Outsourcing by Canadian Companies: Another Look at the USA PATRIOT Act

There may be no greater area of confusion and misunderstanding than fear of the PATRIOT Act” - Ontario Information and Privacy Commissioner

Cloud computing and data outsourcing has been embraced by many Canadian companies. In a recent poll, the adoption rate of cloud-based services by Canadian businesses experienced one of the highest year-over-year increases. Data security and concerns over personal information and privacy remain one of the biggest barriers to adoption.

One of the most common concerns raised by businesses who are considering cloud computing is the law known as Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“PATRIOT Act”). There has been much discussion and some misinformation regarding the PATRIOT Act. For those unfamiliar with the topic, the central concern is that U.S. government authorities may use the provisions of the PATRIOT Act to access the personal information of Canadians where that information is stored in the United States, particularly in the context of outsourcing or cloud-computing.

Overall, a review of recent decisions in Canada shows that these concerns are overstated in light of the risks, and that for private sector businesses there are no prohibitions on outsourcing to the United States in light of the PATRIOT Act, provided (1) reasonable safeguards are built into the outsource contract (including confidentiality, use-restrictions, security, and provisions to meet monitoring and audit requirements), and (2) customers are notified in a clear way when their personal information will be stored or handled outside Canada. It is important to remember that the confidentiality and use-restrictions imposed on the service provider must be tied to the purposes to which the customers originally consented.

“Transparency and security” are watchwords for Canadian businesses considering the cloud.

Industry-specific regulations or guidelines, such as those found in the Insurance Companies Act and the OSFI guidelines applicable to banks and other financial institutions, place certain controls on outsourcing but do not specifically prohibit outsourcing or data-storage outside of Canada.  Canadian laws, as well as the PATRIOT Act and OSFI Guidelines are reviewed below.

1.         Federal Private Sector Legislation

The Personal Information Protection and Electronic Documents Act, (PIPEDA) governs federally-regulated entities, such as insurance companies. PIPEDA is also the default private-sector privacy legislation for provinces which have not passed “substantially similar” privacy legislation. To date, only Alberta, B.C. and Quebec have passed general private-sector privacy legislation that has been deemed “substantially similar” to PIPEDA.

PIPEDA governs the handling of personal information by private businesses such as insurance companies in the course of commercial activities. PIPEDA does not prohibit outsourcing of personal information to the U.S.  In fact, there is a clear decision of the Canadian Privacy Commissioner that PIPEDA does not prevent federally-regulated entities from outsourcing personal information data handling or data processing to the U.S.

2.         Provincial Privacy Legislation

There are multiple layers of regulation at the provincial level, for the public sector, private sector and for personal health information. Let’s have a look at the Alberta law. With respect to outsourcing, under the Alberta Personal Information Protection Act (PIPA) (sections 13 and 13.1), a service provider must notify consumers when personal information is stored by a service provider outside Canada. This includes a notification of the position or title of a person who is able to answer the consumer’s questions about the collection, use, disclosure or storage of personal information by the service providers outside Canada.  This is considered prudent practice for any private-sector organization engaging in outsourcing personal information to U.S. service providers.

Other than these notice requirements relating to storage of personal information outside Canada, there is no prohibition on outsourcing or data processing in the U.S. in private-sector privacy laws.

3.         USA PATRIOT Act

Regarding the PATRIOT Act, the Privacy Commissioner of Canada has stated that: “.. there is a comparable legal risk that the personal information of Canadians held by any organization and its service provider — be it Canadian or American — can be obtained by government agencies, whether through the provisions of U.S. law or Canadian law.” The Ontario Information and Privacy Commissioner has gone further and stated: “There may be no greater area of confusion and misunderstanding than fear of the PATRIOT Act. The PATRIOT Act has invoked unprecedented levels of apprehension and consternation – far more than I believe is warranted.”

The PATRIOT Act has been in effect for over 10 years, and during this time the Government of Canada states that there have been no instances where the personal information of a Canadian has been accessed under the PATRIOT Act.

Some public sector laws in B.C., Nova Scotia and Quebec require public bodies to ensure that personal information is stored only in Canada. For example, in B.C. public bodies and their service providers are obliged to notify the government if the public body receives “a foreign demand” for personal information. This is designed specifically to address PATRIOT Act concerns.

In Alberta, the public sector Freedom of Information and Protection of Privacy Act, permits a public body to disclose in response to a “subpoena, warrant or order” issued by a court, as long as the court has “jurisdiction in Alberta.” While no prohibition on outsourcing to the U.S. is explicitly built into the Alberta law, this provision is intended to ensure that the public body is constrained in its ability to disclose to a court of a foreign (U.S.) jurisdiction. Once again, it should be noted that this is public sector legislation.

Several privacy commissioner decisions have directly considered the issues raised by the PATRIOT Act in the context of Canadian public and private sector privacy laws.

  • In a 2005 decision, the Privacy Commissioner of Canada decided that PIPEDA does not prohibit the use of foreign-based third-party service providers, but it does oblige Canadian-based organizations to have provisions in place, when using third-party service providers, to ensure a comparable level of protection (including guarantees of confidentiality and security of personal information). The Commissioner’s decision was also clear that, at the very least, a company in Canada that outsources information processing to the U.S. should notify its customers that the information may be available to the U.S. government or its agencies under a lawful order made in that country.
  • Again in 2006 and 2008, the Privacy Commissioner of Canada decided that data handling in the U.S., which exposed the personal information to potential PATRIOT Act concerns, did not offend PIPEDA since the Canadian company had implemented comprehensive strategy and techniques to safeguard the personal information.   
  • Most recently, a June 2012 decision of the Information and Privacy Commissioner of Ontario reviewed a complaint about PATRIOT Act concerns with the outsourcing of personal information to the U.S. by an Ontario public body (the Ministry of Natural Resources). The Commissioner decided that the Ministry’s collection, use and disclosure of personal information for the purpose of administering the Ministry’s hunting and fishing licensing program was in compliance with the Act.

All of these decisions point to the need for transparency and openness when dealing with customers, to ensure that they are made aware in cases where personal information handling, processing or storage may or will be outsourced to the U.S. Secondly, the service or outsourcing agreement must contain contractual protections ensuring confidentiality, security and compliance with privacy laws, so that service provider provides a comparable level of protection for the personal information.

4.         OSFI Guideline B-10: Outsourcing of Business Activities, Functions and Processes

OSFI’s Guideline B-10  describes requirements for federally-regulated entities (FREs), such as banks, financial institutions and insurance companies, when engaging in outsourcing. These are the guidelines relevant to the issue of outsourcing to foreign jurisdictions. Generally, these guidelines mandate appropriate security and data confidentiality protections.   

Guideline 7.1.1(j) (“Confidentiality, Security and Separation of Property”) says: “At a minimum, the contract or outsourcing agreement is expected to set out the FRE’s requirements for confidentiality and security. Ideally, the security and confidentiality policies adopted by the service provider would be commensurate with those of the FRE and should meet a reasonable standard in the circumstances. The contract or outsourcing agreement should address which party has responsibility for protection mechanisms, the scope of the information to be protected, the powers of each party to change security procedures and requirements, which party may be liable for any losses that might result from a security breach, and notification requirements if there is a breach of security.”

OSFI also expects “appropriate security and data confidentiality protections to be in place. The service provider is expected to be able to logically isolate the FRE’s data, records, and items in process from those of other clients at all times, including under adverse conditions.”

In Guideline 7.2.2 (“Location of Records”) OSFI indicates that: “In accordance with the federal financial institutions legislation, certain records of entities carrying on business in Canada should be maintained in Canada. In addition, the FRE is expected to ensure that OSFI can access in Canada any records necessary to enable OSFI to fulfill its mandate.” This is intended to cover information such as accounting records, incorporation documents, corporate by-laws, rather than personal information.

Guideline 7.2.4 (“Outsourcing in Foreign Jurisdictions”) indicates the following: “When the material outsourcing arrangement results in services being provided in a foreign jurisdiction, the FRE’s risk management program should be enhanced to address any additional concerns linked to the economic and political environment, technological sophistication, and the legal and regulatory risk profile of the foreign jurisdiction(s).”

Once again, this speaks to the need for enhanced attention to security rather than any outright prohibition on outsourcing to the U.S.

5.         Breaches in Alberta

The Alberta Privacy Commissioner’s 2012 Breach Report shows that a majority (64%) of the 63 reported cases meeting the real risk of significant harm threshold involved human error or lost or stolen unencrypted electronic devices:

  • 22 breaches (35%) were caused by human error. These incidents included inappropriate disposal of personal information, misdirected emails or faxes, loss of files and portable media, and unauthorized disclosure of passwords. The most common form of human error was mail and courier errors caused by delivery to the wrong recipient. 
  • 18 breaches (29%) were caused by theft, such as office and car break-ins. 
  • 14 breaches (22%) were caused by electronic system compromises, typically through targeted attacks by external hackers.
  • 9 breaches (14%) were caused by a failure to adequately control access to electronic or paper files.

None of the cases involved a disclosure or breach through the PATRIOT Act. And it should be noted that hackers can access records on both Canadian and U.S. servers, so in that sense no additional risk is associated with outsourcing to the U.S.

Conclusion

Many concerns have been raised about the reach of the PATRIOT Act. It should be remembered that Canadian government authorities have similar powers to access personal information in the course of investigations, and to respond to requests by their allies, such as the U.S. in investigations.

This review of recent decisions in Canada demonstrates that private sector businesses are not prohibited from outsourcing to the United States in light of the PATRIOT Act. However, Canadian companies are well advised to implement reasonable safeguards and build these safeguards into the outsource contract. Secondly, customers should be notified in a clear way when their personal information will be stored or handled outside Canada.

Calgary - 07:00

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