HKSAR v. LUM LAP KWAN SIMON AND ANOTHER

DCCC 808/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 808 OF 2011

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REASONS FOR VERDICT

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1.  The defendants pleaded not guilty to a joint charge alleging that being agents of a company called Sun Hung International Limited ( Sun Hung) between May and December 2003 they used documents to deceive their principal, contrary to s.9 (3) of the Prevention of Bribery Ordinance Cap 201.

2.  D1 faced an additional similar charge allegedly committed between January 2004 and February 2005.

Background

3.  USI Holdings Limited (“USI Holdings”) was a company listed on the Main Board of the Stock Exchange of Hong Kong and was the mother company of Shui Hing Textiles International Limited (“Shui Hing”).  Shui Hing held 78% of shares in Sun Hung International Limited (“Sun Hung”).

4.  D1 was the General Manager of Shui Hing and he became a director of Sun Hung on 19 September 2003.  D2 was the Managing Director of Sun Hung and owned 20% shares in Sun Hung.  Both D1 and D2 were responsible for overseeing the operation of Sun Hung.

5.  The processing of salary payments to Sun Hung staff was centralized at the Treasury Department of USI Holdings.  For newly employed staff, their salaries would be paid by cheques drawn on Sun Hung’s bank account.  Madam CHAU Yuk-ngor (PW1), Treasury Supervisor of Treasury Department, USI Holdings, and her subordinates were responsible for handling the salary payments documents.  D1 and D2 were authorized to approve these payments.

Count 1 (Against D1 and D2)

6.  On or about 22 May 2003, D1 delivered to PW1 a memo (“the Memo”) issued by D2 to the Accounting Department of USI Holdings.  The Memo stated that LAM Hok-ngai (“LAM”) was an employee of Sun Hung and requested them to issue a cheque in the sum of $135,000 as payment of LAM’s salaries from February to April 2003.  The Memo was signed by D2 and approved by D1.  Relying on the truth of the Memo, PW1 caused her subordinate to prepare a payment request form for releasing the salary to LAM and a cheque of $135,000 payable to LAM.  The said payment request form was signed by D2 and approved by D1, whereas the cheque was signed by D1 and D2 as the authorized signatories.

7.  Between 5 July and 30 December 2003, D1 and D2 caused Sun Hung to pay LAM a further sum of $360,000 as his salary from May to December 2003 by company cheques of Sun Hung.  Similarly, the relevant payment request forms were approved by D1 and/or D2 and all the cheques were signed by D1 and D2.

8.  In total, Sun Hung had paid LAM, son of D2, a total amount of $495,000 as his salary in Sun Hung from February to December 2003 (a monthly salary of $45,000).  LAM in fact had not worked for Sun Hung at the material times or at all.

9.  Under caution, D2 admitted that LAM had not worked for Sun Hung and he signed payment for LAM’s salary under D1’s instruction.

Count 2 (Against D1 only)

10.  On 31 January 2004, D1 sent PW1 an email (“the Email”) informing her to include Madam CHU Siu-san (“CHU”), a new salesman of Sun Hung, on the payroll of Sun Hung at $45,000 per month.  As a result, Sun Hung was caused to pay CHU a total amount of $630,000 (as her salary in Sun Hung from January 2004 to February 2005) from 31 January to 28 February 2005.

11.  CHU was in fact the mother of D1.  She had not worked for Sun Hung at the material times or at all.

12.  It was submitted by the prosecution that had the other directors and senior management of Sun Hung known that LAM and CHU had never worked for Sun Hung, they would have refused payment to LAM and CHU.  Bank enquiries revealed that all the cheques for the salaries of LAM were bearer cheques and were deposited into D1’s bank accounts whereas the salaries of CHU were credited to CHU’s own account.

13.  On 17 May 2010, D1 was arrested by the ICAC.  On 4 June 2010 and 22 July 2010, D2 was interviewed under caution and made certain admissions.

14.  It was not disputed by the defendants that Chu and Lam were not employees of the company and that the payments were bogus. However, they maintained that the payments were made in order to pay bribes on the mainland and that the senior management were aware of  this and had authorized such payments.

Admitted Facts Ex 124 (1) and (2)

15. Most of the facts set out in the previous paragraphs were admitted into evidence under the provisions of s.65C of the Criminal Procedure Ordinance Cap 221.

Oral Evidence for the prosecuti on

PW1 Madame Chau Yuk- Ngor- Treasury Supervisor of USI Holdings

16. PW1 dealt, inter alia, with salary payments of USI and all its subsidiaries. PW1 said that most employees were paid by way of autopay.

17. PW1 produced Ex 7, page 59 of the Core Bundle , which is a memorandum dated 22 May 2003 from D2 to the accounts department asking for the preparation of a cheque for HKD135,000 to be paid to employee Lam Hok Ngai, in payment of his salary for February to April 2003 of HKD45,000 per month and signed by D1 and D2. She said that following receipt of the memorandum a payment request form was prepared, Ex 5 and a bearer cheque, Ex P6.

18. PW1 was shown a series of payment requisition forms relating to the payments to Lam , the subject of the charge 1, all initialed as approved by D1 and/ or D2. She said that the forms were prepared by either her department or the accounts department. PW1 said that very few staff were paid by cheque. She said it was generally confined to temporary staff, new staff or staff who had resigned.

19. PW1 produced a series of e-mails relating to payments to Chu, Ex 21, pages 73-75 of the Core Bundle.

20. PW1 produced Ex 38, page 111, relating to a purported terminal payment to Chu in the sum of HKD57,411.28 and includes a copy of an unsigned cheque. PW1 said that this was prepared following receipt of a notice from the Human Resources department, page 112.

21. PW1 said that she made no enquiries as to why there were no mandatory provident payments in respect of these purported employees or why there was no report made to the IRD. PW1 said that she never saw Lam or Chu. PW1 said that she never questioned the payments.

PW4 Hung Kar Wah – Former director of Sun Hing International

22. PW4 said that there was a procedure for claiming entertainment fees. He said it would depend on the amount spent and receipts would be required. He said that the group would not accept making claims for fictitious workers.

PW5 Ng Tak Wai, Frederick –Former Executive Director of USI

23. PW5 was superior to D1 at the relevant time. PW5 confirmed that in 2003 the business of Sun Hing was poor and D1 was moved over to assist in building up the business of the company. PW5 said there was some discussion about getting in someone to strengthen the company’s business by arranging entertainment. PW5 said it was up to the managing director of the particular company to decide how that should be done. PW5 said he did not recall anyone recruiting Lam or Chu.

24. PW5 said that no one would be allowed to claim for the salaries of fictitious workers.

25. PW5 agreed that he and D1 were friends and he and other ex-colleagues had lent him money to fund his defence.

26. PW5 denied that he was aware of and authorized the payments the subject of the charges.

27. He agreed that matters in connection with salaries would be sent to him with large numbers of other documents. He said that he would not open them or pay particular attention to them. He said he was concerned with the larger figures relating to profit and loss. He said that the individual managers and their staff would deal with the details. D5 said that Sun Hung had a managing director with shares in the company, D2 and he would rely on him to watch the corporate expenses.

28. PW5 was referred to an affidavit filed on his behalf in a High Court civil action brought by D2 against USI. PW4 agreed that he regarded D2 as not competent to run the Sun Hung which had been losing money and D1 was brought in to improve operation efficiency and to improve its standing and support within the group.

29. PW5 was shown a series of e-mails, PD1 – 4 relating to taxation, customs and foreign exchange problems on the mainland in relation to the two Sun Hung factories on the mainland. PW5 said he would not involve himself in such matters. He said that the company employed professional accountants and auditors to deal with such problems.

30. PW5 said that he was aware that some operational expenses of the factories in China were funded via remittances paid through the personal accounts of staff on the mainland. PW5 said that he did not know the details. He said the decision to do this was made by the professional accountants used by the company.

31. PW5 said that he was aware of taxation and customs problems concerning the mainland factories.

32. PW5 disagreed that a decision was made, of which he was aware, that the way to resolve the problem was to pay off the tax and other mainland officials to keep them away from the factories.

33. PW5 said he knew nothing about the creation of fictitious posts and the payments to Lam and Chu resulting therefrom.

34. PW5 said that Sun Hung did pay a management fee to Shui Hung who dealt with matters of administration such as wages.

35. PW5 said that he never told D2 to sign P7, the memorandum to the accounts department concerning the payment to Lam. He denied that he told him that this was done to streamline matters.

PW2 Chiu Man Chor – former director of Sun Hung

36. PW2 said he joined Sun Hung in 1990 as a sales manager. In 1996 he became a director and purchased 2% of the shares. He said that he ran the sales department which had three managers and a number of executive sales staff. He said he had never heard of Lam or Chu working for Sun Hung.

37. PW2 said that expenses could only be claimed for entertainment in respect of monies actually spent on entertainment and making a claim for reimbursement.

38. PW2 said that Mags International Sourcing Limited ( Mags) was a sourcing company for American companies. They would introduce buyers to Sun Hung and would receive a sourcing fee calculated on the amount of the purchase. PW2 said that only the sourcing fee could be paid to Mags, not other payments by way of commission or other advantage.

39. PW2 agreed that Mags provided a substantial part of the business of Sun Hung.

PW6 Lee Ka Kui, Edmund – Executive Director of Shui Hing Textiles International Limited

40. PW6 said that he joined the company in 1988 as an accounts officer. In 2001 he was promoted to the position of group finance manager in the garment manufacturing department.

41. PW6 said he worked under D1 for many years.

42. PW6 said that he was aware of money being remitted to China for the mainland factories via company staff. He said that this avoided handling charges imposed by the banks. PW6 said he never discussed this with PW5.

43.. PW6 said he was aware of the taxation and customs problems referred to in exhibit D1-4- A to C. PW6 said that he never discussed this problem with PW5.

44. PW6 said that he would see documents relating to salary payments but would not look at them in great detail. He would look at the overall figures. PW6 said that if there was a problem concerning salary payments, the Human Resources Division would approach management about such problems.

PW7 Madam Lo Po Yee, Pamela – former assistant to D2

45. PW2 was employed by Shui Hing Textiles from early 1990. In 1998 she became the personal assistant to D2 and assisted him with his daily administration work.

46. PW2 said that in 2004/5 she found amongst Sung Hung pay advices delivered to her by the finance department some advices which related to persons not employed by Sun Hung. She said that she spoke to PW1 and PW8 about the matter but she was not told what he follow up action was.

47. PW7 said that D2 was not able to use a computer very well.

PW8 Madam Lo Shun Ling, Betty – Executive Secretary of USI

48. PW8 said that she joined USI in 1988 and worked for PW5. PW8 said that in addition she was required to take up some human resources duties.

49. PW8 said that exhibit P38, page 112, a termination payment notice in respect of Chu was prepared by her and verified by D1. PW8 said that she could not recall who asked her to prepare it. She said that she never saw page 111 of the exhibit. She said that she did not know why there was no employment file in relation to Chu or why no there were no mandatory provident fund ( MPF) payments made in respect of Chu. PW8 said that she did not discuss the matter with PW5 as matters involving human resources would not concern him.

50. PW8 said that she did not recall being asked by PW7 about these payments. PW8 said that if she had any queries about any matters concerning human resources she would approach D1. PW8 was shown Exhibit D1-3 which is a letter from a subisidiary USI company called, Mission System Consultant Ltd (MSC) which stated that from June 2004 D1 was the Chief Operating Officer of that company. PW8 said that D1 was still working at the head USI office and therefore she would still ask D1 about such matters and ask him to sign P38.

51. PW8 said that the company’s accounts were audited annually and payroll records and personal files would be checked randomly.

PW11 Mr Li Shiu Man, Alex, Managing Director of Mags International Sourcing Limited ( Mags)

52. PW11 said that he runs a sourcing company which he set up in 1988. His company would receive samples from buyers and he would approach companies to make samples and give quotations. If satisfactory the customers would ask Mags to place orders and he would charge the manufacturers 3% of the price as a sourcing or handling fee. PW11 said his staff were not allowed to accept additional commission or other advantages.

53. PW11 said that his company ‘s turnover with Sun Hung was about USD3-4 million in the 1990’s but it dropped in the years 2003/4. PW11 said that his company employed about 2-3 quality control staff on the mainland who would be in direct contact with the mainland factories.

54. PW11 said he knew D2, the boss of Sun Hung and met him occasionally. PW11 said he did not know D1.

VRI of D2 Ex P77

55. In his second record of interview D2 admitted that the he had signed the documents referred to in charge 1 and knew that they were false. He said that he signed them for the purpose of “company kickbacks” to suppliers (counter 278-293). Later in the interview D2 stated that the supplier concerned was Mags ( counter 653 to 679). D2 said that he did not know to whom at Mags the bribes were paid.

56. D2 said that D1 had told him that it had to be done in this manner on the instructions of PW5 and he was told that this was company practice. He said that the decision to proceed in this way was the company’s decision and he was forced to sign ( counter 338). At counter 366, D2 said that he was not in a position to refuse to sign and that if he did not sign it would be taken into account,

Defence Case

Evidence of D1

57. D1 elected to testify. He said he was deployed by PW5 to help D2 to improve the business of Sun Hung in early 2003. As Sun Hung was then facing a number of problems including decrease of orders, failure to meet delivery dates, loss of revenue, and the additional problem of being probed by mainland officials from IRD and Customs, after a number of meetings with D2 and the mainland factory management personnel, it was decided in March 2003 that a fictitious post was to be created in Sun Hung to get money to pay bribes to the mainland Quality Controllers of Mags and to pay off the IRD and customs officials.

58. D1 agreed that he did use the documents as particularized in the charges to get payments from Sun Hung, which documents he accepted to be false in material particulars. He said the payments received were deposited into his own personal account and his mother’s account and withdrawn by him for the said purposes. He said that he kept a small booklet setting out the use of the monies at that time but the booklet was thrown away when he left the USI group in 2007. He claimed that the arrangement was known and approved by PW5 Fred NG. D1 claimed that he had no intention to deceive his principal.

59. Under cross-examination, D1 accepted that he treated D2 as a close personal friend whom he trusted because D2 had taught him a lot about the affairs on the mainland when he first joined Shui Hing. D1 said he knew that D2 did have some financial problems throughout the years and had been selling some of his shares before 2000. D1 accepted that he has acted as the co-borrower and guarantor of D2 when D2 purchased a property in the sum of HK$2.2 million in mid 2000. D1 also agreed that he had lent D1 HK$50,000 in December 2004 and asked his sister to pay tax for D2 in the sum over HK$58,000 in January 2005.

60. D1 accepted that he had lied in 2 of his affirmations filed in The High Court to oppose the Petition presented by D2. He agreed that he had reiterated in the 2 affirmations that there was no fictitious employees and that LAM and CHU did work in Sun Hung. D1 said that he said this as a result of a decision made following discussions Fred Ng (PW5) and the Company’s lawyer Mr. Henry Chung.

61. D1 agreed that when he was arrested by ICAC and interviewed under caution, in respect of the fictitious employment of CHU, he did say that the arrangement was not known to the company before the affirmations were filed. D1 said that he explained the situation to his company and they accepted his explanation. He claimed that he said the this because he was arrested in the early morning and he was very worried because his mother was also arrested. D1 said when he was interviewed in the afternoon, he had told the ICAC the purpose of getting money from the fictitious post and how the money was used.

Directions

62. I reminded myself that the prosecution are required to prove each and every ingredient of each offence beyond reasonable doubt, the defendants have nothing to prove.

63. I reminded myself the both defendants had clear records and, in the case of D1, there was positive evidence of good character. This is relevant to the issues of credibility and propensity.

64. .I reminded myself that if I were to disbelieve the evidence of D1, that does not mean he is guilty either offence. I have to consider the evidence I do accept and decide if that satisfies me of the guilt of the defendants to the required standard.

65. I considered the evidence for and against each defendant separately.

66. I reminded myself that where the prosecution rely on circumstantial evidence, I had to be satisfied that the facts relied on to support any inference must be prove beyond reasonable doubt and that any inference drawn must be the only inference that could reasonably be drawn from such facts, the inference must be irresistible.

Evaluation of the Evidence

67. D1 and D2 were directors of Sun Hung and as such owed the company a fiduciary duty. They were employed by the company and therefore in senior positions, positions of trust, and acted as agents of the company at the relevant time.

68. D1 and D2 did use the memorandum and payment request forms referred to in charge 1. D1 did use the email referred to in charge 2.

69. The documents referred to in each of the charges purported to relate to the employment and remuneration of staff of Sun Hung and were matters in respect of which Sun Hung was interested.

70. The documents contained statements which were false, erroneous and defective in a material particular. It was not disputed that the employment of Lam and Chu was false. It was not disputed that D1 and D2 knew that Lam, D1’s son, was not an employee of Sun Hung at the material time. It was also not disputed that Chu, D1’s mother, was never an employee of Sun Hung.

71. The issue in respect of both charges, was whether the defendants used the documents to deceive their principal.

72. The principal referred to in each charge is Sun Hung. 78% of the shares in Sun Hung were held by Shui Hing, a wholly owned subsidiary of USI, a company listed on the Main Board of the Stock Exchange of Hong Kong. At the material time, PW5 was the Executive Director of the USI group. The defence case was that, at all times, PW5 was fully aware that D1 and D2 were using the funds received from the bogus employment of Lam and Chu to pay bribes to mainland officials and to quality controllers employed by Mags on the mainland. D1 gave evidence that the payments to officials were to forestall their enquiries into irregular payments being made to Sun Hung in respect of its running costs. D1 said that the payments to the Mags’ quality controllers were for the purpose of obtaining more favourable reports about their factories with a view to securing extra orders.

73.. I considered the case of Regina v. Roziek [1996] 1 WLR 159, which held that a person could not be convicted of an offence of obtaining property by deception in respect of property belonging to a company if someone whose knowledge was to be attributed to the company, knew of the deception.

74. It was argued by the prosecution that D1’s contention that bribes were paid to the quality controller of Mags was not credible as the director of Mags, PW11, told the court that it was the overseas buyer who place the order after selecting suitable samples, the quality controllers only came in after the orders were placed and the garment manufactured. It was submitted that therefore paying bribes to quality controllers would not solve the problem of diminishing orders.

75. D1 said that he learnt about the idea of bribing the quality controllers after discussing the matter with D2 and factory staff. I noted that D2 in his record of interview said that he did not know to whom the bribes were paid and made no mention of quality controllers.

76. I also noted that D2 made no mention in his record of interview of paying bribes to mainland officials. He makes no mention of any impending official visit to the Shaoguan factory. He make no mention of their coming to any urgent arrangement to pay of Inland Revenue or Customs officials who were about to pay an official visit to the Shaoguan factory.

77. D1 said that the discussions about paying off the mainland officials took place in March 2003 and the arrangements for Lam’s bogus salary payments started in May 2003. I also noted in this regard that the first of the e-mails produced as D1-4, dated 31 August 2004 from Maria Dai to Esmond Kwan, David Pong and D2, stated the problem concerning the mainland officials remained unresolved.

78. I took into account the D1 lied in his affirmations filed in the High Court proceedings commenced by D2. He said in both affirmations that Lam and Chu were not fictitious employees.

79. When D2 was arrested by the ICAC, in his first record of interview he stated that the arrangement concerning the bogus employees was not known to his company before the High Court proceedings.

80. I also took into account the close relationship between D1 and D2. D1 had acted as guarantor in the sum of HKD2.2 million for a property purchased by D2 in 2000. He lent D2 HKD50,000 in December 2004 and his sister paid the tax bill of D2 in the sum of over HKD58,000 in January 2005.

81. It was submitted on behalf of the defendants that PW5 was aware of the arrangements made by D1 and D2 and had approved them.

82. There was no doubt that from 2000 to 2003 Sun Hung was in financial difficulties. The two mainland factories were making a loss of over HKD10 million

83. Three particular problems were identified. The first was poor management, the second, lack of orders and thirdly, mainland officials from the Inland Revenue and Customs Departments were probing into the way in which remittances were made to the mainland factory from the Hong Kong company. PW5 said that D1 was tasked with trying to resolve these problems.

84. D1 said that it was against this background that the decision to create bogus positions to divert funds from Sun Hung for paying bribes on the mainland. D1 said that this was done with the full knowledge of PW5. D2 told the ICAC that he was told that this was done with the knowledge of PW5.

85. There was no doubt that the documentation referred to in the charges was sent to the treasury staff. It would have been apparent that there were significant anomalies. The Human Recources deparment had no personnel file for Lam or Chu. There were no arrangements made for mandatory provident fund payments and the inland revenue were not to be notified. These are all matters which should have caused serious questions to be raised as they would involve the company be in breach of the relevant statutory provisions.

86. The salary referred to, HKD45,000 per month, was substantial, far more than other staff employed by Sun Hung, and only slightly less than D2’s salary. The amount is greatly in excess of what would have been paid to a salesman. In respect of the autopay checklists produced for the period, eg P24/80 and P35/103, payments were made in respect of Chu were recorded.The amounts paid to Chu would have stood out because of the amounts involved and because there were no mpf deductions or payments.

87. The terminal payment to Chu, Ex 38, in the sum of HKD57,411.28 was never cashed.

88. In January 2004, D1 sent an e-mail to PW1, Ex 21,concerning the employment of Chu describing her as a new salesman. PW1 sent an e-mail to D1 stating that “ Pamela” ( PW7- the assistant to D2) had asked for Chu’s payroll details and whether the payments needed to be reported to the IRD. D1 then sent an e-mail to PW1 stating that there should be no report to the IRD and that if PW7 asked about the discrepancies, to tell her that it was the private arrangement of D1 and to talk to him directly.

89. D1 claimed that he had told Esmond Kwan, the financial controller of the treasury department , about the arrangement. Esmond Kwan was not called as a witness.

90. PW8, Betty Lo, executive secretary of PW5 and person looking after Human Resources, signed the termination notice, P7, in relation to Chu. It was submitted that she must have realized the gross irregularities in relation to Chu, particularly, no contract of employment, no MPF payments and the very high salary. Moreover the cheque prepared was never signed or cashed. It was submitted that PW8 was an evasive witness.

91. There was no doubt that D1 and PW5 had a very close working relationship for a number of years and that D1 was regarded as being the right hand man of PW5. D1 insisted that he gained nothing from the arrangement and that everything was done in the best interests of the company.

92. The behaviour of D1 and D2 was very suspicious, however I cannot be sure that the senior management of the company and in particular PW5 were unaware of the arrangements made by D1 and D2 in relation to the payments purportedly made to Chu and Lam. They are therefore entitled to be acquitted of the charge before the court.

93. D1 had certainly committed a serious offence in relation to the false statements contained in the affirmation affirmed by him and filed in the High Court proceedings instituted by D2.

94. Both D1 and D2 had conspired to produce false accounting records. D1 stated that the purpose of creating bogus employees was to provide funds to bribe mainland officials and quality control officers. D2 admitted using these funds to pay bribes on the mainland. However, none of these matters were the subject of any charges before the court.