Thinking of Expanding Your Business Overseas? Your Cyber Security Compliance Just Got More Complicated

China’s new data protection regulation, in addition to laws enacted by the U.S. and EU, all have huge implications for any business with international exposure.
By: | December 11, 2018 • 7 min read

U.S. companies that do business abroad or handle overseas data will now have to comply with a host of new cyber security rules after China became the latest country to impose regulations on firms operating there.

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This follows hot on the heels of the Clarifying Lawful Overseas Use of Data (CLOUD) Act, which came into force in the U.S. in March, and the European Union’s (EU) General Data Protection Regulation (GDPR), introduced two months later.

The implementation of these new protocols is driven by the recent surge in cyber attacks and, in the case of China, greater protectionism, exacerbated by the U.S. trade war, as the world becomes more divided than ever before.

Now, even if you are U.S.-based, you could be affected by a law in a country thousands of miles away. To date, 117 countries now have cyber security laws in place, not to mention each U.S. state having its own rules.

That has only led to greater ambiguity and conflict between the different regulations, increasing the burden and cost of compliance for organizations.

For many companies, these greater regulatory requirements have forced them to scale back their activity in certain countries, and in some cases, they have pulled out altogether.

“There’s a big call to action by governments to be seen to be doing something to protect their citizens, but it’s not being done in a way that’s consistent,” said Shannon Groeber, JLT Specialty’s cyber and E&O practice leader. “It’s a real challenge for companies operating on a global scale to make sure that they understand all of these new regulations and how they differ from country to country, or even state by state.

“Added to that, for many companies it seems that as soon as they have got up to speed with a new regulation, another one is introduced that they have to comply with,” she said.

The Second Great Wall of China

China’s new cyber security law, enacted in June, requires organizations operating in critical sectors such as finance, telecommunications and transport to store personal information and business data in the country, provide unspecified “technical support” to security agencies and pass national security reviews. It also stipulates that data must not be transferred overseas without government approval.

Shannon Groeber, cyber and E&O practice leader, JLT Specialty

Penalties for violations range from a company’s business activities being suspended and its website shut down to its forced closure or loss of license. The maximum fine for an offense is RMB 1 million ($150,000).

Carrie Yang, assistant vice president and team leader of Aon’s Cyber Solutions Group, said the new law significantly increases the cost of compliance for companies. It also exposes them to far greater regulatory action, she said.

“Companies will now have to adhere to much stricter rules requiring them to conduct local cyber security assessments, obtain local certification and have in place a local cyber security and compliance team,” she said. “We are also hearing anecdotal evidence that organizations have already been subject to informal regulatory inquiries under the new cyber security law.”

As recently as last month (November), Yang said that China introduced a new regulation on the Internet Security Supervision and Inspection, which gives the country’s police sweeping powers to inspect company networks onsite and remotely. It also requires firms to carry out security breach assessments, she said.

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“It has huge implications for companies doing business in China, as well as increasing their exposure to third party liability,” she said. “The biggest challenge, however, will be how to protect their intellectual property and confidential information.”

Roy Hadley, cyber security attorney for Adams and Reese, said this increased scrutiny exposes companies to a greater risk of their information being misappropriated, shared with competitors or used by the Chinese government. In response, many have announced plans to separate their Chinese operations from the rest of their business by transferring data to government sponsored data centers, he said.

“The bottom line is that many global companies doing business in China are worried that under the broad wording of the new law and their compliance obligations, their trade secrets, proprietary information and data are now subject increasingly to oversight by the Chinese authorities, including possible misappropriation,” he said.

“Any international company needs to be very careful about operating in China and about how to protect this crucial information while simultaneously complying with the law.”

Kevin Richards, Marsh Risk Consulting’s global cyber risk consulting leader, said in the event of a criminal investigation, firms need to work with Chinese law enforcement and provide full access to data and unspecified “technical support” upon request. They must also store data gathered or developed in China on local servers and it must not be transferred abroad without government permission.

“Data sovereignty is a big topic for a number of countries — so that part isn’t new — but it does limit the types of service providers or cloud services firms that are available for use,” he said. “Minimally, companies will need to review their external vendor contracts to assure that they can achieve this ‘data sovereignty’ requirement.”

GDPR and the CLOUD Act

GDPR is the biggest overhaul of the EU’s data privacy policies in more than 20 years, standardizing data protection across all 28 member states and governing the control and processing of personal information. It applies to any company that accesses data from EU-based users, even if they don’t physically operate in any of the member states.

The maximum penalty for a violation is a fine of up to €20m or four percent of a company’s global annual turnover, whichever is higher.

Karen Schuler, BDO USA’s data and information governance leader, said GDPR served as a wake-up call to organizations to get their privacy policies in line with global standards. To comply, she said, some even went as far as to set up data centers in the EU.

“In certain cases, companies have decided it may be easier to comply with GDPR by opening up data centers in the EU,” she said. “Regardless, now when boards consider how their organizations can keep pace with mounting data-related challenges, their priority should be building a culture of privacy, with cyber security and regulatory compliance as critical components.”

The CLOUD Act requires U.S.-based technology companies to provide data stored on servers in any jurisdiction if requested by Federal law enforcement. Last year New York also brought in tough new cyber security rules for banks, insurers and other financial institutions.

“Companies will now have to adhere to much stricter rules requiring them to conduct local cyber security assessments, obtain local certification and have in place a local cyber security and compliance team.” —  Carrie Yang, AVP and team leader, Cyber Solutions Group, Aon

But Annie O’Leary, assistant vice president of Aon’s Cyber Solutions Group, believes that the California Consumer Privacy Act, slated for 2020, will have a much bigger impact on companies.

The new law will put much greater restriction on the collection and use of personal information by companies, she said.

“Essentially it provides a number that a third-party individual can file if there’s damage due to loss of their information or any breach,” she said. “For any company operating in the state that handles citizens’ data, that’s a huge concern.”

Global Compliance

In order to comply with these new laws, companies need to ensure their cyber security policies and IT systems are up to speed, including carrying out risk assessments. They must also have the appropriate incident response and business continuity plans, as well as insurance coverage, in place.

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Richards added companies need to have an ongoing and robust cyber regulatory readiness program in place that helps them understand the different jurisdictional requirements.

They must also maintain regular dialogue with their internal information security leadership and corporate counsel to keep up to date and review their cyber security policies, he said.

“A good starting point to maximize the utility of corporate cyber security policies is to map existing policies to one of the current internationally recognized security frameworks,” he said.

“The main two are the International Organization for Standardization ISO 27,000 series and the U.S. National Institute of Standards and Technology Cyber Security Framework.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]