confidential, including entering
into a confidentiality agreement, establishing a confidentiality code, or otherwise
specifying confidentiality obligations.
8
Under the Criminal Law of the People’s Republic of China, criminal liability may include up to a maximum ten years of
imprisonment. Where one is charged with the same act on behalf of an organization, institution, or personnel outside
the country, criminal liability may include a maximum life sentence. The scope and seriousness of administrative liability
under the New Law remains unclear.
9
Criminal Law of the People’s Republic of China [1997].
10
Anti-Unfair Competition Law of the People’s Republic of China [1993].
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New SOE Trade Secrets Law
In an effort to further strengthen trade secret protections for specified SOEs administered by
the central government, the State-Owned Assets Supervision and Administration Commission
promulgated a set of SOE Trade Secrets Implementation Measures (the “TSIM”)11 on 25 March
2010.
The TSIM regulates a broad range of trade secrets, including: (i) operational information such
as strategic plans, business plans, business models, financial information, investment or
financing decisions, customer data, tenders, or bidding information; and (ii) technological
information, such as designs, programs, formulas, manufacturing methods, and know-how.
Furthermore, the TSIM stipulates that the trade secrets of SOEs may become state secrets.
SOE Trade Secrets May Become State Secrets
The risks and liabilities for foreign companies operating in China are exacerbated where the
information in question relates to an SOE. In China, SOEs are state administrative entities and
have the authority to classify information in their possession as state secrets. A broad range of
commercial information originating from or concerning SOEs may be subject to the Revised
State Secrets Law’s definition of state secrets, including information a foreign company may
obtain or access by means of an arms length commercial transaction with an SOE. This is
particularly true when dealing with an SOE that operates in a government regulated industry,
such as energy, resources, information technology, telecommunications, and banking.
Implications
Foreign companies, particularly those that deal with SOEs, can unwittingly find themselves in
violation of the Revised State Secrets Law and the TSIM. Therefore, initial business contact
with SOEs should include discussions on these issues, and such discussions should form an
integral part of a foreign company’s internal compliance procedures. A request should be made
to the SOE during the earliest stages of a business transaction for assistance in complying with
the state secrets law. This may include:
1.
11
requesting the SOE to liaise with SAPSS to obtain the relevant written approvals
and/or exceptions; and
Interim Rules on Protection of Trade Secrets of Central State Owned Enterprises [2010].
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2.
entering into agreements with the SOE restricting that SOE’s authority to classify
information as a state secret12.
SPECIAL ISSUES RELATING TO BRIBERY
Bribery remains an important issue for foreign companies operating in China and, as highlighted
in the Rio Tinto Case, is often related to the possession of highly sensitive information which
can be classified as state secrets. State and trade secrets are commonly disseminated and
obtained through bribery. Moreover, those who commit bribery are often subject to very serious
administrative or criminal liabilities, such as the employees in the Rio Tinto Case.
Commercial Bribery
Commercial bribery is defined by the AUCL as “the use of property or other means by a
business operator to bribe the other transaction party in order to secure the sale or purchase of
goods”13. “Property” can be money or in-kind benefits such as the purchase of goods,
payments for fictitious promotional expenses, marketing expenses, sponsorship fees, expenses
for scientific research, service fees, consulting fees or commissions, gift cards, or the
reimbursement of various expenses.
Commercial bribery can be distinguished from legitimate gift-giving. Reference is made in the
AUCL to several factors when examining whether a gift constitutes a bribe, including: (i) the
reason for the gift; (ii) the value of the gift; (iii) the cause, timing, and method of the gift; and (iv)
whether the receiver has taken advantage of his/her position to benefit the gift-giving party.
Criminal Bribery
An individual or a company may commit criminal bribery by giving money or property for the
purpose of obtaining “illegitimate benefits”.14 However, what constitutes “illegitimate benefits”
is not defined, thus providing prosecuting authorities with significant discretion.
12
Although such agreements could be struck down as unenforceable, its inclusion would serve to put the SOE on notice
that this is an issue of importance for the foreign company and that care should be taken to promote compliance by all
parties with the New Law and the TSIM.
13
The offering and the acceptance of “commercial bribes” constitute violations of the Anti-Unfair Competition Law of the
People’s Republic of China [1997] and the Interim Rules on the Prohibition of Acts of Commercial Bribery [1996].
This can lead to fines and the confiscation of income derived from the illegal activities. If the State Administration of
Industry and Commerce considers a violation to be serious, it may refer such a case to the Public Security Bureau for
criminal investigation, and criminal penalties may be imposed.
14
Article 2, Interim Rules on the Prohibition of Acts of Commercial Bribery [1996].
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Bribery and State Secrets
Many foreign companies operating in China have already implemented strict internal controls
and procedures to comply with bribery laws. Nevertheless, the sweeping nature of the Revised
State Secrets Law may require that such controls and procedures be modified. By
promulgating the Revised State Secrets Law, the Chinese government is officially stating that
bribery is no longer just a commercial issue, but can also be a matter of national security. This
implies tougher penalties for violators and also the need for foreign companies to be even more
circumspect with their own internal compliance procedures.
CONCLUSION
Foreign companies operating in China cannot afford to take China’s new state secrets regime
lightly. The new laws are broad and could easily lead to situations where the foreign company,
in the course of engaging in ordinary commercial transactions, unwittingly finds itself in violation
of possessing, handling, or transferring state secrets. Foreign companies must take
precautions in order to identify information that may be considered sensitive and institute
internal compliance procedures to ensure that they will not be subject to the severe criminal
and administrative liabilities that would result from a violation of China’s state secrets laws.
*
*
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If you have any questions about the foregoing, please contact:
Rocky T. Lee
+86 10 6599 7200
Asia Managing Partner and Head of the China Corporate Practice
[email protected]
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