HKSAR v. KOTAGARALAHALLI PEDDAPPAIAH NAGARAJA

HCMA 707/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO 707 OF 2014

(ON APPEAL FROM KCCC 4733 OF 2013)

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JUDGMENT
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1.  This was an appeal by the appellant against a refusal by the magistrate[1]to award costs in favour of the appellant after the prosecution had withdrawn a charge against the appellant.

2.  A charge of dealing with property known or believed to represent proceeds of an indictable offence, contrary to sections 25(1) and 25(3) of the Organized and Serious Crimes Ordinance, Cap 455 was laid against the appellant.  Approximately ten months after the charge was laid and following several court appearances, the prosecution withdrew the charge and the defence applied for costs pursuant to section 3(1)(a) of the Costs in Criminal Cases Ordinance, Cap 492. 

3.  After hearing both parties, the magistrate refused to award costs to the defence on the basis that the appellant had brought suspicion upon himself and had also misled the prosecution into thinking the case was stronger than it was.

The hearing for costs

4.  The magistrate anticipated that there would be factual disputes in the costs application and prior to the hearing directed the parties to prepare a set of admitted facts and, if necessary, to adduce oral evidence at the costs hearing on 3 November 2014. 

5.  The prosecution had prepared written submissions against an award of costs to the appellant.  At the hearing for costs, the defence sought to adduce an affirmation by the appellant dated 28 October 2014 in support of the costs application.  The appellant was absent from the hearing as he had left Hong Kong. 

6.  The prosecution made it clear that it did not accept the contents of the appellant’s affirmation.  The magistrate found it relevant but refused to accept it.

Facts agreed between the Prosecution and Defence at the costs hearing

7.  For the purpose of the costs application, the prosecution and the defence prepared a set of agreed facts dated 3 November 2014.  Those facts were that on 14 October 2013, Ms. Forsberg, the Finance Manager of Zimmer Sweden, had fallen victim to a telephone fraud. Acting on the fraudster’s instruction (purporting to be the Vice-President of Zimmer Sweden), she made a transfer of €487,000 to UAB Kosona’s bank account in Lithuania.  On 21 October 2013, there was another transfer of €490,000 to a bank account in Latvia.

8.  The money transferred to Lithuania was traced to an account in Hong Kong which had connections to the defendant.  Thereafter it was traced to a company’s bank account to which the defendant was the only director and was the sole signatory of its bank account.

9.  The day after the transfer on 15 October 2013, it was converted into US$628,862.20 and transferred to KPN Hong Kong Limited’s (“KPN”) HSBC bank account in Hong Kong in three tranches. 

10.  Then on the dates of 15, 16, 17 and 25 October 2013, KPN transferred a total of US$296,641 to Brand Trading Limited’s (“BT”) HSBC bank account in Hong Kong.  Those transfers were made in five separate tranches over those four days, US$169,043 was made in three separate tranches on 16 October 2013. 

11.  The appellant was one of the three directors and a minority shareholder of KPN and the sole director of BT.  He was the only authorised signatory to KPN’s and BT’s HSBC bank accounts. Both KPN and BT shared the same registered address in Tsim Sha Tsui and the same service company as their company secretary.

12.  On 30 November 2013, the appellant was arrested when he was leaving Hong Kong through the airport.  He appeared before a magistrate sitting in Kowloon City Magistrates’ Courts and was remanded in custody.  On 20 December 2013, his application for bail in the magistracy was refused.  The Court of First Instance admitted him to bail pending trial on 28 March 2014.  On 20 October 2014, the prosecution withdrew the charge against the appellant.  Between 30 November 2013 and 20 October 2014 the appellant had made several appearances at court mostly with legal representation.

The magistrate’s reason for refusing costs

13.  The magistrate said since the charge was withdrawn, the appellant was entitled to costs unless there was positive reason to order otherwise. 

14.  He took into account the fact that the bulk of the money obtained fraudulently was transferred into the KPN account then on the same day and the following days just under half of the amount was transferred from the KPN account to the bank account of BT which the appellant was the sole director.  He considered that KPN and BT had the same registered address at Tsim Sha Tsui and the same service company with a common company secretary using the same address. 

15.  The magistrate considered in particular that the appellant had dealt with the monies in KPN’s HSBC account on more than one occasion shortly before UAB Kosona transferred US$628,862.20 from Lithuania.  He said that as the appellant was the sole signatory of the KPN account and his operating it in early October 2013 indicated that the appellant had de facto control of the KPN HSBC bank account.

16.  The magistrate ruled that the appellant had brought suspicion against himself and had also misled the prosecution into thinking the case against him was stronger than it was.  He refused costs.

Grounds of Appeal against the order refusing costs

17.  The appellant essentially relies on the following grounds in the perfected grounds of appeal:

(1) The magistrate failed to consider or consider sufficiently the general principle that costs follow the event, i.e costs should, upon exercise of discretion, be awarded to the defendant;

(2) The magistrate erred in failing to recognise that the present application was brought under section 3(1) of Cap 492;

(3) The magistrate erred not considering and in excluding the appellant’s affirmation dated 28 October 2014;

(4) The magistrate erred in placing the burden of proof of entitlement of costs on the defence;

(5) The magistrate erred in failing to sufficiently recognise the appellant’s right to silence;

(6) The magistrate erred in failing to sufficiently consider the materials voluntarily disclosed by the defence; and

(7) The magistrate erred in refusing to award costs to defendant when there was no explanation by the prosecution as to why the prosecution withdrew the charge.

Discussion

18.  Under s.3 of the Costs in Criminal Costs Ordinance Cap. 492 the magistrate has a discretion to make an award of costs to the defendant where the charge has been withdrawn. 

19.  The above provision must be read in conjunction with the authorities which discuss the factors relevant to the exercise of this discretion.  The established principles governing an award of costs where a charge is withdrawn was referred to in Secretary for Justice v Lam Chiu Fong [2009] 2 HKLRD 484.  As a general principle where the charge was withdrawn, the court should award costs in favour of the person charged unless there was positive reason for making a different order.  In exercising the discretion to deprive a defendant of costs for bringing suspicion on himself the court must look at the conduct most relevant to the charges.  This included not only conduct during the investigation of the trial, but also conduct which formed part of the setting for the charges laid against him prior to the investigation or at trial.   Where the charges had been withdrawn, as opposed to where evidence had been called and tested in court, it was not necessary to call evidence on an application for costs. The matter could be decided on the basis of a statement of facts provided by the prosecution. But the magistrate or judge would be looking for independent evidence to justify the conclusion that the defendant brought the proceedings on himself, eg a confession. Finally, this was not to say that evidence was not relevant or never required; that would depend on the individual case. However, it was not desirable that court lists be clogged, unnecessarily, with evidential enquiries springing from costs application (HKSAR v Dove [1998] 1 HKLRD 179, Tong Cun Lin v HKSAR (1999) 2 HKCFAR 531, Mooney v Cardiff Magistrates' Court (2000) 164 JP 220 applied). (See paras.25–28.)  

Ground 1

20.  The Magistrate was fully aware of the general principle of costs.  He expressly said[2]:

“The charge was withdrawn, Mr. K [the Appellant] is entitled to his costs unless there are positive reasons to order otherwise. There is no burden on Mr. K to prove/show his entitlement. The positive reasons are usually proved/shown by Prosecution”

21.  He went on to say that one of the positive reasons to deprive the defendant of his costs was where the defendant brought suspicion upon himself.

Ground 2

22.  Whether the court is considering an application for costs after a defendant is acquitted under s 5 of the Costs in Criminal Cases Ordinance or upon the charge being withdrawn under s 3, the same principles applies see Lam Chiu Fong, at paragraph 42, Stock JA (as he then was) held that where the charges were withdrawn, the starting consideration was the same as where there had been an acquittal, namely, that there should be an award of costs in favour of the person charged unless there was positive reasons for making a different order. 

Ground 3

23.  The appellant sought to adduce an affirmation dated 28 October 2014 in reply to the prosecution’s written submissions objecting to costs being awarded to the appellant.  The magistrate refused to accept it because the prosecution did not admit the contents although he considered it relevant.

24.  The affirmation is prima facie evidence of the matters stated therein, the magistrate should have considered its content, giving such weight to it as it might have warranted, bearing in mind that the appellant was not available for cross-examination.  

25.  Since a magistracy appeal is an appeal by way of a rehearing, this Court is able to consider the affirmation, giving such weight to it as is warranted. In doing so, this Court is not in a less favourable position than that enjoyed by the magistrate as the appellant had not been available for cross-examination in any event.  There was no assessment of the appellant’s credit made by the magistrate. This error on the part of the magistrate however does not lead to the appeal being allowed. 

Grounds 4 and 5

26.  In relation to ground 4, the magistrate was clearly aware that the appellant does not have a burden to show his entitlement to costs.  This is made abundantly clearly in paragraph 11 of the Reasons for Decision as set out above. The magistrate said that the appellant was entitled to his costs unless there were “positive reasons” for depriving costs and this could emanate from the prosecution or the defence.  The magistrate went on to say that the appellant had the right to remain silent and not respond to enquiries by the prosecuting authority.  This silence itself should not disentitle him to costs[3].

Ground 7

27.  I turn to deal with this ground before ground 6.  The magistrate stated[4]:

“It is not for the Court to speculate on why the charge was laid or withdrawn. Although Mr Liu commented that the Prosecution did not offer any explanation, I did not hear any submission that the Prosecution was bound to explain and that I should so order.”

28.  In Lam Chiu Fong the Court of Appeal held that one of the matters for the court to know in the exercise of its discretion was the reasons for withdrawing the charge.  Stock JA (as he then was) at paragraphs 43-45 stated, where charges were withdrawn, no findings of fact were made and it would be unrealistic and undesirable to expect the tribunal faced with a cost application to conduct a trial.  The matter must be approached with common sense.  It would be important to know the reasons for withdrawing the charge, what the proposed evidence was, the apparent strength of that evidence, including the question whether there was evidence from a clearly independent source to support the complaint and, importantly, what undisputed indicia there were as to the charged person’s conduct in the setting of the factual circumstances giving rise to the alleged offence and in the investigation of them.

29.  At the hearing of this appeal Mr Li counsel for the respondent informed the court of its reason for the withdrawal of the charge.  Mr Li stated that in the KPN bank account there were over 1,000 transactions both in and out.  It was the appellant’s case that on the instruction of Mendel he applied for internet banking and when he received the security device and passwords from the bank he immediately mailed them to Mendel in London without opening them. He produced a DHL receipt[5]. It was the appellant’s case that subsequently all these transactions were carried out by Mendel through internet banking and therefore the appellant did not know anything about the transactions in the bank account. 

30.  The investigation revealed that the relevant transactions had been carried out in London given the IP (internet protocol) address of the internet banking transaction.  The appellant said he was never in London.  It was confirmed from the appellant’s travel index record that the appellant had never been to London during the relevant transactions.  As a consequence it was difficult to disprove the appellant’s case.  Mr Li however submitted that with the advance of current computer technology it was so to speak possible to fake an IP address, that means that would show that the internet banking had been carried out in a certain place say London, when in fact it had been carried out in Hong Kong, but that was only a possibility and the prosecution could not surmount that.  So for those reasons the prosecution decided to withdraw the charge against the appellant.

31.  Mr Liu had in his submission before the magistrate pointed out that the prosecution had not explained why the charge was withdrawn.  The prosecution did not offer an explanation as to the withdrawal of the charge at the time.  The magistrate was of the view that the prosecution was not bound to explain nor was the court bound to request for an explanation.  It is apparent that the case of Lam Chiu Fong was not brought to the magistrate’s attention.  On the facts of this case, the absence of an explanation was not fundamental.  Had the explanation been revealed to the magistrate I am of the view it would not have affected his decision to refuse costs. 

32.  The withdrawal was on the basis that prosecution was unable to disprove the fact that the appellant had not carried out the transactions as a result of the IP address being in London.  However the facts as agreed demonstrated the appellant’s de-facto control of the KPN account by his use of funds in it before the transfer of the sums fraudulently transferred and thereafter the appellant’s strong connection to the KPN account by the transfer of large sums into his BT account almost immediately after the deposit of these sums, in spite of the appellant’s protestation that he had nothing to do with the transactions in the KPN bank account or the business connected with Mendel in the KPN account.

Ground 6

33.  Mr Liu Yuen Ming counsel for the appellant submitted that the appellant should not be deprived of its costs because of late and voluntary disclosure of information and materials to the prosecution.  He submitted that the appellant’s conduct before and during the police investigation had been non-criminal in nature, but involved civil disputes on liability between many parties.  The appellant had co-operated with the police, including exercising his right of silence during police interview, disclosed a large quantity of facts and materials during the two bail applications on a voluntary basis which the prosecution has been unable to challenge. 

34.  The suspicion identified by the prosecution was simple and straightforward.  Since March 2013, the appellant became a minority shareholder of KPN (a shareholding of 9%), yet he remained the sole authorised signatory of KPN’s HSBC bank account in Hong Kong.  Thereafter funds were then transferred from KPN to BT where he was also the sole authorized signatory of BT’s bank account. 

35.  The appellant sought to explain this when he applied for bail in the magistracy. In an affirmation dated 13 February 2014, he said his business partner and majority shareholder in KPN, Mr Mendel Cluck (“Mendel”),

“is the only person to operate the said bank account… I have no knowledge of the past and current passwords [of the internet banking] and have never caused any movement of funds in and out of the bank the said bank account. In short, I did not take part in the business of trade by Mendel via KPN.” (emphasis added)[6].

36.  This was untrue.  The banking documents clearly showed that the appellant’s signature appeared on a USD cashier’s order purchase form in favour of Panchu Wholesalers Limited dated 9 October 2013, just four days prior to the telephone fraud.  The amount of the cashier’s order was US$63,400[7]. Furthermore, the appellant made two withdrawals on the same day in the amount of HK$4,800 and US$2,500 respectively.  His signatures also appeared on the withdrawal slips[8]. The appellant’s dealings with the funds in the bank account are of significance.

37.  First, as the magistrate said the appellant had de facto control of the HSBC bank account; and second, the appellant had not told the truth in his affirmation that Mendel was the only person to operate the bank account and he had not caused any movement of funds in and out of the bank account.

38.  The appellant sought to explain this in the affirmation (which the magistrate excluded) dated 28 October 2014.  In short, he confirmed that those were his signatures.  But he applied for the cashier’s order on the express instruction of Mendel for his business dealing which he was not involved[9]. In relation to the two withdrawals, this was the withdrawal of cash he made in person when he was in Hong Kong (not being made by internet) which were for his personal use and not for any business purpose of KPN Hong Kong Ltd[10].

39.  For the purposes of considering the award of costs the explanations afforded are unpersuasive and rejected for the following reasons:

i. the appellant had caused the operative device and password for internet banking to be couriered to Mendel (who is the majority shareholder of KPN) in London to solely operate KPN’s business, yet the appellant remained as the sole authorised signatory of the HSBC bank account not adding Mendel as a signatory as would have been expected;

ii. the appellant had not explained why he not being involved in Mendel’s business was asked to issue a cashier’s order, why a cashier’s order was needed, nor why Mendel could not have affected the transfer through internet banking.  The appellant’s sole explanation for the cashier’s order was simply that he had no reason not to trust Mendel;

iii. the appellant had not explained why it was that he failed to mention the fact that he had dealt with the sums in the KPN bank account when he had previously said he had never dealt with any sums in the bank account;

iv. given that the appellant was only a minority shareholder of KPN and had no interest of its business dealings, why it was that that he could withdraw money from the HSBC bank account for his personal use;

v. the fact that the appellant was able to withdraw money from the KPN account for his own use was a reasonable inference that he had an interest in either the business or the money in the account;

vi. given the fact that the appellant as a director had not received any remuneration or fees from KPN why funds were transferred from KPN to BT;

vii. from the funds KPN transferred to BT there was a reasonable inference that the appellant had an interest in the business and money in the KPN account and

viii. the explanations by the appellant were only provided after the prosecution pointed out that the appellant had been lying.

40.  Most significantly and illuminating was the fact of the transfers of the total sum of US$296,641 from the KPN account to BT’s bank account shortly after the sums obtained by fraud were transferred as illustrated above in paragraphs 8, 9 and 10.  The appellant was the sole director and authorised signatory of the BT bank account.  In his affirmation dated 13 February 2014[11] he said:

“In short, I did not take part in the business of trade by Mendel via KPN. Moreover, all three directors have not received any remuneration or fees from KPN.”

41.  There has been no explanation from the appellant why these transfers were made.  The above unchallenged facts powerfully illustrate why costs was not awarded to the appellant.  The magistrate had considered these facts[12] and came to the conclusion that there was a distinct relationship between KPN and BT and that the prosecution was entitled to suspect or believe that the appellant was privy to the money laundering[13]. 

Conclusion

42.  On the basis of the agreed facts and the exhibits produced on the affirmations of the appellant, the magistrate was entitled, in the proper exercise of his discretion to refuse costs to the appellant on the positive reason that the appellant brought suspicion upon himself and in so doing he had misled the prosecution into thinking the case against him was stronger than it was.

43.  The appellant’s appeal is accordingly dismissed.