Chinese Walls: Maintaining client confidentiality

For years, law firms, accountants and banks have relied onChinese walls to prevent information obtained whilst acting for oneclient passing to another client of the same firm. A case now beingconsidered by the House of Lords (Bolkiah v KPMG) is of greatimportance to the large accountancy firms. It is also of relevanceto law firms which compete with forensic accountants. All firmsthat rely on Chinese walls, and clients whose advisers may usethem, should take this opportunity to review their use and ensurethat the procedures for establishing and monitoring them areadequate.

A Chinese wall is an internal measure adopted by a firm toensure that information gained while acting for one client does notleak to people in another part of the same firm who are acting foranother client to whom that information may be highly relevant. Theprincipal aims are to protect client confidentiality and, if thefirm is carrying on "investment business", to ensure fair treatmentof all the firm's clients or customers as required by thestatements of principle made pursuant to the Financial Services Act1986 . There are a variety of different procedures for achievingthis, for example, locked rooms for relevant documents, separateteams working on the different sides to the matter, written ruleson maintaining confidentiality and restricted access to certainparts of a building and monitoring of those who enter thoseareas.

Maintaining client confidentiality is crucial to any firm, butparticularly to large multi-service businesses. Where firms areproviding a wide range of services to many clients, it is vitalthat their clients can rely on the confidentiality of theiraffairs, and that means that they must be able to trust in Chinesewalls. The concept of Chinese walls tests self-regulation to thelimit and there have always been those who have doubted theirefficacy.

Prince Jefri, the brother of the Sultan of Brunei, brought acase in the High Court against the accountancy firm, KPMG. Theaction arose because KPMG was carrying out an investigation for theBrunei Investment Agency (BIA) into its affairs, includinginvestigations into certain dealings in which the prince may havebeen involved (the prince had, at one time, been the head of theBIA). KPMG had previously acted for the prince in 1996 on aseparate matter and the prince felt that information concerning hispersonal finances gathered by KPMG in 1996 could leak out to thosecontemplating action against him in this current case. He sought aninjunction to prevent KPMG from continuing work on the BIAinvestigation. At first instance Mr Justice Pumpfrey granted theinjunction to the prince.

Pumpfrey J. said that the courts are generally sceptical aboutthe efficacy of Chinese walls in preserving client confidentialitywhere there is a conflict of professional interest (see, forexample, Re a firm of solicitors [1992] 1 All ER 353). Ingeneral, according to the judge, Chinese walls are not well adaptedto deal with accidental, inadvertent or negligent disclosure,although they are suited to deal with foreseeable or deliberatedisclosure.

KPMG argued that, although the work carried out for the princein 1996 had been a substantial piece of work, it did not considerthat it still had a client relationship with the prince and ittherefore felt free to take on work for the BIA. Clearly, it owed aduty of confidentiality to the prince, but did not view a conflictof interest as arising in acting for the BIA. To safeguardconfidentiality, BIA had waived KPMG from any duty to disclose tothe BIA any confidential information concerning the prince that itheld as a result of the 1996 work. KPMG also set up a Chinese wallin the firm, by ensuring, for example, that no person worked on theBIA investigation who possessed confidential information aboutPrince Jefri's affairs.

It was the judge's view that where accountants offer forensicservices which are the same as or similar to the services offeredby solicitors, they should be regarded as having the same wideranging duties as solicitors to pass on absolutely everything to aclient that could help their client's interests.

KPMG appealed to the Court of Appeal to have the injunctionoverturned.

The judges in the Court of Appeal did not give a unanimousdecision. Two of the judges (Lord Justices Woolf and Otton)overturned the first instance ruling, but the third judge (LordJustice Waller) dissented. Woolf LJ said that there were issuessuitable for the Law Lords to consider, so the injunction wasallowed to stand, provided that the House of Lords could hear thecase in the next few weeks, otherwise the Court of Appeal will haveto reconsider it.

Woolf LJ said that it was wrong to assume that accountants hadthe same wide duties as solicitors in relation to confidentialitybecause accountants have a culture which gives a very high priorityto preservation of confidentiality. This argument seems a littleunrealistic, as it would put solicitors and forensic accountantsunder different standards despite the fact that the work carried onby them both is quite similar in its nature. It would also putsolicitors at a commercial disadvantage given that they compete inthe same market as forensic accountants.

Woolf LJ also said that Chinese walls were capable ofremoving real risks of information leaks and it was wrong to assumeotherwise.

In KPMG's case, for example, they had boxed up sensitivedocuments and put them under the control of lawyers, downloadedrelevant computer data on to CD-Roms and handed these over tolawyers and put relevant documents in a strong rooms fitted withcombination locks. In all, it would appear that the measures takenwere comprehensive.

At the time of going to press, it was not known whether theHouse of Lords would hear the case, or whether it would be goingback to the Court of Appeal. If the House of Lords hear it anduphold the first instance judgment, it would have significantimplications for accountancy firms which would have to review thekinds of work they undertake. For example, they may not be able toexpand their forensic accounting practices as they would be moreopen to conflicts of interest.

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 ofinterest, not only by accountants carrying out forensic work(especially the Big Five accountancy firms, which aim to provide aglobal one stop shop service) but also by solicitors and merchantbanks, which also use Chinese walls.

The accountants' ethical rules on conflict of interest andconfidentiality are set out in the members' handbook produced bythe Institute of Chartered Accountants of England and Wales. Theserules do not specifically deal with the issue of Chinese walls; itis left to individuals to make a judgment about whether the settingup of a Chinese wall would breach the rules on clientconfidentiality.

For solicitors, the professional conduct rules on conflict ofinterest are very clear. A solicitor or firm of solicitors must notaccept instructions to act for a new client against a former clientif the solicitor or firm has acquired relevant confidentialinformation concerning the former client during the course ofacting for him (Rule 15.02, Guide to the Professional Conduct ofSolicitors, seventh edition). The reason for this rule isbecause of the conflict that would arise for the solicitor (note1 to rule 15.02); he has a duty to inform his clients of allmatters that are relevant to the retainer (which would includeconfidential information on other clients) (Rule 16.06).However, information about one client cannot be disclosed toanother client without the first client's consent (Rule16.01). This would mean that a solicitor must not act for a newclient against a former client and would prevent a solicitor in thesame circumstances from acting in the same way that KPMG acted inthis case.

Those who are authorised by the Financial Services Act 1986 toprovide financial services are also subject to regulatory rules onChinese walls and client confidentiality. (The new FinancialServices and Markets Bill will contain a provision ensuringprotection from criminal liability and civil actions for breach ofduty for those firms who comply with FSA rules on Chinesewalls.)

As both solicitors and persons authorised by the FinancialServices Act are already covered by quite strict rules on the useof Chinese walls, the final outcome of the KPMG case is likely notto affect them as significantly as accountants, although the casewill be still be of interest.

The following measures can be used when it is necessary to putin place a Chinese wall to separate the affairs of two clients:

For companies whose advisers are proposing to deal with theiraffairs using a Chinese wall, it is normally sufficient to rely onthe firm's assurance that an adequate Chinese wall is in place. Inrare cases, if the matter is particularly sensitive to you, you maywish to request specific assurances that the above measures are inplace.

Ensure that firm know-how developed as a result of a transactiondoes not breach confidentiality. CAS