‘Chinese Walls’
| DOI | https://doi.org/10.1108/eb025955 |
| Pages | 336-344 |
| Date | 01 February 2000 |
| Published date | 01 February 2000 |
| Author | Michael Grant,Lorraine Talbot |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 7 No. 4 — Financial Services
FINANCIAL SERVICES
'Chinese Walls'
Michael Grant and Lorraine Talbot
Journal of Financial Crime
Vol
7 No
4,
2000,
pp.
336-344
© Henry Stewart Publications
ISSN
0969-6458
The handling of conflicts of interest has become an
increasingly important concern for modern profes-
sional advisers, in particular lawyers, accountants,
brokers and financial advisors. This concern has
become exacerbated because of the convergence of
a number of factors, namely the bureaucratisation
of many areas of professional advisory work, the
emergence of megafirms and large national and
multi-national partnerships dealing with this work,
coupled with a customer base dominated by large
corporations and governments. Indeed, it is the
demand of these customers that partly accounts for
the emergence of larger advisory firms. However,
the outcome of this process has inevitably created
severe conflicts of interest problems for such con-
glomerate professional practices and large advisory
firms, problems that they have attempted to contain
through the use of what has become commonly
known as Chinese walls.
The emergence of the Chinese wall as a means of
seeking to contain conflicts of duty and interest prob-
lems has been an innovation which has in the past
hitherto provided a convenient solution to the pro-
blem of conflict of interest. Most discussion of Chi-
nese walls has arisen in the context of the securities
and banking industries, although the use of these pro-
cedural mechanisms is also relevant for accountants
and lawyers working in large firms. Although the
paper will focus mainly upon the respective experi-
ences of conflicts in the legal profession and the secu-
rities industry, many of the experiences of these
industry groups with Chinese walls are applicable
to other areas of professional practice even if it is
accepted that different types of business enterprises
may generate different public interest concerns.
The popularity of the Chinese wall rests more
upon commercial convenience or practice than
upon legal foundation. This is hardly surprising, as
the practice of corporation law has historically
rested upon fictions of this kind, famously the fiction
of separate legal identity of a corporation notwith-
standing that the corporation in question may be
little more than a department or division of a larger
group of companies. Most recently similar conclu-
sions have been drawn by the English courts about
the theory and practice of Chinese walls. At the
heart of these decisions is a fundamental policy
dilemma concerning the balancing of public confi-
dence in the advisory profession against the com-
mercial needs of those professions to operate larger
entities.
WHAT IS A CHINESE WALL?
The term 'Chinese wall' is an imprecise metaphor. In
Re a Firm of
Solicitors1
the trial judge commented that
'in order that metaphor may not cloud meaning, I
prefer to call it an information barrier'. Yet perhaps
we should remember that the Chinese wall was ori-
ginally a wall of paper through which you could
whisper, it was not designed to contain information.
Therefore the name is a flagrant indication of what
goes on. In the Western Australian case of Malleson
Stephen Jacques v KMPG Peat Marwick,2 IIP J
observed that Chinese walls 'appear to be an attempt
to clad with respectable antiquity and impenetrability
something that is relatively novel and potentially
porous'.
The classic definition can be found in 'Financial
Services Law and Practice',3 which describes a
Chinese wall as follows:
'In simple terms a Chinese wall is a notational bar-
rier constructed to prevent price sensitive informa-
tion passing between different parts of the same
organisation or group of organisations. In the
United Kingdom it has two different purposes —
(1) Preventive — To stop inside information in the
possession of persons in one part of an organi-
sation from being misused by persons in
another part;
(2) Legal — To provide a defence for an organisa-
tion against liability resulting from the possible
legal consequences of conflicts of interest.'4
Page 336
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