Part of the Business terms glossary:

A Chinese wall is a barrier that separates two or more groups, usually as a means of restricting the flow of information. Typically, the wall is purely conceptual, although groups may be divided by physical barriers (areas of a building, for example) as well as policies. The concept of the Chinese wall is employed in a wide variety of environments, including the financial industry, business, software development, project management, network security, law, and journalism.

The term Chinese wall is said to have originated after the catastrophic stock market crash of 1929, when the largely unregulated United States market suffered a 40% drop between September and October. According to one theory, the crash resulted from inflated stock values created by price manipulation and insider trading. After the crash, Congress passed a law mandating the separation of commercial and investment banks, in an attempt to prevent conflict of interest. Rather than enforcing physical or corporate separation, however, the law only mandated that policies must be in place to create a logical division between these segments.

In theory, a Chinese wall serves to restrict information to those individuals or groups that need it to conduct their jobs. In practice, however, Chinese walls are far from infallible because they rely on the honor system: the information is only restricted by the discretion and meticulousness of the parties involved. Regulations that specify legal requirements for information security tend to improve compliance in this regard.

Here's one example of a Chinese wall: In software development, the Chinese wall (sometimes referred to as the clean room technique ) is a reverse-engineering method in which programmers working on code are separated into two groups. The first group translates a program's machine code back into source code and document s the process, but writes no new code. The second group doesn't refer to the original code, but creates a new program from the first group's documentation. The purpose of this exercise is to ensure that the new program's code cannot be said to be derived from the code of the original program.

Chinese wall is usually said to be a reference to the Great Wall of China, erected over 2000 years ago to protect inhabitants from invaders. However, other theories exist. In a Wikipedia entry, for example, the author argues that the term probably derives from a diplomatic contrivance of the Late Imperial period in China: "...if a junior mandarin saw a senior mandarin on the road he was expected to bow and present his compliments. In Beijing this tended to happen quite a lot and so traffic was frequently blocked. Instead mandarins came up with a method of pretending they did not see each other on the road by the clever placing of a retainer with an umbrella. Because they did not "see" each other, they were not obliged to stop."

The term "Chinese wall," because it refers to a race of people, may be potentially offensive. For that reason, the term "ethical wall" is sometimes used instead. 

This was last updated in July 2013
Posted by: Margaret Rouse

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