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Chinese Wall – Definition

Chinese Wall Definition

In business, the Chinese wall refers to a barrier related to virtual information that restricts the flow of information between two or more groups. In an organization, the Chinese wall may be used to block departments from exchanging information that may result in legal consequences.

The wall, in this case, is basically conceptual and is represented by policies. However, separation of departments may also include physical barriers such as buildings or walls.

A Little More on What is a Chinese Wall

The Chinese wall is basically used to prevent information from reaching those not authorized to access it. If there were no barriers to information access, then it could lead to illegal use of inside information. Therefore, it helps to prevent unnecessary conflicts, that may emerge as a result of information reaching the wrong people. The Chinese wall is a business technique that can be employed in a different environment such as;

  • Business
  • Financial industry
  • Software development
  •  Network security
  • Project management
  • Law
  • Journalism.

Chinese Wall Information Background

The term Chinese wall originated from the Great Wall of China. The length of this impermeable wall is 5,500 long. It was built to keep enemies from entering China in ancient times. The term Chinese wall was applied after the stock market crash incident in 1929.

There was a debate by the Congress on the need to create regulatory barriers between investment and commercial bankers. This regulation was necessary to ensure that there was no conflict of interest between the two.

The Chinese wall in the field of finance became popular in 1999. This was as a result of the federal regulations’ repeal, which prohibited firms from providing combined services in the following areas:

The new Chinese wall law came in and reversed the combination restrictions which had been in existence. The law enabled the creation of the financial giants we see today. A good example is the JPMorgan Chase and Citigroup. The two financial giants then saw a need for creating a Chinese wall between its departments to specifically restrict the flow of information.

In other words, the Chinese wall law was created to allow a combination of services. However, the same law was also meant to ensure that there is a restriction in information sharing between departments. Information was to stay within departments and not to be leaked outside.

The Chinese wall policies were put in place to regulate the flow of information. The policies were also meant to reinforce employee compliance when it comes to information sharing.

 How Chinese wall Works [Example]

Let’s assume that public company ABC has a takeover plan of a rival company. And there is a financial services company with a corporate investment arm which is initiating the takeover plan on behalf of public company ABC. The conversation involved here is to be treated with the utmost confidentiality. This is because it is easy for this information to be leaked to unauthorized persons within the firm.

Also, keep in mind that this very company has engaged investment advisers in another place to advice shareholders to sell their shares of the target company. Now, in such a situation, the Chinese wall is supposed to come in handy to prevent the conversations on the takeover to get to investment advisers.

 Why the Chinese Wall?

Note that the Chinese wall policy was solidified in 2002 when the Sarbanes-Oxley Act was passed. The act was created to ensure that there was strict guarding of insider trading within the companies. In other words, it was created to prevent conflict of interest.

It is also worth noting that the Chinese wall concept started to be applied in other professions such as the legal field. For instance, let’s assume that legal firm ABC is the representative of both parties involved in a lawsuit. In this case, a temporary Chinese wall is necessary between the two legal representatives. This will prevent any perceived or real conspiracy or bias in the representation.

Generally, Chinese wall has been considered by investment banking as one of the best practices and compliance. This is because it has helped prevent conflict of interest during investment deals.

 Controversy Behind Chinese Wall Term

Currently, there has been controversy regarding the use of Chinese wall term. The phrase has been considered to be offensive by some legislators. They felt that it was a damaging connotation towards business practices and Chinese culture.

For this reason, the phrase has been noted as inappropriate. There are, therefore, suggestions to change this term to read “ethics screen.”

 Reference for “Chinese Wall”



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