HKSAR v. CHIN KAM CHIU AND ANOTHER

CACC 179/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 179 OF 2004

(ON APPEAL FROM HCCC NO. 158 of 2003)

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J U D G M E N T

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Hon Stock JA (giving the judgment of the Court):

1. On 22 July 2005 the appeals of five appellants in this case were dismissed and it falls for us now to consider the applications of two of those five, namely the first and second, for leave to appeal against sentence.

2. We do not propose for the purpose of this judgment to repeat the facts of the case for they are set out in considerable detail in the earlier judgment.  It suffices to say that the case was one of conspiracy to defraud the shareholders and creditors of the Sin Hua Bank (‘the Bank’) by negotiation of letters of credit in respect of which there were, to the knowledge of the defendants, no underlying transactions.  There were 25 such letters of credit negotiated between 19 November 1998 and 16 April 1999, and they totalled in terms of the sums generated something in the order of $222 million.  The funds thus generated were used by Keen Lloyd, the first applicant’s company, to retire overdue trust receipts which the Group had with the Bank and, as the judge commented in his sentencing remarks, “by this arrangement, Keen Lloyd would be kept afloat”.

3. The first applicant for leave was the principal shareholder of the Group’s companies, as well as of the purported beneficiaries, and it was he who agreed to the plan proposed (so the evidence suggested) by the banking defendants; and he then acted upon it by causing the applications to be made and the supporting commercial documents to be produced.  He also signed various of the necessary documents.

4. The second applicant was an accountant of the Group and she was responsible for overseeing the preparation of the applications and other supporting documentation; and also responsible for ensuring transfer of the funds from the beneficiary companies back to the Group.

5. The third defendant, who is not before us in the context of the present application, was a deputy general manager of the Bank; the fourth was an assistant general manager in charge of the Bill’s Department; and the fifth a senior manager in charge of the particular branch of the Bank where Keen Lloyd maintained a number of accounts. 

6. By the spring of 1998, the Bank was considerably over-exposed in relation to the Group, for the amount of credit that had been extended to the Group represented about 25% of the Bank’s capital and, as has been explained in the earlier judgment relating to conviction, the downturn in the market that year led to the Group being unable to meet its debt payments to the Bank owing, by November 1998, when the scheme which was the subject of the indictment was hatched, a large sum, mainly in respect of overdue trust receipts.  The effect of the scheme, when implemented, was to replace secured debts – that is to say those covered by the trust receipts – with unsecured debts, namely, the new debts created by the sums advanced under the letters of credit unsecured because there were no underlying transactions.  The effect of what transpired was to keep the Group afloat, and to retain it as one of the major customers of the Bank, whose custom, it seems clear, the Bank officials involved in the scheme were particularly anxious to retain for the Bank’s benefit.  It is to be noted that, rather unusually, a direction was given and followed, that the funds generated by the issue of the documentary credits were not to leave the Bank.

7. The sentencing judge noted that each of the defendants had not previously been convicted of any criminal offence.  He proceeded also on the basis that the Bank had not suffered loss, although he commented, quite correctly, that the gravity of offences within this category lies in the attack which they present to the efficacy and importance of the documentary credit system, and the risk that is created whether or not in the event there is a loss.  He noted – and this is point to which we shall return – that Bank officials, perhaps at a high level, were themselves involved in the scheme; that the scheme lasted for several months; and that each defendant played a pivotal role in the execution of the scheme.  He accepted that in the case of all defendants, save the first, there was no evidence of any financial gain.

8. His sentencing process was as follows: he took a starting point in the case of the first applicant of seven years’ imprisonment; in the case of the second applicant a starting point of five years’ imprisonment; in the case of the third applicant a starting point of six years’ imprisonment; in the case of the fourth applicant a starting point of five years’ imprisonment; and a starting point of five years’ imprisonment also in the case of the fifth defendant.  He then reduced each such term by six months because each was a first offender, a step that might be said to have been generous in principle in so far as previous good character tends to play very little or no part in cases of ongoing fraud.

9. The resulting sentences were as follows: the first applicant was sentenced to a term of six and a half years’ imprisonment; the second to a term of four and a half years’ imprisonment; the third to a term of five and a half year’ imprisonment; and the fourth and fifth to terms of four and a half years’ imprisonment each.

10. We have been presented with a number of grounds on behalf of each applicant.  It is said that the starting point adopted in relation to the first applicant was manifestly excessive since the evidence established that the offence was instigated by Bank officials and must have been known to those at high levels within the Bank; that there was delay in the launching of the prosecution ; that no loss was caused to the Bank; that the conspiracy seems to have been engendered for the benefit not of Keen Lloyd but rather for the benefit of the Bank; and it was today emphasized that directions were given that the funds generated were not to leave the Bank and that the letters of credit were not to be issued until overdue trust receipts were retired.

11. On behalf of the second applicant, it is said that the starting point adopted by the trial judge was manifestly excessive because he failed to give adequate regard to the fact that she was not party to the decision to embark upon the conspiracy; that she was acting in a position subordinate to that of the first applicant; that she derived no benefit from the conspiracy; that she played a minor part; and that there had been delay in bringing the prosecution.

12. Mr Bruce, SC says that there was no real exposure occasioned to the Bank.  We do not agree.  The Bank lost the security of goods which is part of the security evidenced by trust receipts.  It can hardly be said that in a letter of credit fraud involving the sums involved in this case a starting point of seven years’ imprisonment was manifestly excessive; and it matters not, for the purpose of that particular statement, that no loss was proved.  Nothing we hereafter say in this judgment should, therefore, be utilized as suggesting that this judgment disapproves of sentences of that range, or indeed more, depending on the circumstances, for offences of this particular gravity.  But there is in this case an unusual feature and that unusual feature is that the instigation for these offences appears to have emanated from staff within the Bank rather than from the applicant for the letters of credit.  It is not only that senior bank officials knew full well, according to the sentencing judge and indeed according to the evidence, what the first defendant ultimately was doing but that, so it appears – and so we are prepared to assume in the first applicant’s favour – they initiated the scheme.  It is however not correct to say that the first applicant was to derive no benefit from that scheme, for the benefit to him and to his Group was clear – it was the benefit that the Bank would not foreclose on his business and that he could continue to operate it.  Mr Loughran in his helpful submissions today postulates that in truth the guilty bank officials who were also sentenced embraced a culpability less than that of the first defendant for they should be treated as having acted at his agent.  That is one tenable view of the matter; but there was evidence, and it is version that must be assumed in his favour, that the Bank officials themselves perceived a benefit to the Bank which triggered the hatching of scheme.  The perceived benefit to the Bank was to keep the company afloat, to reduce the indebtedness in respect of overdue trust receipts, and thereby to retain this large group as its customer.  This is merely to state what was perceived and not in any way to derogate from the fact that a fraud was practiced upon the creditors and shareholders of the Bank, and that risk was created.   In this particular regard, it will be remembered, from paragraph [178] of the earlier judgment in relation to conviction, that there was evidence that ‘the arrangements and the decision to proceed with the scheme was one made by officers of the Bank, in an open manner, so that other officers of the Bank were likely to know of it.  That there was evidence that upon the decision being made within the Bank, D1 had been informed what it was that the Bank had decided.  That there was evidence, that upon being informed of the scheme, D1’s reaction was: “If this is what you want to do, I will do it.”’.  And we see from that same paragraph of the judgment that funds never left the Bank.  It is to be noted that in his sentencing remarks the judge said:

“Suffice it to say that the scheme must have had the blessing of the highest management of the bank.  I am certain that not everyone involved has been brought to justice.”  (page 86).

He also said that:

“This case involves a concerted effort of the defendants in abusing the documentary credit system.  I accept that the scheme could have come from the highest level of the Bank.” (page 88).

13. It is in this context that we have nurtured some concern and concentrated in this appeal upon the disparity between the sentence imposed upon the first applicant and that imposed upon the Bank officials in the case.  Standing alone, the sentence imposed upon the first applicant is entirely unobjectionable, but for the reasons that we have sought to illustrate, and in the unusual circumstances in the case, and having considered the submissions of Mr Loughran as to relative culpability which we have earlier addressed, we think that the sentence imposed upon the first applicant should not have been greater than that imposed upon the third defendant.  In the event, the third defendant was sentenced to five and a half years’ imprisonment and that is the sentence we shall substitute in the first applicant’s case.  Accordingly, we give him leave to appeal against sentence, treat this as the hearing of the appeal, allow the appeal and substitute for the sentence of six and a half years’ imprisonment a sentence of five and a half years’ imprisonment.  The disqualification order made under section 168D of the Companies Ordinance remains undisturbed.  In taking the course that we do, we have regard to the other grounds of appeal including, we should add, the question of delay which in this case the respondent concedes was a little long.

14. In so far as it is said that the role of the second applicant was passive and minor, we cannot agree.  She took an active and continuous part in making applications for the letters of credit and in ensuring the transfer of funds from beneficiary to applicant.  That said, it is correct that she was not party to the initial conspiracy and that she must have been acting under some degree of pressure from her boss, the first applicant.  We do not in this particular case perceive it to be an exercise in tinkering were we to reduce her sentence by six months.  Such a reduction follows not as an exercise in a vacuum, but in order adequately to reflect the difference between her role and that of the first applicant whose sentence we have, for the reasons that we have provided, reduced to a term of five and a half years’ imprisonment.  Accordingly, we grant the second applicant leave to appeal against sentence, treat the hearing of her application as the appeal, allow her appeal and substitute for the term of four and a half years’ imprisonment in her case, a term of four years’ imprisonment.