Chinese Walls: Maintaining client

confidentiality
What is a Chinese wall?
A Chinese wall is an internal measure adopted by a firm to ensure that information
gained while acting for one client does not leak to people in another part of the same firm who
are acting for another client to whom that information may be highly relevant. The principal
aims are to protect client confidentiality and, if the firm is carrying on "investment business",
to ensure fair treatment of all the firm's clients or customers as required by the statements of
principle made pursuant to the Financial Services Act 1986 . There are a variety of different
procedures for achieving this, for example, locked rooms for relevant documents, separate
teams working on the different sides to the matter, written rules on maintaining confidentiality
and restricted access to certain parts of a building and monitoring of those who enter those
areas.
Maintaining client confidentiality is crucial to any firm, but particularly to large multi-
service businesses. Where firms are providing a wide range of services to many clients, it is
vital that their clients can rely on the confidentiality of their affairs, and that means that they
must be able to trust in Chinese walls. The concept of Chinese walls tests self-regulation to the
limit and there have always been those who have doubted their efficacy.

The KPMG case ( Bolkiah v KPMG)

Prince Jefri, the brother of the Sultan of Brunei, brought a case in the High Court against
the accountancy firm, KPMG. The action arose because KPMG was carrying out an
investigation for the Brunei Investment Agency (BIA) into its affairs, including investigations
into certain dealings in which the prince may have been involved (the prince had, at one time,
been the head of the BIA). KPMG had previously acted for the prince in 1996 on a separate
matter and the prince felt that information concerning his personal finances gathered by KPMG
in 1996 could leak out to those contemplating action against him in this current case. He sought
an injunction to prevent KPMG from continuing work on the BIA investigation. At first
instance Mr Justice Pumpfrey granted the injunction to the prince.
 Pumpfrey J. said that the courts are generally skeptical about the efficacy of Chinese
walls in preserving client confidentiality where there is a conflict of professional interest (see,
for example, Re a firm of solicitors [1992] 1 All ER 353). In general, according to the judge,
Chinese walls are not well adapted to deal with accidental, inadvertent or negligent disclosure,
although they are suited to deal with foreseeable or deliberate disclosure.
KPMG argued that, although the work carried out for the prince in 1996 had been a
substantial piece of work, it did not consider that it still had a client relationship with the prince
and it therefore felt free to take on work for the BIA. Clearly, it owed a duty of confidentiality
to the prince, but did not view a conflict of interest as arising in acting for the BIA. To safeguard
confidentiality, BIA had waived KPMG from any duty to disclose to the BIA any confidential
information concerning the prince that it held as a result of the 1996 work. KPMG also set up
a Chinese wall in the firm, by ensuring, for example, that no person worked on the BIA
investigation who possessed confidential information about Prince Jefri's affairs.
It was the judge's view that where accountants offer forensic services which are the same as or
similar to the services offered by solicitors, they should be regarded as having the same wide-
ranging duties as solicitors to pass on absolutely everything to a client that could help their
client's interests.
KPMG appealed to the Court of Appeal to have the injunction overturned.
The judges in the Court of Appeal did not give a unanimous decision. Two of the judges
(Lord Justices Woolf and Otton) overturned the first instance ruling, but the third judge (Lord
Justice Waller) dissented. Woolf LJ said that there were issues suitable for the Law Lords to
consider, so the injunction was allowed to stand, provided that the House of Lords could hear
the case in the next few weeks, otherwise the Court of Appeal will have to reconsider it.
Woolf LJ said that it was wrong to assume that accountants had the same wide duties as
solicitors in relation to confidentiality because accountants have a culture which gives a very
high priority to preservation of confidentiality. This argument seems a little unrealistic, as it
would put solicitors and forensic accountants under different standards despite the fact that the
work carried on by them both is quite similar in its nature. It would also put solicitors at a
commercial disadvantage given that they compete in the same market as forensic accountants.
Woolf LJ also said that Chinese walls were capable of removing real risks of information leaks
and it was wrong to assume otherwise.
In KPMG's case, for example, they had boxed up sensitive documents and put them
under the control of lawyers, downloaded relevant computer data on to CD-Roms and handed
these over to lawyers and put relevant documents in a strong rooms fitted with combination
locks. In all, it would appear that the measures taken were comprehensive.
At the time of going to press, it was not known whether the House of Lords would hear the
case, or whether it would be going back to the Court of Appeal. If the House of Lords hear it
and uphold the first instance judgment, it would have significant implications for accountancy
firms which would have to review the kinds of work they undertake. For example, they may
not be able to expand their forensic accounting practices as they would be more open to
conflicts of interest.

What are the rules on Chinese walls?

As there is virtually no case law on the use of Chinese walls, the outcome of this case
will be viewed with a great deal of interest, not only by accountants carrying out forensic work
(especially the Big Five accountancy firms, which aim to provide a global one stop shop
service) but also by solicitors and merchant banks, which also use Chinese walls.
The accountants' ethical rules on conflict of interest and confidentiality are set out in the
members' handbook produced by the Institute of Chartered Accountants of England and Wales.
These rules do not specifically deal with the issue of Chinese walls; itis left to individuals to
make a judgment about whether the setting up of a Chinese wall would breach the rules on
client confidentiality.
For solicitors, the professional conduct rules on conflict of interest are very clear. A
solicitor or firm of solicitors must not accept instructions to act for a new client against a former
client if the solicitor or firm has acquired relevant confidential information concerning the
former client during the course of acting for him (Rule 15.02, Guide to the Professional
Conduct of Solicitors, seventh edition). The reason for this rule is because of the conflict that
would arise for the solicitor (note1 to rule 15.02); he has a duty to inform his clients of all
matters that are relevant to the retainer (which would include confidential information on other
clients) (Rule 16.06). However, information about one client cannot be disclosed to another
client without the first client's consent (Rule16.01). This would mean that a solicitor must not
act for a new client against a former client and would prevent a solicitor in the same
circumstances from acting in the same way that KPMG acted in this case.
Those who are authorised by the Financial Services Act 1986 to provide financial
services are also subject to regulatory rules on Chinese walls and client confidentiality. (The
new Financial Services and Markets Bill will contain a provision ensuring protection from
criminal liability and civil actions for breach of duty for those firms who comply with FSA
rules on Chinese walls.)
As both solicitors and persons authorised by the Financial Services Act are already
covered by quite strict rules on the use of Chinese walls, the final outcome of the KPMG case
is likely not to affect them as significantly as accountants, although the case will be still be of
interest.

Setting up a Chinese wall

The following measures can be used when it is necessary to put in place a Chinese wall to
separate the affairs of two clients:
 Compile a list of the individuals in the firm working for each client and ensure that no-one
working for either client is in possession of confidential information relating to the other
client.
 Ensure that all members of the two advisory teams within the firm are aware of the rules
concerning client confidentiality. Consider issuing written guidelines.
 Place the two advisory teams in separate buildings or place one team in a part of a building
with restricted access. Consider measures to log the movements of individuals, for example,
by security passwords for entry into restricted access areas.
 Store sensitive or confidential information in a physically separate location, for example, in
a strong room fitted with combination locks.
 Where information within the firm is placed on a central computer database to which all
may have access, there may be confidentiality concerns. If so, use separate computer file
servers to store information on one client separately from that of the other client. Also
consider the ring-fencing of sensitive information by means of passwords and other IT
security measures. The procedure for making back-up copies should also be considered, as
security can sometimes break down when back-ups are being taken. If these solutions are
used, it is, of course, vital to ensure that they are secure.
For companies whose advisers are proposing to deal with their affairs using a Chinese wall,
it is normally sufficient to rely on the firm's assurance that an adequate Chinese wall is in place.
In rare cases, if the matter is particularly sensitive to you, you may wish to request specific
assurances that the above measures are in place.
Ensure that firm know-how developed as a result of a transaction does not breach
confidentiality.