SECRETARY FOR JUSTICE v. CHAN YING MING

CAAR 13/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

APPLICATION FOR REVIEW NO. 13 OF 1998

(ON APPEAL FROM DCCC 677 OF 1998)

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J U D G M E N T

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Power, V.-P. (giving the judgment of the Court):

1. The respondent faced one count of carrying on a business of taking deposits, without being an authorized institution, contrary to section 12(1) and (6) of the Banking Ordinance. He pleaded guilty to that charge before Judge Wilson and was sentenced to imprisonment for six months.

2. The facts were as follows.

The Banking Ordinance, CAP. 155, operates in the HKSAR to regulate banking business and the business of taking deposit; and to make provision for the supervision of authorized institutions so as to provide a measure of protection to depositors. It was enacted to promote the general stability and effective working of the banking system.

Section 12 (1) of the Banking Ordinance, CAP. 155 provides, inter alia that 'no business of taking deposits shall be carried on in Hong Kong except by an authorised institution'.

. An 'authorized institution' means:

(a) a bank;

(b) a restricted license bank; or

(c) a deposit-taking company

On 6 September, 1993 Chan Ying-ming ("the Respondent") applied to the Business Registration Office of the Inland Revenue Department personally to carry on a money-lending business known as Billion Finance Co. Billion also applied for and was granted a money-lender's licence on 2 December, 1993 and subsequently operated from various addresses in Central. From January, 1997 Billion's principal place of business was the 14th Floor, Wing Hang Insurance Building, No. 11-13 Wing Kut Street, Central, Hong Kong.

By about June 1995 the respondent trading as Billion was not only lending money but was also taking deposits from members of the public, and this practice continued unabated through to February, 1998.

3. The staff employed by Billion increased during the same period. By February 1998 there were over twenty staff members, most of whom were employed as Account Officers.

Their role was, inter alia, to find and introduce new customers to Billion and to solicit deposits from them. Billion offered attractive rates of interest significantly exceeding those on offer from authorised banking institutions.

Acting on the instructions of the respondent Billion's staff solicited monies from members of the public, including their friends and relatives. The staff members received commission based incomes which were dependent on the size of the deposits they attracted to Billion. Some could generate commission based monthly incomes approaching $80,000 by securing deposits from the public.

By 1997 the respondent had also become the Chairman of Billion International Holdings Limited, a Bermudan incorporated company which was listed on the Hong Kong Stock Exchange. In February of 1997, he acquired 71.3% of Billion International Holdings Limited through a company called Ming Kee Investments Limited, which was wholly owned by him. It was also incorporated in Bermuda with limited liability. In January of 1998 the share price of Billion International Holdings Limited collapsed. On 11th February 1998, the Respondent resigned as Chairman and Director of the Company. This public company was renamed Northern International Holdings Limited in June of 1998.

In the annual report of Billion International Holdings for 1996/97, the respondent was described as holding a number of positions in various charitable organisations. He was a director of Yan Chai Hospital, the Chairman of Yan Chai Hospital Emergency Assistance and Relief Fund, the President of the Junior Police Call for the Western District, and a Vice President of the Hong Kong Scout Association.

4. In February of 1998, four depositors of Billion made complaints to the Commercial Crime Bureau. They said that they had deposited money with Billion at the invitation of friends who were staff members and that Billion had failed to meet their withdrawal requests. They told the police that within the past 12 months they had been approached by staff members who solicited deposits from them with the promise that the interest rates offered were higher than standard market rates. When they made deposits they were either issued with a document headed "Loan Certificate", payable on demand which signed by the respondent, or were given a copy of a Loan Agreement, for fixed term deposits, bearing the signatures of the depositor, the respondent and a witness respectively, or were simply issued with a post-dated cheque issued by Billion in the amount of the principal deposited plus interest due. There was another arrangement which involved sub-mortgages which, if registered against the property concerned, provided a degree of security over property owned by persons to whom Billion lent money.

The Commercial Crime Bureau then identified and interviewed other depositors. From these enquiries they established that in most cases the respondent would issue "Loan Certificates" payable upon demand signed by himself or he would simply enter into loan agreements with the depositors. When the depositors wanted to withdraw money, they needed to complete a Repayment Form which contained the payment instruction and the signature of the depositor.

When in January 1998, it became public knowledge that the respondent was in financial difficulties, depositors attempted to uplift their deposits which by February 1998, totalled approximately $100,000,000. On 1st February, 1998, Billion informed its depositors that a proportion of their deposits would be refunded through their bank accounts on 3rd February. However, most depositors have not had their cash deposits refunded to them by the respondent.

On 11th February a police operation was mounted to raid the home address of the respondent and a number of business premises of Billion and its related enterprises, one of which was named Win Win Finance Co.

5. Another residential and eight business premises were raided by the Commercial Crime Bureau. The premises were the respondent's former residential address at Leon Court, Wong Nai Chung Gap Road. The respondent himself was arrested on 11th February and he was charged with the present offence on 12th February.

6. The Commercial Crime Bureau found that there were altogether 17 employees in various sets of premises. During the raids, computer databases and over one thousand hard copy files relating to depositors were seized under search warrants.

7. An evaluation of these records revealed that when a depositor placed his money with Billion, he would be allotted an account number. The responsible staff member would maintain a green file to keep a record of the respondent's clients' deposits. The files would normally contain Personal Particulars Forms, copies of related "Loan" Certificates and bank records such as copy pay-in-slips and cheques. In addition, Accounts Staff kept yellow files to assist in managing deposits, payment of interest due, withdrawals and the like.

8. A number of databases were seized by the police which contained payment records of the interest paid to depositors.

9. Inquiries by the police of staff members revealed that when they joined Billion, they were told by the respondent that Billion was a finance company with a money lenders licence but was not permitted to take deposits from customers. This, according to the facts, came as a surprise to those persons as some had, prior to joining Billion, deposited money with the respondent and had received attractive rates of interest.

10. Billion's declared business activity was lending money, e.g. by way of mortgage, and, in some cases, Billion would also make personal loans to clients who were identified and handled privately by the respondent. The respondent decided the lending terms and the loan amounts and for personal loan arrangements most were examined, approved or rejected by the respondent himself. The interest rate charged by Billion on its money lending activities was usually 5% per month (60% p.a.). However, upon joining Billion as Account Officers some staff were principally instructed to solicit and obtain deposits from the public rather than engaging in money lending related activities.

The decision making process within Billion in terms of management, policy, financial arrangements, posting and promotion of personnel all rested with the respondent. All cheques and payment vouchers had to be approved or signed by him. The wording of the standard "Loan Certificate" and of the "Loan Agreement" was settled by the respondent himself before being passed to Accounts Staff for printing and subsequent use. The respondent would pressure his senior staff to, in turn, persuade subordinates to solicit more deposits from existing or new customers. The respondent would attend staff meetings to brief staff and set targets for his employees. During one such meeting he set a target of $30,000,000 worth of deposits to be obtained in 3 months. At the end of 1997, the respondent raised his staffs' target for securing additional deposits to $100,000,000 from the $30,000,000 target set at the beginning of 1997. He checked the deposit portfolio of Billion almost daily, and all related bank statements and supporting documentation were passed to him upon receipt. His invariable practice was to visit the Accounts Department daily to effect this supervision.

When approached by senior staff who indicated that there were insufficient funds in Billion bank accounts to meet projected withdrawals by depositors, he issued instructions to "secure more deposits to solve the problems". He would sign the "Loan Certificate" in his own name, because as he told senior staff members, his status in society provided better security to his depositors. Customers were told by Billion's staff that their cash would be used to fund Billion's lending activities and that their deposits would be guaranteed personally by the respondent. That is the reason why customers' cheques were drawn in favour of Billion Finance Co. The cash deposits placed with the respondent by members of the public were in fact unsecured and staff members were generally unaware as to how the respondent applied the funds they successfully solicited for him from the public.

11. In 1995, the respondent set the terms of interest payable on deposits as follows:

Deposits on call - 1% of loan amount per month (12% p.a.)

Deposits for a fixed term - 1 to 2% of loan amount per month (12-24% p.a.)

The respondent set and/or varied the rates according to his relationship with a particular depositor.

12. Between December 1995 to January 1998, the Deposit Interest Rates for Hong Kong Dollar short-term retail deposits set by the Hong Kong Association of Banks fluctuated between 3.75% and 5.55% p.a. for both saving accounts and deposits on 24 hours call.

13. Staff were also instructed by the respondent to provide actual or

potential depositors with a Schedule demonstrating the favourable rates of interest offered by the respondent when compared with deposit rates of interest offered by authorised institutions in Hong Kong. These methods led to numerous members of the public depositing cash with the respondent.

14. We turn to the function of the Hong Kong Monetary Authority under the Banking Ordinance. It was set up to promote the general stability and effective working of the banking system in Hong Kong. It does so mainly through the supervision of authorised institutions which are authorised under the Banking Ordinance to engage in banking business or the business of taking deposits.

15. Since 1995, the Authority has been the licensing authority responsible under the terms of the Banking Ordinance for the authorisation, suspension and revocation of all three types of authorised institutions - banks, restricted licence banks and deposit-taking companies.

16. There are minimum criteria for authorization set out in the Seventh Schedule to the Ordinance. One of the principal requirements listed therein, in order to protect depositors, is that an authorised body corporate have adequate financial resources and liquidity to meet its obligations. The Authority maintains a register of authorised institution, by which it can ascertain whether a company is or is not an authorised institution. The register is kept in the office of the Authority and is open to members of the public.

17. The respondent and/or Billion were not so registered under the Banking Ordinance and have never applied for any registration.

18. The only other fact to which we need refer is the print-out for the month of January 1998 which showed that the respondent's portfolio of cash deposits at the end of January was approaching $100,000,000 and that it involved 381 deposits in sums ranging from $10,000 to $10,000,000. The majority were for sums between $10,000 and $50,000.

19. So much for the facts.

20. When sentencing upon those facts, the judge made the following observations. Having referred to a background report on the respondent he said:

"As anticipated the report shows the defendant to have been a hardworking, efficient, ambitious businessman. It shows him to be a devoted husband and father. It shows him to have been active not only in charity and voluntary welfare work, but also active as a donor to such organisations. Undoubtedly Mr. Chan is not merely of good character in the sense of absence of a criminal record, but of positive and exemplary good character.

I cannot believe nor is it seriously suggested that the defendant was unaware he needed a licence. This course of conduct continued for years. He is a sophisticated businessman who had been running a successful substantial money lending enterprise and was well aware of the need for that licence. He is a director of a reputable hospital and holds positions of responsibility in other organisations. He caused to be issued elaborate and ornate certificates of deposit and a promotional newsletter entitled "Billionaire". His company became famous - notorious, perhaps - for paying generous interest rates far exceeding authorised institutions.

The staff were equipped with Billion Company business cards representing that Billion had "Government Licence No. 88/97". That was true so far as it goes, that was the money lender's licence number, but actively misleading in that it suggested the entire enterprise was licensed by the government.

The defendant has not stolen or misappropriated any money, but it is obvious that the situation which has arisen is the very situation the legislation is designed to prevent. The legislation is aimed at ensuring not only that a licence holder is a suitable person, but that his business is suitably and responsibly run; for example, that it has adequate capital and liquidity ratios. The defendant avoided all these requirements and the flouting of these requirements has been the proximate cause of the huge loss of the depositors' money. The defendant did not intend to cause losses, but his actions in allowing this to continue took an unacceptable risk which exposed the depositors to that loss.

I turn to consider the application for a criminal bankruptcy order. This is opposed and it is argued that there is nothing to prove the losses were the result of the offence. It is not necessary that the prosecution do prove this, but merely that it be shown that the losses 'appear to the court' to be such a result; subsection (1). In this case they do so appear to me to be a result, even though there may have been other extraneous causes such as the downturn in the economy. The losses were direct and proximate result of the offence.

Given the spectacular collapse of Billion, which is not a registered limited company, I think that what assets there are should be crystallised in the hands of the official receiver for the benefit of all creditors. Pursuant to section 84A(3) of the Criminal Procedure Ordinance, I therefore make a criminal bankruptcy order in the form of the draft and schedules submitted by the prosecution ...

Given the magnitude and scale of the offence, I regret the suggestions of suspension or community service order to be inappropriate and unrealistic. The defendant's clear record, his good character and his plea of guilty come to his aid in reducing the sentence to be imposed. As Mr. C.Y. Wong says for the defendant, his good character is not merely absence of record, it is positive good character of a charitable and exemplary nature.

I select a starting point of 18 months. I allow a one-third discount for the plea of guilty, I allow a further 6 months' discount for the excellent good character, and in the result impose 6 months' imprisonment."

21. The Secretary for Justice now asks us to review that sentence on the ground that it is manifestly inadequate and wrong in principle. It is submitted by Mr. Chapman, who appears for the Secretary, that the sentence required was one which would adequately demonstrate to the community of the Hong Kong Special Administrative Region that the courts not prepared to tolerate any such bogus banking practice as are revealed in the instant offence.

22. We say immediately that we find no real assistance from the cases of R. v. Reuben, [1996] 1 Cr.App.R. (S) 79 and David Lin, (No. 1) [1997] 2 HKC 679, to which the judge referred. It is argued by Mr. Chapman that the judge did not give proper weight to the maximum which was fixed by the legislature and that he, to an extent, misled himself by relying upon the authorities to which we just referred. Mr. Chapman submits that the judge failed to assess sentence by placing the very substantial criminality involved in the context of the maximum sentence that appears in the legislation. That maximum is imprisonment for five years and a fine of $1,000,000. The criminality involved a course of deceitful conduct over 33 months involving a loss of about $100,000,000 to 364 members of the public. The respondent deliberately flouted the provisions of the Banking Ordinance placing at risks the savings of those who had entrusted their money to him. The Secretary for Justice submits that deterrence was not given proper weight. We find considerable force in this submission.

23. It is also argued that the judge erred in taking into consideration the submission of defence counsel that the respondent has not stolen or misappropriated any money. It is submitted that there was no evidence from the respondent to that effect and that the judge should not have sentenced the respondent on the basis of unsubstantiated assertions by defence counsel in mitigation.

24. We have some doubt whether it lies in the mouth of the prosecution so to argue. In the admitted facts, it was never alleged that there had been any theft or misappropriation. Further, counsel made that submission without demur from the prosecution.

25. The probation report, to which the Secretary for Justice has referred us, states that the commission of the present offence was largely due to the respondent's greed and his growing ambition to expand the business he could ill-afford. While it may have been that the judge was entitled to make the observation he did, it was, we are satisfied, not really to the point. The applicant was not charged with stealing money but with unlawfully taking deposits. What was in point was that, driven by reckless greed and ambition which had no regard for the rights of those who entrusted their money to him, he had caused massive loss to the depositors. That was the gravamen of the offence alleged. It can properly, in our view, be characterized as an offence of very considerable gravity in the upper band of offences of this kind.

26. After careful consideration, we are quite satisfied that the starting point of 18 months was manifestly inadequate. We consider that a proper starting point would have been four years.

27. The only mitigating factor to which we consider any weight could properly be given was the plea of guilty. The four years or 48 months therefore can properly be reduced by one-third to 32 months. In the case of The Attorney General v. Wong Kwok-wai,(1991) 2 HKLR at 384, this court observed a discount might be given where the respondent was very close to the end of his sentence or where the sentence imposed upon review was greatly in excess of the original sentence. Following that indication, we allow a discount of a further three months bringing the sentence to one 29 months.

28. The application succeeds. The sentence is varied from the six months imposed to one of 29 months. The criminal bankruptcy order will, of course, stand.