What is a Chinese Wall

A Chinese wall is an ethical barrier that prevents communication between members of an organization that might lead to conflicts of interest. For example, a Chinese wall could exist between departments where the exchange of information could unfairly influence trades. The "wall" is figuratively erected to safeguard insider information and protect private data that could create negative implications and legal consequences if improperly shared.

BREAKING DOWN Chinese Wall

Protecting client data and confidential information is critical to any business but is especially important to companies with diversified services, such as insurance companies, banks, and other financial services firms. The Gramm-Leach-Bliley Act (GLBA) of 1999 repealed the Glass-Steagall Act that prohibited banks, insurance companies, and financial services companies from acting as combined firms, such as banks offering insurance products.  The Gramm-Leach-Bliley Act resulted in a surge of mergers and increased diversification of services, as well as an increase in fears and public scrutiny.  One concern was the protection and sharing of confidential information and personal consumer data with those of contrary interests. In response to growing concerns, many companies adopted the Chinese Wall concept.

The Etymology of the Chinese Wall in Finance

As suggested by the name, the phrase was coined after the Great Wall of China, a nearly impervious 5,500-mile-long ancient structure erected to protect China from her enemies. However, the expression first entered the U.S. financial scene after the stock market crash of 1929. As a result, regulators proposed forming Chinese walls between brokers and investment bankers.  With increased pressures to regulate the industry, new legislation was enacted. Proactively, companies began to self-regulate enforcing a Chinese Wall culture to prevent the government from splitting up their operations.

"Chinese Wall" Controversy

There have been objections to the use of the term, as it is deemed culturally insensitive and racist. The term also carries a negative connotation that unfairly and inaccurately reflects the Chinese culture and business operations. In 1988, Justice Harry W. Low, the presiding judge in the Peat, Marwick, Mitchell & Co. vs. the Superior Court case, wrote extensively about the offensiveness of the phrase. Justice Low objected to the phrase by both parties and offered the term "ethics screen" as an alternative. In addition to writing about the inherent racism of the phrase, he pointed out its metaphoric inaccuracy. He wrote that while the phrase refers to a two-way hermetic seal to prevent communication between two parties, the actual wall of China acts as a one-way seal to keep invaders out.

The term "Chinese Wall" extends beyond the financial services sector.  Newspapers also embrace the concept of a Chinese wall. In this context, it refers to the division between marketing staff and journalists and exists to ensure that journalists are not swayed by the demands of the paper's advertisers.