HKSAR v. CHAN MAN SHUN, ALLAN

DCCC838/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 838 OF 2008

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Reasons for Sentence

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 1.  The defendants have pleaded guilty to a charge of conspiracy to defraud.

2.  The particulars of the offence allege that between May 2004 and August 2007 in Hong Kong they conspired together with others to defraud officers of the Hong Kong Customs & Excise Department.  The way in which they did that was to falsify invoices of overseas wine suppliers with whom their company, HOTO, had placed wine orders.  They had submitted those falsified invoices to the Department in support of HOTO’s applications for permits.  Those falsified invoices show lower prices than the genuine price of the wine.  And they induced the customs officers to rely on those false invoices to assess duty, and this led to a loss of revenue.

3.  The Summary of Facts admitted by all three defendants shows that HOTO Limited is a Hong Kong registered company and, for the duration of the conspiracy, its registered office was in Cheung Sha Wan Plaza in Cheung Sha Wan, Kowloon.

4.  The company was in the business of importing wines to Hong Kong.  The wines were purchased by HOTO from overseas suppliers and were alcoholic liquors on which duty was payable under the Dutiable Commodities Ordinance.  The company had a licence to carry on that business.  During the relevant period, the three defendants were directors and shareholders of the company.  The three defendants worked full-time in the company and were responsible for its day-to-day operations.

5.  Now, to comply with the requirements of the Dutiable Commodities Ordinance, the company had to obtain from the Customs & Excise Department a permit in respect of each shipment of alcoholic liquor imported into Hong Kong.  The value of the wine had to be declared and duty was ultimately calculated on that basis.  The company had to provide invoices and payment records in support of the declaration.

6.  From the period, March 2002 until 28 February 2007, the duty payable on wines imported was 80 per cent of the value of the wine.  In February 2007, the duty payable was reduced to 40 per cent.  In February 2008, the duty was abolished on all wines.  During the relevant period, the fraud activities covered a total of 187 permit applications in which HOTO under-declared wine prices by $11 million.  This evaded duty of almost $4 million.  The fraud involved 152 shipments of wine imported into Hong Kong from five overseas suppliers.  During the relevant period, the company submitted 212 forged invoices in respect of the 187 permit applications.

7.  On the morning of 9 August 2007, customs officers in possession of a search warrant entered the registered office of HOTO.  The defendants and three employees were present.  And the officers seized a large quantity of documents, 18 computers and a computer server.  All the defendants were arrested.

8.  The Customs & Excise Department contacted the five overseas suppliers and obtained from them invoices and payment records which show the actual value of the wines sold to HOTO.  It also contacted them in respect of the corresponding records of actual payments received from HOTO.  These overseas suppliers confirmed that the 212 invoices submitted by HOTO to the Customs & Excise Department relating to permit applications were not genuine.

9.  The invoices submitted were false invoices prepared by HOTO staff on the instructions of the defendants for the purpose of defrauding the revenue.  The Department obtained the relevant HOTO banking records.  The contents of the computers and the server seized were examined by a computer expert for further analysis.  An accounting system named “E5” and inventory record in Microsoft Excel format named “Cyberport Demo Information Stock in Import Worksheet” were among the contents located in the server.

10.  The Department retained the services of a forensic expert.  The expert examined all the relevant records and drew certain conclusions.  He concluded that the prices provided by HOTO to the Customs & Excise Department for the determination of duty were consistently lower than the actual prices of the wines purchased.  The actual prices paid for the purchase of the wines were greater than the prices declared to the C&E Department.

11.  The quantity of wine involved was 170,267 bottles of wine with undeclared value imported into Hong Kong by HOTO in the relevant period using the 212 forged invoices.  Five thousand one hundred and forty-two bottles were seized by the Customs & Excise Department after the arrest of the defendant, and 165,125 had already been sold to the market before 9 August 2007.

12.  Employees of HOTO admitted that they had prepared forged invoices showing lower value of the wines for submission to the Customs & Excise Department for the permit applications.  They also admitted that they prepared false explanations purportedly from the overseas suppliers for the purpose of answering queries from the Customs & Excise Department designed to elicit the value of the wines.  This was done on the instructions of the defendants.

13.  The HOTO computer system, its computer server, HOTO maintained electronic accounting and inventory system, E5, which included purchase entries, payment entries and stock and inventory entries.  It also stored on the server a number of electronic files in spreadsheet format.  These files contained details of wines purchased, the name of supplier, arrival dates, currency exchange rate, wine description, quantity, unit prices, costs, delivery charges and Dutiable Commodities Ordinance permit application numbers.  This was used by HOTO for recording and calculating the cost of alcoholic liquors purchased.

14.  The unit cost of each bottle of wine was calculated, taking into account the duty payable and the actual higher purchase price of wine payable to the suppliers.  The accounting expert concluded that those who prepared the actual spreadsheets must have been aware that the actual price of the wines was higher than the alleged purchase price declared to the Customs & Excise Department to determine the duty payable.  By accessing these particular files, the defendants could determine the unit cost of any bottle of wine.  And because the declared duty payable was lower than it should have been, HOTO had a potential market advantage by being able to market the wines at a lower price, lower than would have been possible had the correct amount of duty been paid.

15.  The forensic expert examined the banking transactions in relation to payments to the five suppliers.  In the case of payment to four of the five suppliers, substantially all the invoices from these suppliers were paid by HOTO by two separate payments.  When separate payments were made, some 90 per cent of them contained one payment of the two equal to the false wine value submitted to the Customs & Excise Department.  By splitting the payments in this way, HOTO would be able to show to the Customs & Excise Department documents with the payment amount that agreed with the false invoices already submitted to the Department.

16.  The defendants all have clear records.  I was told in mitigation that the 1st defendant is 52 years of age; he is a married man.  He has an elder daughter who is aged 24, who works in the United Kingdom, and he supported his daughter through years of overseas study.  He has a 21 year-old son who is at university in Hong Kong.  His wife works as an office assistant earning some $10,000 per month, and he contributes to the parents’ livelihood.

17.  He started HOTO in 1996.  And his counsel was quite frank in saying that the intention of perpetrating this conspiracy and the motive behind it was simply greed and the conspiracy also had enabled the company to maintain a competitive edge.  Defence counsel submitted generally that the guilty plea saved enormous court time and costs.  Had this case proceeded as a trial, there would have been a number of overseas visitors; experts would have been called; digital bundles had been prepared.

18.  The 2nd defendant, I am told, is 49 years of age and, again, he is a married man.  He has been married for many years and has a daughter aged 18.  His wife works part-time.  Placed before the court in support of the plea and mitigation by the 2nd defendant, I have a number of letters.  The first letter is from the defendant’s daughter.  It is a touching and supportive letter and describes her father as being a responsible and caring father.

19.  It also refers to his work in the Hong Kong Adventure Corps, which he has been a volunteer since 2003.  This is an organisation which helps youngsters gain insight into leadership.  It develops leadership qualities and training.  And for a number of years, the defendant has supported and assisted the group as a volunteer.  I have a letter from the captain of that organisation.  I have also a letter from a scout group leader.  The letter from the defendant’s wife describes him as a responsible and kind husband.

20.  The 3rd defendant, I am told, is 44 years of age.  He is married, and he has been married for eight years, and he has two children, a daughter and a son.  He supports his parents.  He has donated to the Children’s Fund in Hong Kong since 2004.  I have a letter from the defendant’s wife describing him as a responsible and caring husband.  These letters make all the more tragic the defendant’s fall from grace and involvement in these criminal activities.

21.  The conspiracy was an audacious scheme designed to cheat the Customs & Excise Department out of a substantial amount of money.  It had the added advantage that it would give the company a market edge over its competitors.  The offence involved considerable sophistication.  It required the creation of an elaborate accounting scheme whereby false invoices were created with false supporting documentation.  An electronic accounting and inventory system was created and maintained in the company’s server to store the relevant data.  Electronic files in the company’s computers have spreadsheets recording data, including the genuine and false prices of the goods.  Split payments were made to suppliers so that the banking records would not readily show the true position.

22.  The conspiracy continued for a considerable period of time:  over three years.  The fraudulent activities covered a total of 187 permit applications, in which HOTO under-declared wine prices by $11 million.  The company evaded duty of almost $4 million.  The fraud involved 152 shipments of wine imported into Hong Kong from five overseas suppliers.  In respect of the 187 permits, 212 forged invoices were used.  The detection and prosecution of this type of offence requires a huge commitment on the part of the relevant authorities in terms of time and expense, vast numbers of documents required to be examined, digested, classified and indexed.  Banking records had to be examined carefully.  Inquiries had to be made abroad.

23.  The scheme inevitably involved company staff and especially the accounting staff of the company.  One of the evils of this sort of scheme is that for no financial benefit, or for the financial benefit of the company, otherwise honest persons are drawn into a fraudulent scheme.  Staff employees were required to prepare the false invoices and false explanations for the Customs & Excise Department.  The computer and accounting staff involved must have been aware of the fraud being perpetrated.  The architects of this fraud must have proceeded on the cynical assumption that otherwise honest members of staff would go along with the fraud.  What is even more depressing is that this cynical assumption proves in cases such as this to be correct.

24.  I am told that this is the first prosecution of its type in Hong Kong.  Neither the prosecution or the defence counsel have been able to supply me with any authorities which might assist me in terms of deciding the appropriate sentence.  For the reasons I have set out, this is clearly a very serious case.

25.  In respect of this offence, I took a starting point of three years imprisonment and reduced that by one-third to reflect the guilty plea, I sentenced the defendants to two years imprisonment.