House of Lords rule on the inadequacy of Chinese Walls

United Kingdom
House of Lords rule on the inadequacy of Chinese Walls

In a judgement which is mainly aimed at professional firms, but which has implications for firms conducting investment business, the House of Lords recently ruled in the high profile case of Bolkiah v KPMG (a firm) that KPMG could not act for the Brunei Investment Agency (on behalf of the Sultan of Brunei) against the Sultan's brother, Prince Jefri, because he was a former client of KPMG and KPMG could not demonstrate the effectiveness of the Chinese Walls which they put in place in such situations as standard practice.

KPMG were described as 'very experienced in the erection and operation of information barriers', who 'constantly instructed staff in the importance of respecting clients' confidentiality so that it was second nature to them', and who treated forensic projects as 'exceptionally confidential', engaging different people and using different servers and carrying out work in different offices. However, KPMG were not able to persuade their Lordships that they had discharged 'the heavy burden of showing that there was no risk that information in KMPG's possession which is confidential to Prince Jefri [might] unwittingly or inadvertently be disclosed'. It should be understood that their Lordships were not criticising KPMG as an organisation, but rather were suggesting that the current ad-hoc operating methods of many of the world's larger professional organisations may not meet the very high standard which the maintenance of client confidentiality requires.

The judge who delivered their Lordships opinion, Lord Millett, contrasted the financial services industry, where he said that 'good practice requires there to be established institutional arrangements designed to prevent the flow of information between separate departments' with those which were put in place by KPMG, which were 'established ad hoc and were erected within a single department'. He continued, 'Given the large number of personnel involved... with a rotating membership [who] may have joined from and returned to other projects...the difficulty of [KPMG] enforcing confidentiality or preventing the unwitting disclosure of information is very great'.

In the light of this judgement, firms should examine the extent to which their Chinese Walls remain effective. This case suggests that Chinese Walls which are put in place relating to the passing of information between persons who are used to working with each other, or who will have regular contact with each other, or who may have inadvertent contact whilst working on other projects, may be insufficient to protect client confidentiality. In particular, Chinese Walls need to be 'an established part of the organisational structure of a firm' (to quote the judge) not 'created ad hoc and dependent on the acceptance' that staff promise to comply with them.