HKSAR v. CHAN KWOK LUEN

DCCC 961/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 961 OF 2009

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Reasons for Sentence

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Charges

1.  The Defendant is convicted of 4 charges of wilfully with intent to evade Salaries Tax for 4 respective accounting years, namely for 2002/03, 2003/04, 2004/05 and 2005/06 contrary to section 82(1)(a) of the Inland Revenue Ordinance, Cap. 112.  He had understated income of $1,080,000 in total out of which the tax undercharged was $194,854.  The details are as follows:

(1) 2002/03: $50,000 understated, $8,500 tax undercharged;

(2) 2003/04: $350,000 understated, $64,750 tax undercharged;

(3) 2004/05: $350,000 understated, $68,804 tax undercharged;

(4) 2005/06: $330,000 understated, $52,800 tax undercharged.

Facts as found

2.  The Defendant was the leader of a group of account executives (AEs) in several associated companies (jointly referred to as “Companies”).  Both he himself and the AEs earned commission, apart from other forms of income from the Companies.  He had the authority to determine how much commission each AE would get.  He arranged for cheques inflated in the sum of a part of his own commission to be instead issued in the names of 19 AEs.  He asked each of the AEs to return to him the sums representing the Defendant’s commission soon. 

3.  The Companies’ records and tax returns as well as the AEs tax returns reflected such sums of commission as earned by the AEs not the Defendant.  Such extra sums would impose no or nominal tax payment on the AEs because of their low overall income.  It is a common feature in the 4 Tax Returns (for 2002/3, 2003/4, 2004/5 and 2005/6) he submitted to IRD that under Part 4 Salaries Tax income thereof, he had included only the commission (on the Companies’ record) that he had received in his own name but omitted the commission (off the Companies record) that he had been paid back by his AEs.  The Tax Returns comprised other parts such as Profits Tax income and Property Tax income.  The omitted commission was not included anywhere in the Tax Returns.          

Personal background and mitigation

4.  The Defendant is 45 years of age.  He has a clear record.  He is married.  His son is now 24 years of age and works as an estate agent.  His mother is over 80 years old.  He was brought up in a poor family.  After completing F. 5, he worked in different fields at the beginning until he settled himself in the finance field 21 years ago. He evidently thrived and there was a prime moment in his career when he had around 400 AEs under him.  He has 5 properties.  He is living in one of them and the rest are rented out. 

5.  He is commended by his family members, relatives, friends, and colleagues for his care, kindness, generosity and help.  The present offences had caused loss to the revenue but he had already fully paid up the tax undercharged at around or before the time he was charged.  There was no out-of-pocket loss to anyone except the few AEs who had to pay a nominal tax for the commission shouldered up for him.

6.  Defence counsel submits that there has been a lapse of 2 years and 8 months from the date he first realized his being investigated as a result of IRD’s search of his office and home (on 18 January 2007) up to the time he first entered a plea of not guilty in the District Court (on 22 September 2009).  In the interim period, he was in active negotiations with IRD to resolve the matter.  He had fully paid up the undercharged tax on and before October 2009.  There is no complaint against the prosecution by way of inordinate delay but he has suffered immense stress throughout.  He has built up a network of business in his new marketing job monitoring a number of AEs since January 2010.  A term of imprisonment will break his connections and cause a loss of reputation.     

Sentencing principles

Immediate imprisonment is the norm

7.  It is universally accepted by the courts that tax evasion is a serious offence since the defendant committed with a wilful intent and the community suffers a loss of revenue.  The norm is immediate imprisonment. 

8.  Attorney General v Ma Lai-wu [1987] HKLR 744 features the applicable principle and comparable facts.  Silke JA said in the Court of Appeal:

“17. It is necessary for a Court to take into consideration when assessing the quantum of such sentence and this list is not intended to be exhaustive - the time span of the offences, the systems and methods used to evade tax, whether or not there was re-payment of the tax evaded, the amount of that tax, the individual culpability of one or more defendants and the circumstances of each defendant.

18. Lenient sentences, where detection is not certain, may encourage persons to take a risk. Persons who commit offences such as these are favoured by the possibility of non-detection and favoured yet again if upon detection they can look forward to leniency.

19. The deliberate defrauding of the Inland Revenue is a serious matter which affects the community as a whole.

20. We do not accept, by itself, the “clang of the prison gates" argument in relation to such offences. This, if given too great weight, might mean that the whiter the collar the less the time spent behind bars and that, as a general proposition, cannot be right. This is not, however, to detract from the salutary effect which a prison sentence of even short duration may have on the individual defendant and its effect upon the public at large. A balance has to be maintained as between the appearance of leniency to an individual and the effect a prison sentence may have on a defendant of hitherto unblemished character and who is of standing in the community.”

9.  It was an application for review by the prosecution.  The respondents were the major shareholders and directors of a manufacturing company.  They pleaded guilty to 24 charges of tax evasion. They had defrauded IRD by omitting sales proceeds from the accounts of the company and the tax returns for 6 years.  When certain sales proceeds were received by the company, they cheated the book-keeper by alleging that those were only advances made to the company.  They had kept their own secret books of accounts and deposited amounts into separate accounts opened by themselves. The company’s auditor was not aware of the false system being used.  The full sum omitted from the tax returns was near $2,600,000.  The total tax undercharged was over $430,000.  They paid up the undercharged tax in full before they were charged.  The Court of Appeal affirmed a suspended sentence of 18 months after stating as follows:

“13. Sir Oswald Cheung, with him Mr. R. Mayne, emphasizes that in the District Court, since 1978, there have been no immediate custodial sentences imposed for offences of this nature. Without, we hope, doing his submissions any injustice we would summarize them as being if this Court thought immediate custodial to be correct, then leave that for the future and do not visit upon the heads of these Defendants such a punishment. They had pleaded guilty and had done so on the basis of the known nature of the sentences previously imposed.”

10.  Defence counsel has drawn my attention to the case of HKSAR v Pak Wan Kam [2002] 2 HKC 465 where the appellant had been evading tax for 4 years by claiming deductions based on false receipts.  The amounts of tax understated and undercharged respectively were similar to our present case.  Defence counsel submits that the regime of sentence resulting in 3 months’ imprisonment there can be adopted in our present case.  I note, however, that that case had involved a mode of operation which I find quite different from our present case.  I shall return to that in due course.   

Exceptional circumstances to suspend sentence

11.  In R v Lowery (1993) 14 Cr App R (S) 485, Wright J said at page 489:

“No doubt, as counsel has submitted to us, the expression 'the exceptional circumstances of the case' is of sufficiently wide construction so as to allow the Court to take into account all the relevant circumstances surrounding the offence, the offender and the background circumstances.”

12.  Defence counsel has prepared a list dated 27 October 2010 to this Court which contains sentenced cases from the Magistracy, the District Court and Magistracy Appeal to illustrate the point that suspended sentences have been imposed in tax evasion cases. 

13.  A study of those cases shows that the courts have passed suspended sentences based on a combination of some of the factors as follows:

(a) The defendant has invariably pleaded guilty (except in The Queen v Wong Yue Hung, Johnson 3 HKTC 733, which was decided on 27 February 1992, one of the earliest cases included by the defence);

(b) The mode of operation is simply the failure to disclose the income without other crimes such as the use of false documents;

(c) The offending period is not long;

(d) During the long lapse of time between the detection and the laying of the charges, there has been immense stress or change in circumstances on the part of the defendant or his family;

(e) The defendant has fully paid up the tax undercharged at a prior stage or early stage of the proceedings.

Sentencing this Defendant

14.  There are various factors in his favour.  He has a clear record and he has a history of helping his friends, colleagues and even strangers.  The investigation has taken 2 years and 8 months to end up in the District Court for plea.  He and his family have been under immense stress.  He has fully paid up the undercharged tax prior to or at the early stage of the proceedings.  Defence counsel also submits that court’s time has been saved as only 9 out of the 20 AEs on the list have to give evidence.  I do not think much time was saved as the AEs’ evidence is not expected to be long. 

15.  However, there are various factors in his disfavor.  He had abused his position as a group leader.  Firstly, he had abused his authority to access the income data of his AEs in identifying low income earners to suit his scheme.  Secondly, he had instructed the AEs to carry out his scheme.  There is no evidence of any express threat but it is obvious that his AEs could not refuse him because of his superior position and his sole discretion to distribute commission.  He even involved a few of the AEs as knowing accomplices, who had aided and abetted him.  Thirdly, he had abused his authority to implement the scheme.  He was familiar with his Companies’ accounting system.  He knew where his scheme could fit in.  He had abused the autonomy the Companies had given him in the commission distribution within his own group.  His conduct amounted to false accounting.  The Companies were deceived into reporting in the Employers’ Tax Returns the AEs and his commission based on the false figures.  Such scheme was well-planned and lasted 4 years. 

16.  I take a starting point of 6 months for each charge.  The sentences shall be concurrent.  His good character towards his family members, relatives, friends, and colleagues has been cancelled out by his imposition upon his AEs a scheme to benefit himself at the expense of their cheating the companies as well as IRD.  I do not accept that he is entitled to any discount for his character. 

17.  The investigation has taken slightly longer than usual as his scheme has involved false accounting and many AEs.  He is not entitled to complain of any stress or change in circumstances suffered due to the lapse of time taken to get to court.  In the course of hatching this scheme up to the time it end up in court, he has had a lot of time to give a serious thought to the dire consequences facing himself and his family in the event of his being caught and convicted. 

18.  I find no exceptional circumstances to suspend the sentences.

19.  As a financial penalty, I shall order a total amount of $389,708 as follows:

(1) Charge 1: $8,500 tax undercharged, a fine of twice the amount, namely $17,000;

(2) Charge 2: $64,750 tax undercharged, a fine of twice the amount, namely $129,500;

(3) Charge 3: $68,804 tax undercharged, a fine of twice the amount, namely $137,608;

(4) Charge 4: $52,800 tax undercharged, a fine of twice the amount, namely $105,600.