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Chinese Walls are an ethical rather than physical barrier between different divisions of a financial (or other) institution to avoid conflict of interest. For example a Chinese Wall is said to exist between the corporate-advisory area and the brokering department of a financial services firm to separate those giving corporate advice on takeovers from those advising clients about buying shares. The “wall” is thrown up to prevent leaks of corporate inside information, which could influence the advice given to clients making investments, and allow staff to take advantage of facts that are not yet known to the general public.

Where firms are providing a wide range of services, clients must be able to trust that information about themselves will not be exploited for the benefit of other clients with different interests. And that means clients must be able to trust the effectiveness of Chinese Walls.

Although the initial assumption on hearing the term “Chinese Wall” is that it relates to the Great Wall of China (pictured above) the term actually originates from a reference to Chinese standing screens made of paper (more usually thought of as a Japanese feature) which allow for the temporary installation of a wall in a room lacking the permanent architectural feature. Courtly manners (or etiquette in western terms) dictated that anyone on one side of the screen could not or did not hear what was being said on the other – even though they clearly could. They could not act on any information they heard.

Thus in present times even though someone one one side of a “Chinese Wall” heard or knew something from the other side (they might even work on both sides) they must act as if they do not.

However some corporate scandals in recent years have made many people doubt the effectiveness of Chinese Walls, as well placed executives of respectable firms have traded illegally on inside information for their own benefit. They may well have gone to jail but that hasn’t necessarily made up for the financial losses that clients may have experienced.

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Category: Guide to City Jargon 

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