Chinese Wall
Candlefocus EditorWhen the financial industry was first heavily regulated, a Chinese Wall was constructed between departments to maintain the integrity of information for financial services and ensure clients were not exploited. A bank could not pass on to its stockbrokers, for example, information regarding imminent takeovers before the public were aware of it. Or it couldn’t trade on its own customers’ behalf. The Gramm-Leach-Bliley Act of 1999 (GLBA), which repealed federal laws banning firms from any combination of banking, investing, and insurance services, further promoted the construction of Chinese Walls.
The purpose of these walls is to create a boundary to prevent any information or privileges that one department possesses from being passed to another department to the detriment of the company or its customers. For example, an analyst in a bank’s investment banking division couldn’t pass information to its private banking division or its corporate clients. Similarly, a corporate lawyer wouldn’t be able to pass privileged details of a client’s case to the bank’s research team.
These walls are essential for maintaining the trust of customers and preventing misconduct. The walls are primarily maintained through clear policies and internal processes that departments must follow. Employees must also receive training on these policies and the company must conduct regular evaluations to ensure that the barrier is being upheld.
The Chinese Wall is an important tool for creating an ethical environment for businesses. It is also important for companies to ensure that the walls are enforced in order to protect customers and comply with regulatory requirements.