Data Residency, What Is It and Why It Is So Important for Global Data Compliance

By 2025, global data generation is projected to reach an astounding 463 exabytes per day. Coupled with the rise of cloud computing and the expansion of geographically distributed businesses, cross-border data flows are more prevalent than ever, and so too is the significance of data residency the specific physical or geographic location where an organization stores or processes its data.

This significance arises because the regulations governing data, including privacy and data sovereignty laws, are typically determined by the country or region where the data is physically located. This means that data residency is an essential piece of the puzzle for organizations that seek to comply with local data protection, privacy, and security laws. As governments implement greater regulations to protect personal and sensitive information, businesses must prioritize data management with data residency in mind to avoid legal penalties and maintain customer trust.

Key Aspects of Data Residency

Data residency refers to the physical or geographical location where data is stored and processed. This is a crucial consideration for compliance with various legal and regulatory frameworks, as different jurisdictions have specific laws for specific types of data that dictate how that data must be handled, including where it can be stored and processed. The location of data directly influences the legal and regulatory frameworks that it is subject to as defined by data sovereignty, which asserts that data is subject to the laws of the country in which it resides. Data residency intersects with data sovereignty, and means that both the storage and processing of data must comply with local regulations to mitigate risks such as unauthorized access and non-compliance. Organizations must be aware of these requirements to ensure they manage their data responsibly while maintaining compliance with international standards.

Data Residency vs. Data Sovereignty vs. Data Localization

While often used interchangeably, data residency, data sovereignty, and data localization are not synonymous. Each can have particular legal and regulatory implications for organizations, contingent on where they operate and where their customers are located. Understanding each, and the nuances between them will help organizations to ensure compliance with international data regulations, implement effective cross-border data strategies and mitigate risk associated with global data management.

•  Data Residency: This concept refers to the specific physical location where data is stored. Organizations often choose particular storage locations to comply with regulatory requirements or to optimize performance and availability. The principle of data residency emphasizes that data should ideally remain within the country or region where it was originally collected or generated, ensuring compliance with local laws and regulations.
•  Data Sovereignty: Data sovereignty is the principle that data is governed by the laws of the country in which it is collected or processed. For example, data stored in the United States falls under U.S. jurisdiction, regardless of the nationality of the individual or organization that owns the data. This principle affects how data is managed, protected, and stored, requiring organizations to be aware of and adhere to local legal obligations.
•  Data Localization: Data localization mandates that all personal data collected from residents of a specific country must also be processed and stored within that country's borders. For instance South Korea's Personal Information Protection Act (PIPA) has data localization rules that prohibit the overseas transfer of specific data types like Electronic Medical Records (EMR) outside of South Korea. These type of requirements often compel multinational organizations to maintain separate databases for various national or regional jurisdictions. Data localization can be categorized into two main types, absolute data localization, where data cannot leave the jurisdiction at any time and relative localization which in contrast allows for data to leave its jurisdiction under specific conditions or predetermined circumstances.

Picture a local branch of a global business. The local branch is in country A, and collects data from customers resident to country A. The head office of the company is based overseas in country B. If the head office handles all billing, sensitive data may be being sent (transferred) and stored overseas - this touches on data residency, where the data is stored, and data sovereignty as the data may now be subject to multiple jurisdictions and as such multiple regulations. If the the nature of the data was particularly sensitive the laws and regulations of County A may mandate absolute or relative data localization.

The Impact of Cross-Border Data Flows

When data moves offshore, it can become subject to foreign laws and practices. This decoupling of data control can create significant compliance challenges and security risks. The cross-border movement and storage of data occurs for various reasons, including access to SaaS applications, cloud services, reduced transaction costs, streamlined operations, efficient data backup, and secure storage. As such, maintaining and protecting these cross-border flows is not only strategically important but also operationally vital for some businesses. Furthermore, cross-border data flows play a crucial role in driving economic growth and fostering innovation in an increasingly interconnected world. To fully capitalize on the benefits of these data movements, organizations must develop strategies that promote responsible data sharing while adhering to the legal frameworks governing data residency. This balance is essential for maximizing the advantages of cross-border data flows while ensuring compliance and protecting sensitive information.

Global Compliance and Data Residency

Different countries enforce varying laws regarding how data must be stored, handled, and transferred. For example, the European Union's General Data Protection Regulation (GDPR) requires businesses to have a clear understanding of where their data is stored and how it is protected. Compliance with these regulations goes beyond merely avoiding penalties; it demonstrates to customers, stakeholders, governments and partners that an organization prioritizes data security and privacy.

Why Data Residency Matters and Risks of Non-Compliance

Understanding data residency is crucial for organizations operating globally. As businesses rely on cross-border data flows, they must navigate a complex web of regulations governing personal and sensitive information. Ultimately, organizations that fail to demonstrate adherence to these regulations risk costly legal repercussions and a loss of customer trust and reputation.

Data Residency Considerations:

1.    Compliance with Data Privacy Laws: Regulations such as GDPR require careful management and storage of personal and sensitive information.
2.    Data Sovereignty: Data may be subject to the legal authority of multiple jurisdictions based of where it resides, complicating compliance.
3.    Export Law Compliance: Regulations like ITAR (International Traffic in Arms Regulations) place strict controls on data transfer across borders.
4.    Data Protection and Security: There may be risk in exposing sensitive information to foreign countries, companies, laws and practices.
5.    Data Breach Notifications: Different jurisdictions have varying requirements for reporting data breaches.
6.    Contractual Obligations: Contracts may consider have data residency requirements, especially for handling government or sensitive corporate data.
7.    Reputation and Trust: Customers are increasingly concerned about how their personal information is handled and where it resides. Organizations that fail to demonstrate compliance may lose customer trust, leading to decreased business opportunities and customer retention.

Failing to comply with data residency requirements poses significant risks for both individuals and businesses. Non-compliance can lead to substantial fines, legal actions, and reputational damage, depending on the jurisdiction. For instance, under the European Union's General Data Protection Regulation (GDPR), European supervisory authorities issued a total of €1.78 billion (USD1.94billion) in fines since 28 January 2023, an increase of over 14% on the total issued in the year from 28 January 2022.

The risks of non-compliance extend beyond financial penalties. Neglecting data residency requirements can increase vulnerability to data breaches, particularly if data is stored in countries with weak cybersecurity measures. There are also serious concerns regarding data sovereignty; if data is stored outside its country of origin, it may be subject to access by foreign governments. This situation can result in severe consequences for businesses and individuals alike, including identity theft and corporate espionage. It is essential for businesses to thoroughly understand and adhere to data residency requirements in every jurisdiction they operate in to safeguard their interests and maintain customer trust.

Who Must Comply with Data Residency Requirements

Data residency requirements are essential regulations that organizations handling sensitive user data, such as personally identifiable information (PII) and protected health information (PHI), must follow. This includes government agencies, healthcare providers, financial institutions, and technology companies that process and store personal data. Even smaller enterprises, like e-commerce businesses and small manufacturers, must understand and implement these regulations if they collect personal user data. Compliance is enforced by various regulatory bodies depending on the jurisdiction, such as the European Data Protection Supervisor in the EU, the Office of the Privacy Commissioner in Canada, and the Federal Trade Commission in the U.S. Enforcement methods can include regular audits, mandatory breach reporting, and significant fines for non-compliance.

Meeting Data Residency Compliance Requirements

Organizations can efficiently meet Data Residency requirements when utilizing cloud and SaaS applications by securing data before it is transmitted to the end service. Typical Data Residency requirements can be met by adopting the following practices:

1.    Keep data physically stored within the country of origin borders to keep it governed by local laws.
2.    Maintain local legal jurisdiction over data.
3.    Confine data storage to onshore data centers.
4.    Keep security protocols and systems in line with local jurisdiction requirements.
5.    Adopt a local domicile in all aspects of operation and access to the cloud system.
6.    Use cloud encryption or tokenization through a Cloud Data Security Gateway hosted on premises (or local cloud) to secure data before it is sent offshore.
7.    Maintain sole access to data via locally stored encryption keys or token vaults - reducing the risk of exposure to foreign jurisdictions and companies.

It's important to note that when data moves offshore, it is no longer tightly controlled. This decoupling of data control can make data subject to the laws and practices of a foreign country and/or corporation. The legal implications of data residency are profound and multifaceted. Businesses must prioritize understanding and adhering to local regulations to avoid penalties, protect their reputation, and ensure compliance with both domestic and international laws. As the landscape continues to evolve, staying informed about data residency requirements will be essential for maintaining operational integrity and customer trust.

How Encryption and Tokenization Work to Address Data Residency Requirements

Both encryption and tokenization serve as effective strategies for organizations to help meet with data residency requirements. Tokenization enables businesses to keep sensitive information within specific geographic borders (reducing the jurisdictions it is subject to) by replacing it with tokens that can be safely transmitted across borders. The original data and the tokenization system, including the token vault, remain in the required jurisdiction, ensuring compliance. Since tokens have no intrinsic value and cannot be reversed to reveal the original data, they can typically be transferred without violating data residency laws. Similarly, encryption protects data both at rest and in transit, ensuring that even if it crosses borders or is intercepted, it remains secure and unreadable without the appropriate decryption keys. By storing these keys in the required jurisdiction, organizations can effectively mask and secure data throughout its lifecycle, potentially exempting it from certain data residency regulations.

Why The Encryption Offered By Your SaaS Provider Is not Enough To Address All Residency Requirements

While encryption protects data during transmission, it may not address the legal implications of storing that data in a foreign jurisdiction, this is certainly the case when you leave encryption up to a foreign company who may store or have access to your encryption keys. Organizations must implement additional measures, such as tokenization and localized key and vault storage solutions, to ensure compliance with residency requirements. Moreover, organizations need to adopt comprehensive security frameworks that include access controls, audit logs, and monitoring systems to ensure that only authorized personnel can access sensitive data, regardless of its location. This is where products such as StratoKey's Cloud Data Protection Gateway and EMAD™ come into play.

StratoKey Can Help With Data Residency Requirements Via Their Cloud Data Protection Gateway

StratoKey's intelligent Cloud Access Security Broker (CASB) features a Cloud Data Protection Gateway that combines encryption and tokenization for popular SaaS and cloud services like NetSuite, Salesforce, Jira, Confluence, and ServiceNow (plus many more). This solution allows sensitive data to remain stored within local environments while securely substituting and transmitting it as tokens or encrypted form to cross-border cloud services. Importantly, encryption keys and token vaults are kept securely within the client's country (and environment), ensuring compliance with local regulations and secure key management. StratoKey's CASB provides Encryption, Monitoring, Analytics and Defensive (EMAD™) capabilities, to layer security through access controls, audit logs, and monitoring systems to ensure that only authorized personnel in a chosen location can access sensitive data. By leveraging StratoKey's platform, businesses can implement a comprehensive data protection strategy that addresses data residency concerns while enabling the effective use of cloud and SaaS applications. This approach not only enhances security but also helps organizations navigate the complexities of data governance in a global context.

Since 2012, StratoKey has assisted clients in meeting data residency, privacy and security needs across a range of verticals such as healthcare, banking, financial services, manufacturing, cybersecurity, education, and technology sectors. If you would like to know more about StratoKey, please contact us or download the StratoKey White Paper.