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What is the Chinese Wall?

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  • Written By: Mary McMahon
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 August 2016
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A Chinese wall is a communications barrier which is established within an organization such as an investment or law firm. The wall is designed to ensure that people do not have access to insider information, and to protect the confidentiality of individual clients of the firm. Some people object to the phrase “Chinese wall,” claiming that the term is a bit confusing, and perhaps even culturally offensive. The origins of the term are a bit unclear, which clouds the issue even further.

There are a number of reasons to enact a Chinese wall. In some fields of industry, such laws are established by industry mandate, to ensure that people do not have access to information which could give them an unfair advantage. For example, if someone in the customer relations arm of an investment bank was aware of a major deal that was about to take place, he or she could not discuss it with the research division, because this would be a breach of customer privacy and the information could potentially be used for insider trading, an illegal practice.

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In other cases, a Chinese wall is voluntary. In these instances, members of an organization collectively agree that certain information should not be shared between departments for ethical reasons, even if it is technically legal to disclose this information. The Chinese wall ensures that all of the branches of a business act in good faith, and it may give potential customers a sense of reassurance about their privacy.

When the establishment of a Chinese wall is mandated by law, a company may have to take several steps to ensure that all employees understand the policy. These steps may include government mandated education programs, along with the use of code names to refer to people who have access to sensitive information. In this way, individual members of the staff may not know who to go to for inside information, ensuring that they cannot utilize information which the general public would not have.

The goal of a Chinese wall is to prevent conflicts of interest. Such barriers are not always effective, of course, as demonstrated in ample prosecutions of insider trading. Chinese walls also do not necessarily prevent leaking of information to outsiders who could potentially use it unscrupulously.

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