HKSAR v. LUAN GANG AND ANOTHER

DCCC 788 & 790/2015

[2018] HKDC 811

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASES NOS. 788 & 790 OF 2017

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REASONS FOR VERDICT

1.  D1 and D2 are brother and sister. D1 faces 1 charge of conspiracy to commit money laundering (Charge 1) alone. He and D2 are jointly charged with an offence of conspiracy to commit money laundering (Charge 2). They both pleaded not guilty to the respective charge(s).

The Prosecution Case

2.  During the offence period, D1 was the sole proprietor and director of 4 companies incorporated in Hong Kong, the British Virgin Islands and mainland China respectively.

3.  D2 is D1's younger sister.  The prosecution alleged that she was the financial controller of D1's companies and had knowledge of the business affairs of those companies.  Madam LI (PW7), who was D1's employee during the offence period, stated in her evidence that D2 was rarely in the office; may be once or twice a year[1]. Madam LI also agreed that in her first written statement dated 13 December 2010, she named someone else as head of the Finance Department[2].

4.  D1 engaged in the business of providing professional technical services (including the provision of specialized vessels and machinery) to mainland oil companies in relation to offshore oil exploration works.

5.  The prosecution alleges that in order to avoid mainland customs duty and related taxes, D1 had conspired with others to furnish false information or make false declaration to China Customs in the process of importing oil engineering vessels and machinery into China waters.  Through his companies, D1 then rented out those vessels and machinery to mainland oil companies and earned substantial rental income.

6.  The prosecution alleges that the rental income earned by D1's companies constituted proceeds of crimes committed in the mainland (i.e. deceiving China Customs; or alternatively conspiracy to defraud in Hong Kong).  When being investigated by mainland law enforcement, D1, with the assistance of D2, laundered the proceeds of crimes (i.e. the rental income) by removing them out of Hong Kong.

7.  To prove the alleged commission of predicate offences, the prosecution relied on the evidence of Mr. CHEN (PW9), a China Customs officer and an expert in China Law.  In gist, Mr. CHEN took the view that the import status of the 4 vessels and 1 dredger in question (namely the Assister, the Challenger, the Trico Sabre, the Eclipse and the T8000) should have been declared as "Import on Lease" instead of "Temporary Import".  The making of such false declarations to China Customs constituted "smuggling" offences under China Law and evaded substantial customs duty and related taxes.

The Defence Case

8.  D1 and D2 both elected not to give evidence or call any defence witness.  This is their right; I drew no adverse inference against them in this regard.

Assessment and Analysis of Evidence

9.  The burden of proof is on the prosecution to prove each element of each offence beyond reasonable doubt.  Both defendants have a clear record.  I have directed myself on their good character accordingly.

Nature of the contracts

10.  Counsel for both sides spent much time in court with Mr. CHEN on the basis of classification of "Temporary Import" and "Import on Lease". According to Mr. CHEN, since the relevant contracts for the 4 vessels and 1 dredger reveal that they were charged on a daily rate (as opposed to being provided for use in the course of the project free of charge), they were considered as "Import on Lease", and were thus subject to customs duty and VAT[3].  This is Mr. CHEN's expert opinion, which is stated in his report (Exhibit P179) as well as his live evidence.  He, however, did not point to any statutory definition of "Temporary Import" or "Import on Lease"[4]. Mr. CHEN also did not point to any statutory provision which makes it a pre-condition that only goods which are included in a service contract (i.e. free of charge) could be declared as "Temporary Import".

11.  Defence counsel, especially Ms. Draycott, SC, leading counsel for D1, did not focus their cross-examination of Mr. CHEN on the definition of the 2 terms (statutory or otherwise), but on his interpretation of the relevant contracts instead.  Assuming Mr. CHEN is correct about the definition of the 2 terms, I share the same criticisms made by Ms. Draycott against his interpretation of the relevant contracts

12.  For the Assister and Challenger, their respective "daily rate" contracts (COPMIC-FB-09-020[5] and COPMIC-FB-09-030[6]) clearly state :-

RECITALS

1) Whereas the CONTRACTOR has been awarded by CNOOC (the "CLIENT"), a contract (the "AGREEMENT") for the execution of certain portions (the "WORK") of the Project (the "PROJECT") as defined in Exhibit 1 hereto;

2) Whereas the WORK includes the performance of certain Trenching works [Pipe Installation works, for the Challenger] (the "SUBCONTRACT WORKS") on board a vessel operated by SUBCONTRACT.

3) Whereas the SUBCONTRACTOR declares that it has the technical and financial capabilities to perform the "SUBCONTRACT WORKS";

4) Whereas the SUBCONTRACTOR and the CONTRACTOR desire that the SUBCONTRACT WORKS as defined in Exhibit 1 is performed by the SUBCONTRACTOR. (emphasis added)

Furthermore, the Exhibit 1 of each contract sets out the SUBCONTRACT WORKS to be performed[7]; whereas the respective Exhibit 4s each contains a detailed SCHEDULE OF SUBCONTRACT WORKS illustrated in a time line format typically used by engineers[8].

13.  For the Eclipse and Trico Sabre, their respective "daily rate" contracts[9] clearly state :-

RECITALS

CHARTERER as specified in Exhibit B desire to hire one (1) VESSEL (the VESSEL), manned and operated on a continuous basis, to service CHARTERER' offshore exploration and/or production facilities and to perform services (subsea survey and inspection work including support ROV/diver work to quickly respond to pipeline leak emergencies and used as a standby/supply vessel at ACT-OG's option) in conjunction with CHARTERER' hydrocarbon exploration and/or production programs in Contract Area(s) specified in Exhibit B; and OWNER, being engaged in the business of providing such services, represent that they will provide a seaworthy VESSEL and manage, control and operate the VESSEL in accordance with acceptable recognized standards of performance consistent with the established practice of OWNERS providing similar type service to oil exploration and production companies. (emphasis added)

14.  It is obvious that more than just renting out of a vessel was involved in each contract.  The OWNER was required to manage, control and operate the VESSEL[10].  In other words, crew members and related personnel were involved.  When human beings are involved, some form of service would invariably be rendered.  It is simply common sense.

15.  Similarly, the price list of the T8000 (the dredger) is mostly related to the fees of personnel[11].  Again, more than just renting out of a piece of equipment was involved.  It is at least a reasonable conclusion that the transaction in respect of the T8000 dredger was a service package.

16.  In my view, all these contracts are clearly contracts for services (at least it is a possible interpretation). No doubt all contracts involved the hiring of certain machinery and related equipment.  How the contractual parties intended to price and pay for the services rendered does not alter the nature of the contract.  When cross-examined by Ms. Draycott, Mr. CHEN was unable to explain why a contract which stipulates charging at a daily rate cannot be a contract for services.

17.  Whether a service provider itemizes in the contract the fees for each piece of equipment to be used or wraps all charges in a lump sum, this factor alone cannot be determinative as to the true nature of the contract (i.e. to provide service for a fixed sum which is inclusive all tools, materials and personnel involved or to simply rent out certain machinery).  In my view, even if the contractual price is stated as a fixed sum, any reasonable business man would have in the pricing process factored in the costs of all the tools to be used.  The basis of Mr. CHEN's classification of the contracts is unsound and arbitrary.  I cannot accept his opinion on this issue.

18.  Ms. Draycott has outlined in her written submissions the explanation given by D1 in his video recorded interview regarding the type of service that he provides for his clients.  It includes technology design, construction design and technical supervision; whereas the personnel involved includes technology designers, offshore construction commanding officers, seamen and professional technical operators[12].  D1's explanation is consistent with the terms of the relevant contracts.  I am not satisfied beyond reasonable doubt that the 4 vessels and 1 dredger could not have been declared as "Temporary Import".  Hence, there may not have been any falsity in the relevant information provided to China Customs.

19.  Regarding the issue of "dual characteristics" of oil exploration vessels, Ms. Draycott's argument is contained at paragraphs 45 to 103 of her closing submissions.  I need not repeat them here, suffice it for me to say that I am not satisfied with the reasoning of Mr. CHEN's opinion that during the offence period, the 4 vessels were required to be declared as "goods" when they entered China waters.  There is evidence showing that not until January 2013, the term "dual characteristics" first appeared in any related statutory document[13].  I agree with Ms. Draycott that the purpose of Exhibit D33 was to clarify the then uncertainty as to the nature of oil-related vessels and their Customs declaration procedures.  One reasonable inference to be drawn from the issuance of Exhibit D33 is China Customs acknowledged that there were ambiguities in the relevant statutory provisions before that notice.  As such, under the Hong Kong legal framework, no criminal liability should have been attached when the penal statutes were ambiguous.

The alleged predicate offences

20.  As the trial judge in this case, I appreciate the fact that mainland China operates under a legal framework which is completely different from Hong Kong's.  I have reminded myself of the comments made by leading prosecuting counsel Mr. LEE, SC at paragraphs 25 to 28 in his closing submissions.

21.  When a criminal offence has allegedly taken place in the mainland, the best way to resolve the matter would of course be through a trial in a mainland court applying mainland laws.  Regrettably, it cannot be done in the present case, and I need not go into the reasons.

22.  I have no knowledge of mainland laws.  In deciding whether any criminal offences were committed in the mainland, I can only rely on the expert evidence of Mr. CHEN.  Same as any expert called in a Hong Kong court, Mr. CHEN needs to state clearly and justify the basis on his opinion.  As he was a prosecution witness, the standard of beyond reasonable doubt applies to his evidence.

23.  In forming his opinion, Mr. CHEN had to interpret the relevant contracts.  In Hong Kong, the court is usually the ultimate body for interpretation of its contents when an issue related to a contract needs to be resolved.  I appreciate that being a qualified mainland lawyer, Mr. CHEN may have his own ways of interpreting the contracts in question in order to determine their nature.  He is of course entitled to his own opinion.  But when I assess his evidence, I must consider the basis of his opinion.  If I am not satisfied beyond reasonable doubt that his opinion is a sound one, I cannot accept it.  As explained in the reasons given in the preceding paragraphs, my own interpretation of the relevant contracts leads to a different conclusion; or to say the least, I do not find Mr. CHEN's interpretation to be the only reasonable interpretation.  Hence, I am not satisfied beyond reasonable doubt that there was any deception, misrepresentation or fraud against China Customs in the declaration process when importing the 4 vessels and 1 dredger into China.  In other words, I am not satisfied beyond reasonable doubt that any predicate offences were committed in the mainland or Hong Kong.

24.  I have not overlooked the alleged false contracts in relation to the Assister[14] and Challenger[15].  Neither contract was signed by D1[16].  The customs declaration procedure for both vessels was handled by COOEC (Offshore Oil Engineering Company Limited, a subsidiary of a state-owned enterprise CNOOC China National Offshore Oil Corporation).  There is no evidence showing under what circumstances those 2 contracts were signed and from which exact location(s) they were seized by China Customs.  There is insufficient evidence proving that D1 had any knowledge or involvement in these alleged false contracts or the respective customs declaration procedures.

Were the contractual payments received by D1's companies proceeds of crimes?

25.  The prosecution submitted that the contractual earnings of D1's companies were proceeds of crimes because they have been "tainted" by criminal activities in that D1's companies could not have performed the relevant contracts but for the false declaration or non-declaration made to China Customs.

26.  In terms of the evidence relating to this issue, I recall having entered into a discussion with Ms. Draycott and Mr. LEE in the afternoon on 27 April 2018[17].  Mr. LEE may argue otherwise, but Ms. Draycott submitted that there is no evidence showing one way or the other that the relevant vessels and dredger must have been properly declared and granted customs clearance before they could be used to carry out the works in accordance with the contracts.  I agree with her.

27.  Even if any alleged deception against China Customs did take place, it was carried out for the purpose of tax evasion rather than procuring the entry into China waters of those vessels and dredger and enabling them to carry out the required works[18]. In other words, the fraudster's intention was not to bring into China waters machinery which was forbidden in the country and use it to earn revenue. Hence, the causal link or nexus between the alleged predicate offences (namely deceiving China Customs) and the contractual payments received by D1's companie seems to be missing or insufficient by our criminal standard.

28.  The Court of Final Appeal in HKSAR v LI Kwok Cheung George (2014) 17 HKCFAR 319 held :-

32. A relationship of "reward" linking the payment and the commission of the offence must therefore exist before the payment qualifies as "proceeds of an indictable offence" under section 2(6)(a) [of Cap.455]. For a payment to have this character, it has, for instance, to be a recompense or return or remuneration or incentive for or in connection with doing or having done something. In the context of section 2(6)(a) [of Cap.455], that "something" is the commission of the predicate offence. It follows that the payment must derive from or be generated by, or be received on account of, commission of the offence.

33. ..."Clean money" which is not paid or received in the nature of a reward in connection with commission of the predicate offence does not qualify as the proceeds of such an offence for the purposes of section 25(1) [of Cap.455] [19].

29.  Applying the above legal principles, the "proceeds" of the false declaration or non-declaration made to China Customs in the present case (if any) would be the tax evaded as alleged by the prosecution experts.  In other words, the "proceeds" of deceiving and/or furnishing false information with China Customs (or any of its related counterpart offence(s) in Hong Kong as suggested by the prosecution) are the relevant mainland tax evaded.

30.  Regardless of the nature of the contractual payments in relation to the 4 vessels and 1 dredger (be they pure rental income or remuneration for works/services), such payments were received by D1's companies in accordance with legitimate and lawful contracts.  In my interpretation of the legal principles laid down in George LI, the scope of "proceeds of an indictable offence" does not extend to cover the contractual payments in question.

31.  In YU Nongxian v NG Ka Wing [2007] 4 HKLRD 159, the Court of Appeal awarded employees' compensation to the widow of an unemployable person (a 2-way permit holder) who fell from height and died whilst being employed to carry out scaffolding works.  Cheung JA held that even the deceased was not lawfully employable in Hong Kong, the work he carried out was nevertheless lawful (and thus should be entitled to recover compensation from his employer)[20]. In my view, his Lordship was not condoning unlawful employment but simply stating that the unemployable status of the deceased did not render the rights and benefits arising or derived from his work unlawful.

32.  In R v Gabriel [2007] 2 Cr. App. R. 11 (p.139) the English Court of Appeal held that profits made from trading in legitimate goods, without declaring the profits to the Inland Revenue or the Department for Work and Pensions, could not in any circumstances convert the profits in to "criminal property" for the purpose of the Proceeds of Crime Act 2002[21].

33.  The legal principles set out in YU Nongxian and Gabriel lend support to the defence submission that contractual payments received by D1's companies in relation to the 4 vessels and 1 dredger were lawful revenue generated from its ordinary course of business and could not be "tainted" by any of the alleged unlawful acts in relation to customs declaration.

34.  In the present case, the proceeds of deceiving China Customs (if any) must be the tax evaded and the tax evaded only.  The 4 vessels and 1 dredger were not contrabands like dangerous drugs or strategic commodities, the import of which would normally be prohibited or under strict government control.  They were brought into China waters pursuant to lawful and enforceable contracts.  I reject the prosecution's submission that at law, the contractual payments received by D1's companies constituted the proceeds of any alleged criminal activities.

Conclusion

35.  Since I have found, as a fact and at law, that the property dealt with by D1 and D2 represented legitimate earnings of D1's business, I need not discuss the "having reasonable grounds to believe" limb.  For the sake of completeness, I make it clear that with the benefit of hindsight, I see nothing sinister when D1, despite knowing that China Customs was investigating him but genuinely believing that he committed no offence (and perhaps even being persecuted by certain mainland authorities), transferred his assets out of Hong Kong and tried to start afresh in another country.  By the same token, all D2 did was to assist her elder brother to transfer his assets out of Hong Kong.  There is insufficient evidence to prove that D2 had participated in or had any knowledge of D1's business affairs.

36.  Based on the reasons stated above, I find D1 not guilty of Charges 1 and 2; and D2 not guilty of Charge 2.