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NPCs can see through and spell cast through walls. I had a character at Brit cem being targeted and attacked by a wraith even though he was behind a wall.

Verified.

To reproduce:

1. 'go 1670 1546 30 0
2. 'add npc lich a few times on the inside of the northern wall
3. 'add npc m_fighter a few times on the outside of the northern wall
4. Observe that they'll eventually see eachother and start pathfinding inside/outside the house.

I can't check it myself at the moment, but are there any windows/holes in the wall?

That was my initial thought as well, Grimson - but at the location I posted there are no windows/holes in the northern wall, yet the NPCs south of the wall were able to "see" the NPCs north of the wall, and vice versa I guess.