HKSAR v. SIT LAI HA

DCCC234/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 234 OF 2009

----------------------

----------------------

-----------------------------------

Reasons for Sentence

---------------------------------

1.  The defendant, Madam Sit Lai-ha, pleaded guilty before me to two charges of using a false instrument and admitted the facts pertaining to the charges. 

2.  This case concerns a Shereda Enterprises Limited, herein after referred to as “the company”, a Hong Kong company incorporated in 1993.  The defendant and her husband are the major shareholders and directors of the company.  The company was involved in the manufacture and distribution of cassette tapes, videotapes, compact discs and digital discs boxes.  The production of boxes took place in the mainland, China. 

3.  The company did business both with local and overseas companies.  The defendant’s husband was responsible for running the factory in the mainland.  The defendant handled the affairs of the company in Hong Kong.  The defendant was responsible for all the purchase orders placed with the company and she also had to deal with the company’s current account and cheque signing. 

4.  The company had banking facilities with the Nanyang Commercial Bank Limited and the Standard Chartered Bank.  The defendant and her husband were signatories to the accounts of both banks.  The signature of either one was sufficient to operate the accounts.   

5.  The Nanyang Commercial Bank and the Standard Chartered Bank offered credit facilities, known as a factoring service.  Pursuant to the factoring service, the company was able to obtain an advance of moneys from the bank for goods sold by the company to its customers up to the credit limit extended by the banks before the company received payment from the customers.

6.  At the time this matter came to light, the credit limits extended by the Nanyang Commercial Bank and the Standard Chartered Bank were HK$11 million and HK$15.8 million respectively. 

7.  Both the defendant and her husband had signed bank documentation relating to the credit limits. 

8.  To use the Nanyang Commercial Bank’s credit facility, the company had to submit a factoring application form, setting out the names of the purchasers of the company’s goods, the amount of credit limit wanted and the terms of repayment of the moneys advanced.

9.  To use the Standard Chartered Bank’s credit facility, the company had to submit copies of invoices, evidence of shipment of goods together with an application form. 

10.  If a particular transaction was approved, the banks would allow funds to be withdrawn by the company up to the maximum amount through utilisation of the factoring services, usually 90 per cent of the invoiced accounts.  

11.  Sometime in July 2007, both banks experienced difficulties in recovering repayments of the moneys advanced under the factoring services facility.  Both banks contacted the purported buyers of the goods, the subject of the usage of the facility.  The purported buyers informed the bank that they did not owe moneys to the company and denied any knowledge of the purported transactions.

12.  On 23 July 2007, staff of the Standard Chartered Bank met with the defendant to discuss repayment of moneys owed.  In that meeting, the defendant admitted that the company had received the amount outstanding.  Further, that the company had submitted false invoices to the bank in order to obtain finance.

13.  On 6 August 2007, the staff of Nanyang Commercial Bank met with the defendant to discuss the outstanding amounts but received no satisfactory explanation.   The bank reported the matter to the police in the same month. 

14.  The result of the enquiries by the investigators with each of the purported buyers were:

(1)  Of the Hong Kong buyers contacted, six of them confirmed that the documents submitted to the banks purportedly evidencing the purchase by them of goods from the company were false.  In relation to the seventh company, Atooly Limited, which was managed by the defendant’s father, the trading manager indicated that he had never seen the documents related to the alleged purchase by Atooly.

(2)  Of the overseas buyers, two companies confirmed that the purported purchases they made had not taken place.   

15.  In reliance upon the aforesaid false transactions, the Nanyang Commercial Bank gave credit totalling HK$2,375,323 to the company.  The Standard Chartered Bank gave credits totalling HK$5,728,916 to the company.  The defendant had made the applications for the said credits. 

16.  On 6 December 2007, the defendant and her husband were arrested in relation to the matter. 

17.  On 23 October 2007, the defendant and her husband were declared bankrupt, and on 24 October 2007, an order for liquidation was made against the company. 

18.  The sum outstanding for Nanyang Commercial Bank is HK$2,375,323 and for the Standard Chartered Bank it is HK$3.9 million approximately, the total is HK$6.275 million approximately.

19.  The 1st charge which concerned the Standard Chartered Bank took place between 21 November 2006 and 26 June 2007.   

20.  The 2nd charge which concerned the Nanyang Commercial Bank took place between 10 May 2007 and 23 June 2007. 

21.  The defendant is a person of hitherto clear record.  The antecedent statement of the defendant reveals that she was born in the Mainland China and is now 47 years old.  She had received High School education in China.  She set up the company with her husband in 1993.  The defendant lives with her husband and her 17 years old son and 14 years old daughter in Quarry Bay, Hong Kong. 

22.  Mr Loughran, in his realistic and helpful submissions, accepts that a custodial sentence is inevitable despite the clear record of the defendant.  He cannot put forward any exceptional grounds that can justify a suspended sentence. 

23.  Learned counsel submits while there were reported cases on LC fraud, he is not aware of any reported case on the fraudulent use of factoring services facility.

24.  Under the said credit facility, money was advanced by the banks to the company.  There would be an assignment of the debt in that the buyers would become debtors to the banks, although in practice, it was invariably that the company who would repay the banks from day to day. 

25.  Under the factoring service, the banks would have some kind of security.  The banks inspected the factory in China every six months.  When one compares the LC facility and the factoring service, the risk that the banks had to take for the factoring service in the present case is local as the company is a Hong Kong Company, although some of the buyers may be overseas.

26.  The company started its business in 1993.  Things went well for the company and a factory was set up in Dongguan.

27.  The company did very well for 12 years until year 2005.  Two clients of the company defaulted in a debt owed to the company.  The total debt owed was over HK$4.4 million.  Then, in year 2006, the Reminbi went up in value and the wage bill for the factory in Dongguan went up substantially.  The company suffered as it was paid in US dollars and Hong Kong dollars.  Furthermore, the costs of raw materials also soured as the price for oil went up in 2006.  At that time, the Chinese Government increased import duty by 6 per cent, hence, an additional burden to the company. 

28.  At the time of difficulties, the company looked for and found a new customer, a US Company called BVE Century.  The company extended credit to this new client, which defaulted, and as a result the company suffered a loss of HK$5 million.

29.  As the company went into trouble and in order to save costs, in 2007 the company wanted to close its Hong Kong office and move the administration to the mainland.  The company still wanted to keep the existing banking facilities in Hong Kong. 

30.  Faced with the various problems identified, the defendant, in an attempt to keep the company going, resorted to false transactions to obtain money.  The intention was that the company would carry on with the loans from the banks and it would try to get more business.  It was hoped that things would be recovered and the debts would be settled in due course.  However, the company could not repay their debts owed to the banks. 

31.  During the period from April to July 2007, the company was still doing business and the defendant was still trying to make a genuine effort to save the company.

32.  The present case is not a case where a company was set up for the purpose of committing a fraud.  The offences took place during the period between November 2006 and June 2007, over a period of seven months.  The defendant tried to carry on the business and she committed the offences.  There was genuine business for the company and the present case is not one that money was put into the personal pocket of the defendant.  The money obtained was used to save the business.

33.  The security given for the factoring services facility from the Nanyang Commercial Bank was personal guarantee and the Nanyang Commercial Bank did not have any real property used as security.

34.  For the Standard Chartered Bank, it had considerable security against the various forms of loan credit facilities granted to the company.  The bank had a charge on the defendant’s property and the $3 million fixed deposit and personal guarantees.  The total indebtedness to the Standard Chartered Bank was around one HK$15 million.  The Standard Chartered Bank sold the property which was subject to the charge and received $10 million, leaving approximately $5 million outstanding.

35.  I am told that the Standard Chartered Bank had used this security towards the other credit facilities.  For the factoring service, which was covered by insurance, the bank did not see fit to have the loan under the factoring service covered by security.

36.  As things turned out, the insurance would not cover the false transactions and loss was incurred for the bank.  Had the bank approached the matter differently, the loss suffered as a result of the factoring service would be less.

37.  The defendant has shown a high level of co-operation.  She admitted to the Standard Chartered Bank since her arrest and was put on bail.  She was allowed to travel to and from China.  She honoured her bail conditions throughout and she indicated her intention to plea to the charges at the earliest opportunity.  Anxiety of the trail has been removed for everybody concerned and overseas witnesses are spared from coming to Hong Kong to testify.

38.  The defendant is now 47 years old and she has a clear record.  She married her husband in 1990.  For the son and daughter of the family, the defendant has made practical steps for the children.  They will be taken care of by the defendant’s sister and the defendant’s husband would work in China in an attempt to meet the expenses of the family.

39.  Mr Loughran refers me to the following authorities: HKSAR v Yao William [2002] 3 HKLRD 397; HKSAR v Chan Chun Hung, CACC553/2002, dated 16 July 2003; HKSAR v Leo Yee Sang Patrick, CACC494/2004, dated 28 July 2005; HKSAR v Tse Ching Ng and others, CACC361/2004, dated 6 September 2005; HKSAR v Law Chi Man Kenneth, CACC356/2006, dated 7 September 2007; HKSAR v Chu Wai San [2008] 4 HKLRD 18, dated 30 January 2008.

40.  From the case of Yao William, Mr Loughran submits the risks that the banks were exposed to was local, not international, as in the case of LC fraud.  It is also submitted that it is not appropriate to treat the present case as one of breach of trust and sentence the defendant on that basis.  Admittedly, there was an element of trust between the defendant and the banks but the trust relationship was not one of employer/employee relationship.  The banks and the defendant were in a commercial trust situation. 

41.  Mr Loughran goes through the facts of the authorities and submits that in terms of the number of charges, the amount involved, the elaborate planning by the fraudsters involved in the other cases, the duration of the conspiracies, the facts revealed in these cases depicted more serious scenarios than the present case. 

42.  In some of the cases, the companies were set up for the purpose of deceiving the victims.  The defendant in the present case, at the time when she was unable to handle the downturn and when the company was defaulted by its customers, what the defendant did was for the purpose of saving the business that had been set up for 13 years.  In doing so, she was also saving the jobs of many employees. 

43.  The defendant was misguided in her genuine attempt to save the company, she accepts the seriousness of her mistakes.

44.  Mr Loughran asks me to impose a sentence at the lower end and bear in mind the good character and background of the defendant.  The company had been liquidated and the defendant has become bankrupt and the possibility of the defendant re-offending is nil. 

45.  Mr Tse submits the following cases for my consideration.  On the impact on system and size of potential risks, HKSAR v Yao William; R v Chan Kam Chuen [1995] 2 HKCLR 257; R v Barrick applies to all kinds of fraud; AG v Dominic Cheung Kai Man [1987] HKLR 788; R v Barrick [1985] 7 Cr App Rep (S) 142; small fry obtained $891,000, HKSAR v Cheung King [2001] 3 HKLRD 68; examples of starting point, HKSAR v Chu Wai San.

46.  On the impact of the use of false or misleading letters of credit and bills of lading and necessary supporting documents on the banking  system, Mortimer JA said in R v Chan Kam Chuen,

“...On any view, even though the gain to the applicant was small, these offences are very serious.  The system of documentary credits is the means whereby international trade has been conducted for hundreds of years.  The system depends entirely upon trust.  Money is paid out, not upon any examination of the goods but upon the documents themselves.  It is fundamental to the system that the documents should be truthful and accurate.  If false documents are circulated, some of which are, in effect, title to the goods themselves, the whole system falls apart.  That is why courts always regard offences of this nature as very serious.”

47.  I am aware that the present case concerns factoring service and not letters of credit, but I do not think that justifies the court taking a less serious view of the matter. 

48.  In HKSAR v Leo Yee Sang Patrick, it was argued on appeal that the LCs in question were local and not international LCs, hence, the comments made  by Mortimer JA did not apply.  The Court of Appeal said this at paragraph 26 of the judgment,

“What Mortimer JA was stressing in that passage was the need for trust in the documentary credit system generally.  That system is vulnerable when false documents are involved.  Any offences involving the creation of false documents within the system must be viewed as being ‘very serious’, and there is no valid distinction to be made between ‘local’ LC fraud and ‘international’ LC fraud.  The fraudulent misuse of the documentary credit system within Hong Kong could lead to a worldwide loss of confidence in Hong Kong’s banking system as a whole.”

49.  The Court of Appeal stated again in HKSAR v Chu Wai San, at paragraph 163 of the judgment that the comments made by Mortimer JA in Chan Kam Chuen applied, whereas in that case the documentary credits support local trade. 

50.  I do not think the local risk submission assists the defendant.  In my judgment, the fraudulent use of factoring service were not to be tolerated.  Both the banking industry and the manufacturing sector will suffer greatly.  If the abuse of factoring service became prevalent, the banks would have to put in more manpower and resources in checking the contents of the documents submitted or even becoming more reluctant in granting credit facilities to the manufacturers in need of such facilities.  Ultimately, both the banking industry and the bona fide traders or manufacturers would suffer.

51.  The court of appeal in AG v Dominic Cheung Kai Man, said R v Barrick applies to all kinds of fraud.  Dominic Cheung Kai Man was decided in 1987.  In 2001, the Court of Appeal in HKSAR v Cheung King, a typical case of LC fraud, revisited the issue.  The Court of Appeal, after considering the cases of R v Barrick, R v Clark and SJ v Wong Kay Din, said this at paragraph 22 of the judgment,

“Plainly, this was not a breach of trust case, as it is only fair to say the judge recognised, but we consider that the comparison with such a case probably came about because the judge had in mind that the system generally adopted in business for letters of credit largely depends, as it does in many commercial transactions, upon trust.  However, this was not a case in which it was proper to apply a sentence in strict accordance, as the judge had done, with the guidelines for an offence involving a breach of trust.”

52.  The Court of Appeal said at paragraph 23 that,

“The approach that should have been adopted towards offences of this kind is described in R v Chan Kam Chuen [1995] 2 HKLRD 257 which was put before the sentencing judge.  All letters of credit frauds are very serious offences.” 

Then the court referred to the often quoted comments by Mortimer JA. 

53.  Mr Loughran rightly accepts that immediate terms of imprisonment are inevitable, a reality sensibly accepted also by the defendant.  It gives me no pleasure in sending a decent lady like the defendant to prison, let alone for a lengthy period of time, but I would be failing in my duty, however, if I do not pass a sentence that adequately reflects the serious nature of the offences that the defendant committed and the society’s abhorrence of them.

54.  In my judgment, despite the clear record of the defendant, there ought to be a deterrent element in the sentence for offences targeting the banking institutes so that like-minded people would be deterred from doing the same. 

55.  In the present case, in determining the starting point for Charge 1 and 2, I have borne in mind the followings: the modus operandi in terms of the submissions of false documents and the number of local and overseas buyers made use of by the defendant; the risks that the Nanyang Commercial Bank and the Standard Chartered Bank were exposed to and the substantial loss that the banks actually suffered; the key play role of the defendant and the length of time over which the fraud was practised. 

56.  I appreciate that the appropriate starting point is necessarily offence-sensitive, as the Court of Appeal recognised in Chu Wai San.  From the mitigation, I come to know why the defendant committed the offences, I am aware that what the defendant did was for the purpose of saving the business that she and her husband had set up, but that cannot militate against the seriousness of the offences.

57.  In the present case, while Charge 1 took place over a duration of 7 months, a loss of over $3.9 million was caused to Standard Chartered Bank.  Charge 2 took place within 2 months and the Nanyang Commercial Bank suffered a total loss of around $2.37 million.

58.  On the facts, I think a starting point of 4 years is appropriate for both Charge 1 and Charge 2.  The defendant is entitled to one-third reduction for her guilty pleas and clear record.  I can see no other mitigating factors that can enable me to further me reduce the sentence.

59.  For the reasons given on Charge 1, I sentence the defendant to 32 months’ imprisonment.  On Charge 2, I sentence the defendant to 32 months’ imprisonment.

60.  In the present case, two victim banks were involved.  Although the two offences did overlap in time for around 1½ months, they still call for consecutive terms, subject to totality. 

61.  Bearing in mind the overall loss of HK$6.275 million suffered by the two banks and all the facts before me, in my judgment, a total sentence of 40 months’ imprisonment would adequately reflect the overall criminality borne out by the facts.  That would represent a notional global starting point of 5 years’ imprisonment for the two offences. 

62.  To achieve this end, I order 8 months’ of the sentence for Charge 2 should run consecutively to the sentence for Charge 1, making a total term of 40 months’ imprisonment.   

63.  I thank counsel for their assistance.