Chinese Wall
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A Chinese wall or ethical wall is an information barrier protocol within an organization designed to prevent exchange of information or
communication Communication is commonly defined as the transmission of information. Its precise definition is disputed and there are disagreements about whether Intention, unintentional or failed transmissions are included and whether communication not onl ...
that could lead to conflicts of interest. For example, a Chinese wall may be established to separate people who make investments from those who are privy to confidential information that could improperly influence the investment decisions. Firms are generally required by law to safeguard insider information and ensure that improper trading does not occur.


Etymology

Bryan Garner Bryan Andrew Garner (born November 17, 1958) is an American legal scholar and lexicographer. He has written more than two dozen books about English usage and style such as ''Garner's Modern English Usage'' for a general audience, and others for l ...
's ''Dictionary of Modern Legal Usage'' states that the metaphor title "derives ''of course'' from the
Great Wall of China The Great Wall of China (, literally "ten thousand ''li'' long wall") is a series of fortifications in China. They were built across the historical northern borders of ancient Chinese states and Imperial China as protection against vario ...
",, italics added although an alternative explanation links the idea to the screen walls of Chinese internal architecture. The term was popularized in the
United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
following the
stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange a ...
crash of 1929, when the U.S. government legislated information separation between
investment bank Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
ers and
brokerage firm A broker is a person or entity that arranges transactions between a Purchasing, buyer and a sales, seller. This may be done for a commission (remuneration), commission when the deal is executed. A broker who also acts as a seller or as a buyer b ...
s, in order to limit the conflict of interest between objective company analysis and the desire for successful
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investm ...
s. Rather than prohibiting one company from engaging in both businesses, the government permitted the implementation of Chinese-wall procedures. A leading note on the subject published in 1980 in the '' University of Pennsylvania Law Review'' titled "The Chinese Wall Defense to Law-Firm Disqualification" perpetuated the use of the term.


Objections to the term ''Chinese wall''

There have been disputes about the use of the term for some decades, particularly in the legal and banking sectors. The term can be seen both as
culturally insensitive Cultural sensitivity, also referred to as cross-cultural sensitivity or cultural awareness, is the knowledge, awareness, and acceptance of other cultures and others' cultural identities. It is related to cultural competence (the skills needed ...
and an inappropriate reflection on
Chinese culture Chinese culture () is one of the Cradle of civilization#Ancient China, world's earliest cultures, said to originate five thousand years ago. The culture prevails across a large geographical region in East Asia called the Sinosphere as a whole ...
and trade, which are now extensively integrated into the global market. In '' Peat, Marwick, Mitchell & Co. v. Superior Court'' (1988), Presiding Justice Harry W. Low, a
Chinese American Chinese Americans are Americans of Chinese ancestry. Chinese Americans constitute a subgroup of East Asian Americans which also constitute a subgroup of Asian Americans. Many Chinese Americans have ancestors from mainland China, Hong Kong ...
, wrote a
concurring opinion In law, a concurring opinion is in certain legal systems a written opinion by one or more judges of a court which agrees with the decision made by the Majority opinion, majority of the court, but states different (or additional) reasons as the bas ...
specifically in order "to express my profound objection to the use of this phrase in this context". He called the term a "piece of legal flotsam which should be emphatically abandoned", and suggested "ethics wall" as a more suitable alternative. He maintained that the "continued use of the term would be insensitive to the ethnic identity of the many persons of Chinese descent".''Peat, Marwick, Mitchell & Co. v. Superior Court''
, 200 Cal.App.3d 272, 293–294, 245 ''Cal.Rptr.'' 873, 887–888 (1988)


Alternative terms

Alternative phrases include "screen", " firewall", " cone of silence", and "ethical wall". "Screen", or the verb "to screen", is the preferred term of the
American Bar Association The American Bar Association (ABA) is a voluntary association, voluntary bar association of lawyers and law students in the United States; national in scope, it is not specific to any single jurisdiction. Founded in 1878, the ABA's stated acti ...
Model Rules of Professional Conduct."Model Rules of Professional Conduct"
The ABA Model Rules define ''screening'' as "the isolation of a lawyer from any participation in a matter through the timely imposition of procedures within a firm that are reasonably adequate under the circumstances to protect information that the isolated lawyer is obligated to protect under these Rules or other law", and suitable "screening procedures" have been approved where
paralegal A paralegal, also known as a legal assistant or paralegal specialist, is a legal professional who performs tasks that require knowledge of legal concepts but not the full expertise of a lawyer with an admission to practice law. The market for p ...
s have moved from one law firm to another and have worked on cases for their former employer which may conflict with the interests of their current employer and the clients they represent.


Usage in specific industries


Finance

A Chinese wall is commonly employed in
investment bank Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
s, between the corporate-advisory area and the brokering department. This separates those giving corporate advice on takeovers from those advising clients about buying shares and researching the equities themselves. 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. The phrase "over the wall" is used by
equity research Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the diffe ...
personnel to refer to rank-and-file personnel who operate without an ethics wall at all times. Examples include members of the Chinese wall department, most compliance personnel, attorneys and certain NYSE-licensed analysts. The term "already over the wall" is used when an employee who is not normally privy to wall-guarded information somehow obtains sensitive information. Breaches considered semi-accidental were typically not met with punitive action during the heyday of the " dot-com" era. These and other instances involving conflicts of interest were rampant during this era. A major scandal was exposed when it was discovered that research analysts were encouraged to blatantly publish dishonest positive analyses on companies in which they, or related parties, owned shares, or on companies that depended on the investment banking departments of the same research firms. The U.S. government has since passed laws strengthening the use ethics walls such as Title V of the
Sarbanes–Oxley Act The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. The act, , also known as the "Public Company Accounting Reform and Investor Protectio ...
in order to prevent such conflicts of interest. Ethics walls are also used in the
corporate finance Corporate finance is an area of finance that deals with the sources of funding, and the capital structure of businesses, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and analy ...
departments of the " Big Four" and other large accountancy and financial services firms. They are designed to insulate sensitive documentation from the wider firm in order to prevent conflicts.


Journalism

The term is used in
journalism Journalism is the production and distribution of reports on the interaction of events, facts, ideas, and people that are the "news of the day" and that informs society to at least some degree of accuracy. The word, a noun, applies to the journ ...
to describe the separation between the editorial and
advertising Advertising is the practice and techniques employed to bring attention to a Product (business), product or Service (economics), service. Advertising aims to present a product or service in terms of utility, advantages, and qualities of int ...
arms. The Chinese wall is regarded as breached for "
advertorial An advertorial is an advertisement in the form of editorial content. The term "advertorial" is a blend word, blend (see portmanteau) of the words "advertisement" and "editorial". Merriam-Webster dates the origin of the word to 1946. In printed pub ...
" projects. In student journalism, maintaining a publication's independence from its associated educational institution can be a challenge. Separately, the term can refer to a separation between a publication's news and opinions arms.


Insurance

The term is used in property and casualty insurance to describe the separation of claim handling where both parties to a claim (e.g. an airport and an airline) have insurance policies with the same insurer. The claim handling process needs to be segregated within the organisation to avoid a conflict of interest. This also occurs when there is an unidentified or uninsured motorist involved in an auto collision. In this case, two loss adjusters will take on the claim - one representing the insured party and another representing the uninsured or unidentified motorist. While they both represent the same policy, they both must investigate and negotiate to determine fault and what if anything is covered under the policy. In this case, a Chinese wall is erected between the two adjusters.


Law

Chinese walls may be used in
law firm A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise consumer, clients (individuals or corporations) about their legal rights and Obligation, respon ...
s to address a
conflict of interest A conflict of interest (COI) is a situation in which a person or organization is involved in multiple wikt:interest#Noun, interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates t ...
, for example to separate one part of the firm representing a party on a deal or
litigation A lawsuit is a proceeding by one or more parties (the plaintiff or claimant) against one or more parties (the defendant) in a civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. ...
from another part of the firm with contrary interests or with confidential information from an adverse party. Under UK law, a firm may represent competing parties in a suit, but only in strictly defined situations and when individual fee earners do not act for both sides. In United States law firms, the use of Chinese walls is no longer sufficient on its own to eliminate or "cure" a potential conflict of interest except within very narrow exceptions. They are, however, still used in conjunction with requests from clients as a condition of waivers, or as a prudential measure within the firm to prevent or address potential business issues. The
American Bar Association Model Rules of Professional Conduct The American Bar Association's Model Rules of Professional Conduct (MRPC) are a set of rules and commentaries on the ethical and professional responsibilities of members of the legal profession in the United States. Although the MRPC generally is ...
(2004) state: "While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7 or 1.9, unless the prohibition is based on a personal interest of the prohibited lawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm." Although ABA rules are only advisory, most
U.S. state In the United States, a state is a constituent political entity, of which there are 50. Bound together in a political union, each state holds governmental jurisdiction over a separate and defined geographic territory where it shares its so ...
s have adopted them or have even stricter regulations in place.


Government procurement

Chinese or ethical walls may be required where a company which already has a contract with a public body intends to bid for a new contract, in circumstances where the public body concerned wishes to maintain a fair competitive procedure and avoid or minimise the advantage which the existing contractor may have over other potential bidders. In some cases UK public sector terms of contract require the establishment of "ethical wall arrangements" approved by the customer as a pre-condition for involvement in the procurement process for additional goods and services or for a successor contract.


Computer science

In
computer science Computer science is the study of computation, information, and automation. Computer science spans Theoretical computer science, theoretical disciplines (such as algorithms, theory of computation, and information theory) to Applied science, ...
, the concept of a Chinese wall is used by both the operating system for
computer security Computer security (also cybersecurity, digital security, or information technology (IT) security) is a subdiscipline within the field of information security. It consists of the protection of computer software, systems and computer network, n ...
and the US judicial system for protection against copyright infringement. In computer security it concerns the software stability of the
operating system An operating system (OS) is system software that manages computer hardware and software resources, and provides common daemon (computing), services for computer programs. Time-sharing operating systems scheduler (computing), schedule tasks for ...
. The same concept is involved in an important business matter concerning the ''licensing'' of each of a computer's many software and hardware components. Any hardware component that requires direct software interaction will have a license for itself and a license for its software "driver" running in the operating system.
Reverse engineering Reverse engineering (also known as backwards engineering or back engineering) is a process or method through which one attempts to understand through deductive reasoning how a previously made device, process, system, or piece of software accompl ...
software is a part of computer science that can involve writing a driver for a piece of hardware in order to enable it to work in an operating system unsupported by the manufacturer of the hardware, or to add functionality or increase the performance of its operations (not provided by the manufacturer) in the supported operating system, or to restore the usage of a piece of computer hardware for which the driver has disappeared altogether. A reverse engineered driver offers access to development, by persons outside the company that manufactured it, of the general hardware usage.


Reverse engineering

There is a case-law mechanism called " clean room design" that is employed to avoid copyright infringement when
reverse engineering Reverse engineering (also known as backwards engineering or back engineering) is a process or method through which one attempts to understand through deductive reasoning how a previously made device, process, system, or piece of software accompl ...
a proprietary driver. It involves two separate engineering groups separated by a Chinese wall. One group works with the hardware to reverse engineer what must be the original algorithms and only documents their findings. The other group writes the code, based only on that documentation. Once the new code begins to function with tests on the hardware, it is able to be refined and developed over time. This method insulates the new code from the old code, so that the reverse engineering is less likely to be considered by a jury as a
derived work In copyright law, a derivative work is an expressive creation that includes major copyrightable elements of a first, previously created original work (the underlying work). The derivative work becomes a second, separate work independent from t ...
.


Computer security

The basic model used to provide both
privacy Privacy (, ) is the ability of an individual or group to seclude themselves or information about themselves, and thereby express themselves selectively. The domain of privacy partially overlaps with security, which can include the concepts of a ...
and
integrity Integrity is the quality of being honest and having a consistent and uncompromising adherence to strong moral and ethical principles and values. In ethics, integrity is regarded as the honesty and Honesty, truthfulness or of one's actions. Integr ...
for data is the "Chinese wall model" or the " Brewer and Nash model". It is a security model where read/write access to files is governed by membership of data in conflict-of-interest classes and datasets.


See also

* Brewer and Nash model *
Conflict of interest A conflict of interest (COI) is a situation in which a person or organization is involved in multiple wikt:interest#Noun, interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates t ...
* Glass–Steagall Act * Global Settlement *
Insider trading Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company. In various countries, some kinds of trading based on insider informati ...
* ''Mad Men'': "Chinese Wall"


References

{{DEFAULTSORT:Chinese Wall Investment banking Informal legal terminology Journalism standards Conflict of interest mitigation Data security Metaphors referring to objects Reverse engineering