HKSAR v. ZHENG GUANGXING

DCCC 650/2014

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO 650 OF 2014

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Reasons for Verdict

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1. The defendant originally faced one charge, dealing with property known or believed to represent the proceeds of an indictable offence. There was a subsequent late amendment of the charge to incorporate alternatives, four alternative charges.

2. The main charge alleges the offence to have been committed between 13 June 2012 and 19 October 2012; it being alleged that the defendant dealt with a total of 574,796-odd United States dollars, said to represent directly or indirectly the proceeds of indictable offences or an indictable offence.  The allegation is the defendant had known or reasonably knew that or had reasonable grounds to believe.

3. The individual alternative charges represent the individual remittances or removal of sums to the defendant’s company account in the Mainland. 

4. The offences relate to a Hong Kong Bank of China account opened by the defendant in Hong Kong on 13 June 2012, in the name of Zhengxu International Investment Limited.  Between 6 September 2012 and 5 October 2012, a total of five deposits into the account totalling 574,769-odd US dollars. The monies deposited were shortly after remitted to the defendant’s company, Shenzhen, Guangzhou account of the Agricultural Bank of China, Shenzhen Branch.  For four of the deposits, the transfer was made on the same day. For the final deposit, the transfer was made three days later and that appears to be due to the intervention of a weekend.

5. The prosecution say that the second and third transactions in the account can be shown by evidence to be direct remittances of fraudulently obtained monies (monies obtained from an e-mail fraud) and represent payments for goods by two foreign companies called HR-Chemservice GmbH (“HR”) and HAMPAR Company (“Hampar”).

6. Of these two payments, one can been seen to be directly evidenced as the proceeds of indictable offences, and the other (that being the Hampar payment) requires an inference to be drawn.

7. In respect of the other three payments, it is said that the irresistible inference can be drawn they are also the proceeds of indictable offences.

8. There is no dispute on the evidence as to the movement of funds in this case or that the defendant dealt with the deposits and remittance payments.

9. It is said that the payments appeared to the defendant to be payments for goods in the normal course of business, and that when dealing with the payments from HR and Hampar the defendant was unaware and could not have been aware of their origin.

10. The issue, simply stated, is whether the defendant knew that the payments were the proceeds of an indictable offence (and that is all the payments in the 570-odd-thousand dollars), or did there exist reasonable grounds to believe that all or any of those payments were the proceeds of an indictable offence.

11. To establish the e-mail fraud perpetrated on the two foreign companies, the prosecution called the first prosecution witness. In 2012, PW1 held the post of International Sales Manager with a company based in Nanjing, which traded internationally in chemical products.  This company was called the “Jiangsu Eastwell International Trading Company Limited” (or “Eastwell”). PW1 liaised with overseas buyers through his e-mail, Larry-pan@163.com.

12. In respect of HR, PW1 dealt with a Mr Reimund using a pro forma invoice, which he said provided Eastwell’s banking details. The invoice is usually paid within seven days.

13. PW1 would use his e-mail in all correspondence.

14. In respect of a deal entered into in August 2012, PW1 issued P9, an invoice to request payment of US$64,179.20.  This was to Eastwell’s account at the Bank of East Asia, Hefei branch.  This money was never received into Eastwell’s bank account. 

15. Also, in August 2012, Eastwell dealt with Hampar, an Iranian company.  A deal was arranged whereby four containers of goods were to be shipped for US$270,144 invoice price.  However, initially payment was to be made for only a quarter of this sum, and that was for US$67,536.  By Exhibit P10, this sum was invoiced using PW1’s e-mail address, Larry-pan@163.com. Eastwell never received payment.

16. Those are the bare facts proved.  There were other conversations evidenced, but they are not admissible to prove any fact in this case.

17. I have no evidence from Hampar or HR why their payments were not made to Eastwell’s account.

18. A large body of evidence was agreed, which included the evidence relating to the setting up of a bank account with the Bank of China, Hong Kong, by the defendant, and the banker’s affidavit, which dealt with the remittances into that account and its closure in October 2012. 

19. PW2 evidenced that he assisted the defendant in the opening of the account, the information in the form being given by the defendant, that the defendant requested Internet banking facilities and that when the bank closed the account the defendant would be informed in writing of its closure and that he should attend the branch where the account was opened to sort out the matter.  There was evidence that the Internet/telephone banking service was used.

20. PW3 swore the banker’s affidavit.  She said that the first to fifth deposits would have been subject to bank charges, and she had it save for perhaps the third payment.

21. The agreed evidence showed that the payments into the account were as follows:

(1) The first deposit on 6 September 2012 at 1.47 pm, a sum of US$400,000. This was withdrawn on the same day at 2.50 pm.

(2) On 21 September at 8.02 am, a sum of US$64,154.20 (the second deposit) and US$67,480.75 (the third deposit). The sum of US$64,154.20 had been subject to a deduction of US$5 on bank charges. Now, the deposits were withdrawn at 12.52 pm the same day.

(3) On 27 September 2012, at 8.02 am, a sum of US$33,162 (fourth deposit) was deposited. This was withdrawn at 2.23 pm the same day.

(4) On 5 October 2012 at 4.36, a sum of US$10,000 (that is the fifth deposit) was deposited. This was withdrawn on 8 October at 1.50 pm.

22. All the deposits were remitted to an account of Shenzhen Da Guang Hong Import Export Company Limited, a company admitted by the defendant to be controlled by him.

23. Prosecution’s case was the second and third deposits - namely, those of $64,154.20 and $67,480.75 - were the payments of respectively those of HR and Hampar to Eastwell in respect of the payment of the invoices P9 and P10. 

24. In detail, in respect of the second deposit of $64,154.20, attachment MT3-4 to the banker’s affidavit states that the remittance are HR-Chemservice GmbH, Pressburger STR 6718371, that the payment was subject to a US$5 bank charge. 

25. Also, in MT39, the amount of $64,159.20 can be seen, that being identical to the payment in P9, and evidenced, it is said by the prosecution, that Eastwell was deceived into paying the monies into the defendant’s company’s account.  Again, the reason for payment would require an irresistible inference to be drawn, as there is no direct evidence as to the reason for payment.

26. In relation to the third deposit, the alleged Hampar deposit, the amount remitted to the account is $67,480.75.  The payment under P10 by Hampar is US$67,536.  However, it is admitted that this was subject to a bank charge of $55.25.  Now, this leaves a sum of $67,480.75. Thus, it is said this payment represents the payment by Hampar to Eastwell.

The defendant’s case

27. The defendant gave evidence and called a witness, an employee of his company.  The defendant’s evidence is that he is aged 36, he was born in the Mainland and in 2004 he set up the company known as Shenzhen Da Guang Hong Import & Export Limited.  The company imports plastic materials; has business in South Korea, Japan, USA and Saudi Arabia; and its reports were produced for 2010 to 2012.  This company, Da Guang Hong (or “DGH”) Shenzhen, amongst other bank accounts, had an account with the Agricultural Bank of China, which included a US dollar account to handle the US dollar remittances to the defendant’s RMB account.

28. The defendant evidenced that one client he dealt with extensively was Hongkong Top Tung Group (“HTT”).  The defendant arranged manufacturing of products on this company’s behalf after receiving orders from them.  HTT was itself an agent or middleman for other companies.  The defendant dealt with a Mr Lai in the Longguan district of Shenzhen.  HTT would receive a 3-per-cent commission on business introduced by them. 

29. The defendant said that HTT was dilatory in payment and also he wished to be able to approach clients directly and avoid paying HTT 3-per-cent commission.  In order to achieve this in 2012, he had registered a company in Hong Kong.  That is the Hong Kong Zhengxu International Investment company. 

30. The defendant had opened a US dollar company account with the Bank of China in Canton Road.  He provided all the information for the opening of the account and had requested Internet banking facilities. He said the first defence witness would be responsible for the daily checking of the account, remitting any monies put into it into the Agricultural Bank of China’s account for DGH Shenzhen in the Mainland, and we can see that this is what happened.  DW1 told us all about how she did it.

31. The defendant said through 2012 HTT had owed him money.  He produced seven contracts with HTT, with a total value of $1,139,849.75, with shipping dates between 8 February 2012 and 20 September 2012, with payment due within three months of the shipment date.  In July and August, there was an amount outstanding on the balance of payments for these contracts. 

32. The defendant had met with a Mr Lai and asked for prompt payment.  He had said he would arrange for the outstanding balance to be paid in September and October 2012, and Mr Lai would ask for the outstanding balances to be remitted directly to the defendant’s account.  Mr Lai had said that if money was to be directly remitted by clients, then a Hong Kong account was needed. 

33. Precise dates for payment were not given to the defendant nor were specified amounts given.  It was the defendant’s expectation that the outstanding balance would be part-paid in stages one by one by the overseas clients.  The defendant would then ask DW1 to clear the accounts and to check the accounts daily and clear any monies remitted.

34. The defendant said he was aware of the payments into the account in Hong Kong in September and October.  DW1 had informed him and taken the necessary actions.  She was his administration assistant and was responsible for banking.  She was aware of the Hong Kong account and used the Internet banking facilities to check the account and remit the funds to the US dollar account in the Agricultural Bank.  She actually gave evidence of making all these transfers. 

35. In late October, she became aware that the Bank of China had closed the Hong Kong account.  She called their staff in Hong Kong, who gave no explanation for the closure, but said someone must come in person to resolve the matter.

36. Thus, the defence case is the defendant considered that the payments into the Hong Kong account were legitimate transactions, forming part of his business dealings with overseas clients.  He had no reason to consider them otherwise than this. 

37. There was a body of documentary evidence produced to establish the bona fides of the company, the contracts entered into and monies owed.  The defendant therefore says that it cannot be established that he knew that any or all the monies were the proceeds of an indictable offence, and nor did there exist any reasonable grounds to form that view.

38. The defendant faces one single charge encompassing all the monies and alternative charges in respect of each removal of the money from the Hong Kong jurisdiction. 

39. It is the case that the prosecution need not prove the commission of the original indictable offence that gives rise to the particularised proceeds.  The prosecution needs to prove that the defendant knew or had reasonable grounds to believe the property represented proceeds of an indictable offence. 

40. Thus, there are two methods of committing this offence.  Both are pleaded in the indictment.

41. Firstly, dealing with property knowing that the property is, in whole or in part directly or indirectly, represents the proceeds of an indictable offence.  That is the form of the offence that the prosecution alleges in this case.  They say that is what has happened here.

42. The second form is dealing with property having reasonable grounds to believe property, in whole or in part directly or indirectly, represents the proceeds of an indictable offence.

43. In this case, the prosecution say the evidence is sufficient to prove either method of committing the offence, but submit the defendant can be properly convicted on the first limb of the alleged offence. 

44. They say the monies deposited into the Bank of China account are the proceeds of indictable offences.  They say that the payments in HR-Chemservice and Hampar to Eastwell have been diverted into the defendant’s Bank of China account and that the only inference, the only reasonable inference, can be drawn from this diversion is that the indictable offences had been committed in relation to these monies. 

45. Secondly, that the inference can be drawn that the other payments into the account were also the proceeds of indictable offences, having regard to their similarities to the HR and Hampar payments, that the defendant’s opening of the account in Hong Kong was purely to harvest these monies, and their almost immediate removal from the jurisdiction leads to the irresistible inference the defendant knew the illegal origin of the monies.

46. The defence case on this is that, firstly, there is simply insufficient proof to establish that the monies in the account are the proceeds of an indictable offence.  That inference cannot be drawn to a criminal standard.  Therefore, the defendant himself could not have known that the property represented such an illegal origin.  They also say that the alternative method of committing the offence is not available on this evidence.

47. There is no dispute in this case as to the fact that the defendant dealt with the money.  The issue to be considered primarily is whether the defendant knew that these monies, or any part of those four withdrawals charged separately as the alternatives, whether those withdrawals from the account were the proceeds of an indictable offence. 

48. The defence submits that the prosecution cannot establish to a criminal standard that any of the monies in the defendant’s account were in fact the proceeds of an indictable offence.  In the circumstances, how could the defendant be said to have known this as a fact?

49. In respect of this issue, it is pertinent to note that all PW1 can tell is that HR and Hampar were due to make payments to Eastwell, that those payments were not made and, although PW1 does not say this, there is also undeniable evidence that one of those payments made its way to the defendant’s Hong Kong BOC account, and that the other could have done so if the necessary inferences are drawn.

50. However, PW1 cannot evidence why the companies made the payments that they made or how they made them or by whom they were made or why they were made.  There is no evidence from either company on the salient features of the evidence.  PW1 cannot evidence that any of the payments were made on the basis of a predicate offence and that there is further no evidence the defendant could have known that these payments were made on the basis of a predicate offence.

51. There is, as I said, no evidence from the prosecution to say how the HR payment came to be in the defendant’s account. On the evidence I have, it is simply an unexplained payment. 

52. As to the payment by Hampar, there is a coincidence in the amounts paid by Hampar and received by the defendant once the removal of the tax is taken into account.  However, there is no other connection.  There is no evidence that Hampar itself was the remitter of the money.  The amount comes from the economic exchange centre in Dubai.  PW3 said that she thought the money came from Dubai, but could not be sure.

53. The prosecution appears to be saying in respect of this that the court can infer that the payments attributable to Hong Kong and the defendant’s account are the proceeds of an indictable offence, because there is no other explanation for their origin, and then use initial payment offence to conclude that the other payments in the same account such as the lost Hampar payment are therefore also, the proceeds of indictable offences.

54. However, from the evidence of PW1, all that can actually be established is that two payees of PW1’s company paid money into the defendant’s account in Hong Kong.  As I said, there is no evidence from the payees as to why or how they made these payments.  Even without any further evidence from the defendant or any explanation from him, in my findings, the simple fact of payment to an account does not provide evidence to a criminal standard that the payments were as a result of a criminal act, as opposed to any other explanation.

55. The prosecution also, I notice, are forced to rely upon the payments and withdrawals being made almost on the same day in most cases and has said that the account was apparently set up to take these payments.

56. However, these were simple facts relating to the frequency of withdrawals and setting up the account.  It is, in my view, insufficient for the inference to be drawn that the payments must be, simply stated, the proceeds of crime.

57. I note that the defendant has provided an explanation for all the payments in and the withdrawals.  He is not required to prove anything in the case.  However, the existence in nature of his business operations has not been substantially challenged. 

58. It may be said that his account of setting up the account to receive payments but not being able to account from what source the payments are made shows a lax accounting system, but I find that the criticisms made of his evidence are not sufficient for me to reject his evidence in its entirety.

59. My overall finding in this case is that the defendant has undoubtedly dealt with the money that are the subjects of the charge in the alternatives.

60. The prosecution cannot establish to a criminal standard that any of the payments into that account (the BOC account) were the proceeds of indictable offences.  They do not need to do so, but they do need to show the defendant knew them to be so.  That state of belief cannot be reached on the basis of the evidence I have.

61. I did consider the alternative:  would the defendant have had reasonable grounds to believe, in respect of any of the sums placed into the account or removed, were they the proceeds of an indictable offence?  And, that is, would anyone looking at those grounds objectively reach the same conclusion?

62. What we do have here in this case is that large sums of money were placed in the defendant’s company account by someone unrelated to him, without the defendant making enquiry.  It is unusual, but subject to a number of explanations.  It has been held by the courts, and stated in the Court of Appeal, that, without more, an unexplained receipt does not point inexorably or irresistibly to money laundering.

63. I conclude that, on the facts proved, I cannot reach the conclusion there is irresistible inference that the defendant would have known or have reasonable grounds to believe that the properties in the account represented directly or indirectly the proceeds of an indictable offence.

64. Therefore, I will dismiss the charge and its alternatives.