HKSAR v. TSE CHING NG AND OTHERS

CACC 361/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 361 OF 2004

(ON APPEAL FROM HCCC NO. 260 OF 2003)

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J U D G M E N T

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Hon Woo VP (giving the judgment of the Court):

Introduction

1. The applicants, together with another person, Mr Zhong Guosong, faced trial in the Court of First Instance before Pang J and a jury on three counts of conspiracy.  The 1^st applicant was the 1^st defendant, Mr Zhong was the 2^nd defendant, the 2^nd applicant was the 3^rd defendant and the 3^rd applicant was the 4^th defendant at the trial.  The applicants will conveniently be referred to as D1, D3 and D4 respectively, while Mr Zhong as D2.  

2. All the four defendants were charged with Count 1, a conspiracy to defraud, contrary to Common Law.  The particulars of offence were that between 1 January 1997 and 20 November 1998, the four defendants conspired together to defraud the Bank of Communications Hong Kong Branch, the Bank of China (Hong Kong) Branch, the National Commercial Bank Limited, Hong Kong Branch by dishonestly causing Nan Lung Travel & Express (Hong Kong) Limited (“Nan Lung”) and Hong Kong Textiles Exchange Limited (“HKTEL”) to apply for and utilise credit facilities from the banks in the form of letters of credit (“LCs”), causing to be submitted false documents to the banks purportedly evidencing genuine underlying commercial transactions between Nan Lung and HKTEL or Sunpride International Limited (“SIL”), causing to procure the issue by the banks of LCs in favour of HKTEL or SIL, and causing the bank to release funds to HKTEL or SIL under the LCs. 

3. D3 and D4 also faced two other counts, Counts 2 and 3.  Count 2 was a conspiracy to procure entries in certain records in a bank by deception, and Count 3 was a conspiracy to deal with property, knowing or having reasonable grounds to believe that the property represented the proceeds of an indictable offence.  Count 2 related to the false documentation submitted to the banks under the LCs in the conspiracy in Count 1 as genuine documents, so as to cause HKTEL to be paid the proceeds of the LCs.  Count 3 related to D3 and D4’s dealing with the proceeds of the LCs received by HKTEL and SIL, which had been obtained by the conspiracies in Count 1 and Count 2.

4. Towards the close of the prosecution’s case, the prosecution considered that Counts 2 and 3 were bad, because D3 and D4, the only two persons charged with the conspiracies in Counts 2 and 3, were husband and wife, and could not be guilty as co-conspirators by virtue of section 159B(2)(a) of the Crime Ordinance, Cap 200.  The judge directed the jury to return verdicts of not guilty in respect of these two counts.  The trial proceeded thenceforth on Count 1 only. 

5. In respect of this remaining Count 1, the jury unanimously found D2 not guilty, but by 6 to 1, they found D1, D3 and D4 guilty as charged. 

6. The judge adopted a starting point of 5 years’ imprisonment for the offence, and sentenced D1 to 4 years’ imprisonment.  He imposed on each of D3 and D4 a sentence of 4½ years’ imprisonment. 

7. D1 now seeks leave to appeal against both conviction and sentence, whilst D3 and D4 have abandoned their applications regarding sentence and only seek leave to appeal against conviction. 

The involved companies

8. A number of companies were involved in the LCs transactions. 

9. Nan Lung was a company incorporated under the laws of Hong Kong and was a partly owned subsidiary of China Southern Airlines prior to 1999.  At the time material to the conspiracy in Count 1, the major interest in Nan Lung was owned by Taiwanese investors.  At the material time, D1 was a director and general manager and D2 was the deputy general manager of Nan Lung.

10. Nan Lung was acting as the ticketing office for China Southern Airlines, promoting and selling airtickets.  The ticket sales had an annual turnover of over $200 million for Nan Lung.  Nan Lung had never conducted any business other than that relating to airtickets.

11. HKTEL was a company incorporated under the laws of Hong Kong, and D3 and D4 were the directors and joint shareholders. 

12. D3 and D4 were also the only directors and principal shareholders of Wah Shing Travel Service Limited (“WST”).  They were the directors of SIL, another company incorporated under the laws of Hong Kong.  They also owned the entirety of the interest in Forward Development Company (“FDC”), a firm established in Hong Kong.

13. Prior to the commencement of the trial on 2 July 2004, D3 and D4 had both been made bankrupt.  HKTEL was wound up on 21 August 2000.

The prosecution’s case

14. The prosecution’s case was that the conspiracy to defraud the banks involved a total of 9 LCs.  Details of these LCs and matters related to them were set out in the Admitted Facts agreed by the parties pursuant to section 65C of the Criminal Procedure Ordinance, Cap 221.  The first 7 LCs were opened with one or the other of the banks on the application of Nan Lung in favour of HKTEL each for a sum either of roughly $3.9 million (US$0.5 million) or roughly $7.8 million (US$1 million), purportedly for the purchase of textiles goods or garments by Nan Lung from HKTEL.  In respect of each of these 7 LC transactions, it was D1 and D2 who signed the cargo receipt documents, and the related invoices and packing lists were signed in some cases by D3 and in others by D4.  The 8^th LC was opened on the application of Nan Lung in favour of SIL, with the cargo receipt signed by D1 and D2 and the invoice signed by D4.  The 9^th LC was opened by the bank on the application of HKTEL in favour of Nan Lung, with the cargo receipt signed by D4 and the packing list signed by D1 and D2. 

15. The following are also significant admitted facts.  The total value of the 8 LCs opened by Nan Lung came to almost HK$44 million.  From the proceeds of these LCs, WST received not less than HK$9.6 million, FDC received not less than HK$6 million, D3 received not less than $3.9 million.  In relation to the first 7 LCs, HKTEL issued sales invoices totalling almost HK$36 million.  None of these invoices was entered into the sales ledger of HKTEL for the relevant financial years.  In relation to the 9^th LC, no entry was made in any purchase ledger of HKTEL for the financial year 1997/1998.  

16. Another admitted fact was that the total amount remaining unpaid by HKTEL to Nan Lung in respect of the first 8 LCs came to $29.39 million.  This indebtedness arose from the fact that the LCs were vehicles by which loans were effectually made by Nan Lung to HKTEL.

17. Since HKTEL had not repaid the LC proceeds to Nan Lung, Nan Lung had defaulted in repaying the banks on the first few LCs.  After pressure exerted by D1 on D3 and D4, D3 and D4 persuaded D1 to take out the 8^th LC in the name of SIL.  The proceeds of the 8^th LC were paid by HKTEL to Nan Lung to repay the banks for the first few LCs.  The 9^th LC was also a device to reduce the indebtedness of Nan Lung to the banks under the earlier LCs. 

18. It was an admitted fact that part of the proceeds from the 9^th LC, applied for by HKTEL, was used to repay Nan Lung in respect of the amount outstanding for the first LC.  $3 million used by HKTEL for the partial repayment to Nan Lung for the 2^nd LC was substantially from the proceeds of the 7^th LC.  $7.8 million used by HKTEL for the repayment to Nan Lung for the 2^nd LC and the 3^rd LC came from the proceeds of the 8^th LC.

19. Admitted were also two written agreements: one was made on 26 March 1997 by D1 and D2 on behalf of Nan Lung and D3 and D4 on behalf of HKTEL, and the other agreement was undated and signed by D3 and D4 of the one part and D1 and D2 on behalf of Nan Lung of the other part.  In his summing-up to the jury, the judge described these two written agreements as follows:

“Both agreements bear the signatures of the 1^st and 2^nd defendants.  However, there are no company chops appearing on those documents.  The gist of both agreements is that Nan Lung will provide funds for the normal course of business of Hong Kong Textile and Sunpride International.  The two agreements were never presented to China Southern Airlines’ management for approval.” (Appeal Bundle p 16)

20. It appeared from the two written agreements that Nan Lung agreed to enter into LC and trust receipt arrangements for $10 million to raise funds to be provided to D3 and D4 for the promotion of their textile or piecegoods business.  In return, Nan Lung would get 2% of the LC amount and 5% bonus shares, but how the bonus shares were to be given was unspecified.  Consequently, Nan Lung applied for and obtained the opening of the first 7 LCs with all the proceeds given to HKTEL.  

21. There was evidence from representatives of the banks that D1 and D2 of Nan Lung approached them for banking facilities to open LCs.  They were told that Nan Lung wished to branch out into the fashion business.  Nan Lung required LC facilities to purchase goods for sale in the Mainland in the fashion sector.  The Bank of Communications prepared a credit analysis report on Nan Lung for the purpose of deciding whether to grant Nan Lung the facilities required.  In that report it was stated that Nan Lung

“… is expanding its business and is planning to assist its associated companies in the issuing of letters of credit for goods purchased, to engage in general trade and to bring in supplies for Southern Airlines, … ”

“It is understood from the client that the line of the documentary bills will mainly be used for bringing in supplies for Southern Airlines and for the issuing of letters of credit for associated companies, so as to receive handling charges.”

22. D1 or D2 had mentioned to the bankers that there was to be trading between Nan Lung and HKTEL.  D1 never told them that the LCs applied for were actually loans, nor did he tell them that he was only interested in obtaining loans to finance HKTEL.  The critical omission was that there were never going to be any goods even though the LC documents would assume their existence.  The bankers said that if they had known that there were no underlying commercial transactions without any goods ever involved, no facility would have been granted.  This absence of goods (even though the documents would speak of their existence) was the crux of the deceit.

The defence case

23. Only D2 gave evidence before the judge.  D1, D3 and D4 did not.  These defendants merely put the prosecution to proof, and as from the large amount of materials admitted in the Admitted Facts, allowing the inference to be drawn that there were no underlying transactions (and goods) for the LCs, it seemed that their defence was that either there was no conspiracy between them or they were not dishonest in dealing with the banks.

24. The record of the cautioned interviews of D1 and that of D2 were produced at the trial.  D1 admitted in the interview that it was a way of re-routing money.  He admitted that there were no goods or underlying transactions under the LCs and he believed that the whole scheme was to lend money to HKTEL. 

25. There was evidence that D1 had said that he had no experience in LC matters.  He considered that D3 and D4 were people of high social standing and trusted them.  There were references in the evidence to D1 believing D3 to be associated with the Tung Wah Group and D4 with Po Leung Kuk.  He was unaware of the LC procedures and just trusted D3 and D4 to enter into the transactions with the banks in order to raise loans for HKTEL. 

26. In the record of D2’s interview as well as D2’s testimony, he said he was only the deputy to D1 and played a very limited role in the whole incident.  He had no knowledge of LC matters and acted under the instructions of D1.  He signed the two written agreements and the LC documents because he was told by D1 to do so.  D1 had also told him that the whole thing had been approved by the Chairman of the Board, Mr Wong, who represented the Taiwan interest in Nan Lung.

27. D3 and D4 did not give evidence.  In cross-examination of PW1, the supervisor of Nan Lung’s Accounts Department, it was put by their counsel that the dealings between Nan Lung and HKTEL were open and not concealed in Nan Lung’s books.  It seemed also to be D3 and D4’s case that in HKTEL’s books, there was no record of any sale and purchase transactions between HKTEL and Nan Lung, but the proceeds of the LCs were reflected as loans from Nan Lung on Nan Lung’s current account with HKTEL.  It seemed that their case was that the openness of the transactions in HKTEL’s company books could have raised a doubt as to whether they had the dishonest intent required to be proved. 

The grounds of appeal against conviction

28. On behalf of D1, Mr Graham Harris raised four grounds of appeal against convictions.  Three of these grounds are discrete and can conveniently be dealt with first, while the remaining ground can be dealt together with the first ground of appeal against conviction raised by Mr Lawrence Lok SC on behalf of D3 and D4.  

D1’s grounds 1 and 2

29. These two grounds relate to Counts 2 and 3.  It is contended that as Counts 2 and 3 against D3 and D4 were wrong in law, given the way in which the case was opened and proceeded with, the joinder of these two defective counts prejudiced the fair trial of D1 upon Count 1.  When the defects of Counts 2 and 3 became apparent towards the close of the prosecution case, the judge directed the jury to find D3 and D4 not guilty of these two counts.  It is contended that in the interests of justice the judge should have discharged the jury and the remaining Count 1 be retried by a different jury, particularly so given the apparent confusion and concern expressed by the jury when directed to return the not guilty verdicts.

30. Mr Harris submits that Counts 2 and 3 were effectively withdrawn just one day before the prosecution closed its case after the trial had proceeded for 17 days.  Hitherto the prosecution had been conducting the trial and leading evidence on all three counts, adducing evidence on the basis that there had been a “hidden agenda” on the part of D3 and D4, which might have accorded D1 a defence under section 159B(1) of the Crimes Ordinance, that D1, D2 and Nan Lung were intended victims of the conspiracy and therefore not guilty as co-conspirators.  Under this “hidden agenda”, evidence had been adduced to show that the funds obtained from the LCs were utilised by D3 and D4 for their own purposes.  On the other hand, Nan Lung and D1 bore the financial risks associated with the funds obtained by the LCs and D1 shouldered a secondary liability to repay under his personal guarantees given to the banks.  Had the case proceeded down this route, the jury would have had presented to them a scenario in which they would be entitled to conclude that D1 and D2 were intended victims of the scheme.  When Counts 2 and 3 were gone, the evidence thus far adduced simply became “lumped “ together with that on Count 1.  It is contended that the two separate conspiracies were thus merged into one and the distinction between the role of D1 and that of D3 and D4 was gone, taking with it, inevitably, the section 159B(1) defence.  The jury was left to concentrate on Count 1 in respect of which the spotlight was on the banks, being the only victims of the conspiracy remaining to be dealt with.  It is submitted that this drastic change in the prosecution case and in the focus of the jury resulted in irrefutable damage to D1’s defence.  Not only was the culpability of D1 magnified with the change of focus, but also the defence of intended victim faded away.  D1’s trial was thus greatly prejudiced.  By taking away the proper context in which Nan Lung and D1 could have been seen as victims, the effect on the issue of dishonesty on D1’s part is said to be devastating.  Such damage was not cured by any proper direction given by the judge. 

31. The factual background of the second ground raised by Mr Harris was that after the judge had directed the jury to return verdicts of not guilty on Counts 2 and 3 as against D3 and D4, the jury posed a question in writing to the court:

“As a group of reasonable citizens, we would like to know more information and why the verdicts come to the conclusion of not guilty for the 2^nd and 3^rd count.  Thank you.” (Appeal Bundle p 332)

32. After discussion with counsel, the judge decided not to give a direct answer to the question, save to say that it was a direction in law and the jury was bound to follow the judge’s direction.  It is contended by Mr Harris that this answer could only muddle the jury’s thinking and confuse them in their deliberation of the case.  However, instead of discharging the jury and ordering Count 1 to be retried before another jury, the judge allowed the case to proceed.  This, it is argued, had prejudiced D1’s possible defence of being an intended victim.  D1 had thus been prejudiced as a result of the unsatisfactory way the prosecution had conducted the trial and its oversight of the legal implications of the special relationship between D3 and D4, which was due to no fault of D1 at all. 

33. It would be noted that Count 2, against D3 and D4, was a conspiracy to procure entries in certain records in the banks by deception.  The underlying transactions were the same LC transactions covered by Count 1.  As the particulars of offence of Count 2 clearly showed, the deception alleged to have been perpetrated by D3 and D4 was to use false documents such as invoices, packing lists and cargo receipts required under the terms of LCs to cause the banks to make payments under the LCs to HKTEL.  All the evidence on Count 2 was, as Mr Harris conceded, both relevant and admissible on Count 1.

34. Count 3 against D3 and D4, albeit also relating to their receipt of the LC proceeds knowing them to represent the proceeds of an indictable offence, was entirely separate and had nothing to do with the hidden agenda issue.  We do not need to say anything further on it. 

35. The joinder of Counts 2 and 3 to Count 1 on the indictment, in our judgment, plainly did not prejudice D1.  The joinder of Count 2, focusing on the device of D3 and D4 in obtaining the proceeds of LCs which they caused Nan Lung (through D1) to open in their favour may support the hidden agenda as postulated by the prosecution.  This might assist D1 if he could expand it to avail himself of the protection offered by section 159B(1) of the Crimes Ordinance.  The joinder therefore only benefited D1 and could not have operated to his prejudice.  D1 could have relied (as he in fact did) on the evidence of his alleged belief in the high social standing of D3 and D4 and the trust that he had placed on them so as to create a reasonable doubt that he was an intended victim of the deception in Count 1 perpetrated by D3 and D4.

36. The prosecution proceeded with the trial on the basis of all three counts until the very last moment.  The evidence relating to Count 2 had all been adduced.  However, such evidence was, as we have said, also relevant to Count 1.  There was no evidence exclusively adduced for Count 2 and there was nothing “lumped” together as suggested by Mr Harris.  

37. When the jury was directed by the judge to return not guilty verdicts on Counts 2 and 3, the evidence that might support the hidden agenda still remained.  The not guilty verdicts would not have diminished whatever value this evidence might have in favour of D1. 

38. From the question put by the jury to the judge, it appeared that they were curious as to why D3 and D4 could not be guilty of Counts 2 and 3.  Ultimately, it could not have caused any confusion as suggested by Mr Harris.  In fact, the explanation apparently sought by the jury was given and the defence of “intended victim” was left open by the judge to the jury in the judge’s summing up, when he said:

“	… in law, the 3rd and 4th defendants, being husband and wife, are treated as one person and a person cannot conspire with himself.  To put it simply, there must be at least two persons to form an agreement. In this case, if you find that both the 1st and 2nd defendants not guilty, I stress the word ‘both’, then as a matter of law, the 3rd and 4th defendants cannot be guilty as well, and you must return a verdict of ‘not guilty’ in respect of the 3rd and 4th accused.
	The reason being as I have said, a person cannot conspire with himself without others. The prosecution must prove beyond reasonable doubt that for each of the 1st and 2nd defendants, they are not the intended victims of a fraud scheme against the banks. If the prosecution fails to make you feel sure that they are not the intended victims of the fraud scheme against the bank, then it must follow that there must be a reasonable doubt on the issue whether each defendant was dishonest in a sense which I had explained to you earlier.” (Appeal Bundle p 13)

39. The continuation of the trial on Count 1 after the disposal of Counts 2 and 3 could not have prejudiced D1 either.  The evidence of the hidden agenda was still there, available for D1’s use.  Similarly, the defence of intended victim was similarly left open for D1.  We do not accept that D1 could have been prejudiced in any way as contended by Mr Harris.  In any event, it should not be forgotten that at all times, Count 1 remained as a charge that all defendants, especially D1, had to deal with.

40. Mr Harris submits that in the way the jury framed their question, there was a possibility that they thought D3 and D4 were guilty of Counts 2 and 3, and as they had been directed by the judge to return verdicts of not guilty on these two counts, they could have convicted D1 on Count 1, since without D1’s conviction, D3 and D4 (as man and wife and the only remaining conspirators) would have to be acquitted.  This argument is premised, if we may say so, on the imagination or speculative theory that the jury was so perverse as to find an innocent person guilty, purely for the sake of enabling them to convict two guilty persons.  This would also have been contrary to the judge’s clear direction to them that they had to consider the case regarding each accused separately.  This argument is obviously unsound and must be rejected.

41. In any event, all counsel for the defendants never made any application to the judge for discharging the jury and having Count 1 tried before another jury, and Mr Harris is not saying that defence counsel had failed to discharge their duties properly at the trial.

42. These two grounds have no substance.

Not letting the jury know the reasons for acquittal

43. Before leaving this matter, we wish to make an observation about the judge’s answer to the jury’s question (see para 31 above) as to why they had been directed to return verdicts of not guilty on Counts 2 and 3.

44. After discussion with counsel, the judge said to the jury:

“	Mr Foreman, I have received a note from you. I will just read it out and ask you to confirm if this is what you have written. Please sit down. ‘As a group of responsible citizens, we would like to know more information on why the verdict came to the conclusion of not guilty for the 2nd and 3rd count. Thank you.’ Is that what you have written? Right.
	Now, I fully understand your concern over this but as I have told you very early at this trial and also this morning, it is a matter of law that you need to take my directions and act upon them. Over the weekend we had detailed discussions with counsel and a matter regarding the 2nd and 3rd count has been resolved without having to trouble you over the facts. It’s a matter of law but I don’t need to go into that now because there is no need. There is no need to trouble you. It’s as simple as that. I share your concern and it is very responsible that you have raised this question. It shows how conscientious you are. Thank you very much.” (Appeal Bundle pp 337-338)

45. The reason for the acquittals was in fact very simple: D3 and D4 were husband and wife and could not be guilty as co-conspirators.  In our view, the jury was entitled to be told this simple answer and not be kept in the dark about it.  Normally, unless prejudice will be caused or some other exceptional reason exists, a jury is entitled to have its queries clarified.  In the present case, the jury was informed that as a matter of law, Counts 2 and 3 would be resolved without the need to trouble them on the facts.  The jury was of course later informed in the judge’s summing up that a conspiracy between husband and wife is not possible in law.  Accordingly, no harm was done by the judge’s omission to answer the jury’s earlier question, but, as we have observed, a direct answer should have been given.

D1’s ground 4

46. This ground alleges that the jury’s majority verdict of guilty in respect of D1 was inconsistent with its unanimous verdict of not guilty in respect of D2.  It is the contention of Mr Harris that there were substantial similarities in the prosecution cases against D1 and D2.  Both of these defendants were involved in the management of Nan Lung, they signed on the two written agreements, they signed the LC application forms and cargo receipts, they dealt with the bank officers together, and neither had any personal gain from the LC transactions.  They were both persons of good character, had very little experience or knowledge in LC procedures, and the prosecution would have to prove against each of them a dishonest intent to put the banks at risk or defraud them, and that they were intended victims of the conspiracy of D3 and D4.

47. We do not need to go into any great detail in respect of this ground.  There are several very significant distinctions between the positions of D1 and D2.  D1 did not give evidence but D2 did.  D1 was the director and general manager of Nan Lung while D2 was the deputy general manager, carrying out his duties as instructed by D1.  According to his evidence, D2 had been told by D1 that Nan Lung was prepared to do business with HKTEL in respect of textiles and garments and approval for this had been given by the Taiwanese Chairman of the Board.  This evidence of D2 could be of great significance in the jury’s consideration which might have created a reasonable doubt in their mind that D2 did not have a dishonest intent in going along with what D1 instructed him to do.  This must be contrasted with the fact that two directors of Nan Lung had given evidence that they had no knowledge of Nan Lung’s dealings with HKTEL, which was contrary to the alleged approval by the board of directors.

48. Mr Mackay, for the respondent, has also drawn our attention to the fact that D1 had admitted in his interview that the 9^th LC was a device to enable Nan Lung to recoup part of the LC amounts that HKTEL had failed to repay, with no underlying goods in support, and the jury could have convicted him, rather than D2, on this distinct evidence alone.

49. This ground must fail.  

D1’s ground 3 and D3 and D4’s ground 1

50. These two grounds allege that the judge erred in his summing-up in failing to put to the jury the defences relied on by all these applicants.  It is contended that the overall tenor of the summing-up was unbalanced and unjustifiably tilted towards the prosecution. 

51. The main thrust of these grounds relied on by all the applicants was the “openness” in which both D1 in Nan Lung and D3 and D4 in HKTEL dealt with the LC transactions.  It is also contended that there was some evidence that at least some of the banks concerned were aware of the true purpose of the applications for LCs.  The banks had more than sufficient collateral from Nan Lung for granting the facilities required for the opening of LCs and it is alleged that there was no evidence that D1 attempted to conceal from anybody the true nature of the LC transactions. 

52. PW1, the lady supervisor of Nan Lung’s Accounts Department, agreed that the two written agreements had been shown to her by D1, with the effect of Nan Lung agreeing to lend $10 million to HKTEL for the latter’s business operation.  However, PW1 clarified that she had not shown these written agreements to the banks to which applications for LCs were made by Nan Lung.  She had seen these written agreements which had been shown to her, but she had not been provided with any copy.  This was not evidence of openness towards the banks.  It was merely that D1 did not hide the fact from PW1 that Nan Lung was using the LC transactions to lend money to HKTEL, and in any event PW1 would have known this as the supervisor in charge of the accounts because there was no evidence of any record of any sale of goods transactions in the books of Nan Lung.

53. PW1 also said in cross-examination that she had a conversation with an officer from the Bank of China, a Mr Chan, who had been told by D1 that HKTEL had not repaid the loan.  PW1 agreed that Mr Chan had told her that in the opinion of his bank, the transaction between Nan Lung and HKTEL was not the usual type of LC transaction, and that it was just a loan provided to HKTEL by Nan Lung by way of an LC.  Mr Chan also warned PW1 to ask D1 to handle the matter with caution because D1 was advancing in age and might be prone to be deceived.  However, this conversation did not amount to evidence that the bank was not misled when the LCs were applied for, because it only took place at the time when Nan Lung had defaulted to pay the bank on the LCs and Mr Chan was chasing for payment.  This conversation must be put in the proper context and compared with what D1 and D2 had told the banks when they applied for the opening of LCs, which was that Nan Lung was branching out into the fashion business and required LC facilities for the purchase of supplies for that business, its associated companies, and China Southern Airlines. 

54. The second item of alleged “openness” was that according to the lady bookkeeper of HKTEL who was also responsible for keeping the books for WST and FDC, HKTEL maintained in its books a current account of Nan Lung, but no sales or purchase entries had been made in the ledgers of HKTEL relating to the LCs.  This was done in accordance with D4’s instructions.  This evidence was consistent and consonant with the admitted facts that none of the invoices relating to the first 7 LCs was entered into the sales ledger of HKTEL for the relevant financial year and that relating to the 9^th LC, no entry was made in any purchase ledger of HKTEL for the financial year of 1997/1998. 

55. The judge did remind the jury of a similar suggestion made by counsel.  He said:

“Counsel suggested that the defendants did nothing to hide the flow of funds and this shows the defendants must have thought that there was nothing illegal about the loan arrangement.” (Appeal Bundle p 40)

56. Mr Mackay has made a point, which in our view is valid, that the written agreements and the books of the companies were internal documents never made available to the banks and that the proceeds of the LCs had to go through the companies’ books in any event, which was not actually openness. 

57. In our judgment, this so-called openness did not support the alleged lack of dishonest intent vis-à-vis the banks.  The applicants made misrepresentations to the banks that there were the supplies of goods as evidenced by the false documents the applicants presented to them.  One has to note that there was no evidence that the two written agreements had been shown to the banks, nor for that matter, the accounts and ledgers of Nan Lung or HKTEL.  Quite on the contrary, D1 and D2 had represented to the banks that Nan Lung was branching out into the fashion business and they required LC facilities for the purpose of purchasing supplies for that business and its associated companies.  Additionally, it has to be borne in mind that the evidence did not reveal any openness about the main part of the fraud at all, namely, that goods never existed.  This was always concealed.  Accordingly, on analysis, the openness point was not a valid point at all.  The main part of the fraud (namely, the non-existence of goods) was never out in the open.  The openness point was therefore not a point that had to be specially emphasised to the jury.

58. The prosecution case against D1 was very strong.  He was the person in charge of Nan Lung and instrumental in applying for the banking facilities for opening the LCs.  He had told the bank that he required the LCs to purchase goods for the fashion business in which Nan Lung was going to branch out.  He admitted in his cautioned interview that there was no underlying transaction for the LCs.  There was evidence from the bank representatives that they would not have opened the LCs had they known that there were no underlying transactions. 

59. The judge had directed the jury’s attention to the evidence that D1 had told D2 that Nan Lung’s dealing with and lending to HKTEL had the approval of the Board Chairman, and D1 had also expressed that D3 and D4 were reputable socialites and he trusted them.  These were the major pieces of evidence that might assist D1 in raising a reasonable doubt in the jury’s mind that he was not dishonest.  The large amount of collateral provided the Nan Lung to the banks was also mentioned by the judge, and this might tend to raise doubt in the jury’s mind as to whether D1 had the dishonest intent to deceive the banks.  The strong prosecution’s case against D1 was also put to the jury, and the judge fairly left all findings of facts to them.  All in all, we do not find the judge’s summing-up unbalanced or unfair towards D1. 

60. Regarding D3 and D4 who, like D1, did not give evidence, the prosecution’s evidence against them was even stronger.  They admitted in the Admitted Facts that invoices relating to the LCs had been issued by HKTEL but no sales had been entered into HKTEL’s books.  They also admitted the fund flowing of the LC proceeds, part of which were utilised for their personal, as opposed to business, purposes.  They admitted that they were unable to repay Nan Lung about $26 million that they had received from the proceeds.  They also admitted that they had become bankrupt.  The so-called openness with which D1 dealt with the two written agreements in the presence of PW1 was neither here nor there as we have indicated.  There was no evidence to suggest that there had been openness with the banks and all the indications were that so far as they were concerned, there had been none.  On the contrary, an elaborate system had been put in place to deceive the banks, which negated any suggestion of “openness” towards them.

61. In our judgment, the summing-up was in all the circumstances not unbalanced or unfair to D3 and D4 as suggested.

D3 and D4’s ground 2

62. This ground alleges that the judge erred in failing to direct the jury that the evidence given by PW1 on what D1 had said out-of-court to PW1 about D4’s participation in the arrangement of the LCs would not be evidence of that fact against D4.  PW1’s evidence in-chief was that when she told D1 that she did not know how to process LC applications, D1 told her that D4 had already typed out the necessary forms.  Mr Lok’s complaint is that during the course of PW1’s testimony, the judge did not at any stage direct the jury as to the limited use of this evidence, in that it could not be used against D4. 

63. Mr Lok submits that since what was said by D1 to PW1 about D4 out of court was hearsay it was not admissible as against D4.  This might be correct in other circumstances, but in the present case where D1, D3 and D4 were charged with a conspiracy, the co-conspirator’s rule applies.  It is only necessary to refer to para 36-60 of Hong Kong Archbold 2004, which reads:

“Ordinarily, acts done or words uttered by an offender will not be evidence against a co-accused absent at the time of the acts or declarations.  However, it is now well established that the acts and declarations of any conspirator made in furtherance of the common design may be admitted as part of the evidence against any other conspirator.  Such acts and declarations may provide evidence not only of the existence, nature and extent of the conspiracy, but also of the participation in it of persons absent when those acts and declarations were made.  This is known as the co-conspirator’s rule.”

64. Quite apart from the words spoken by D1 about D4 in what was plainly the furtherance of the conspiracy, there were significant admitted facts and there was other evidence referred to earlier which overwhelmingly established the participation of D4 in the conspiracy.  D3 and D4’s signatures were on the invoices and packing lists relating to the first 8 LCs and D4’s signature was on the cargo receipt under the 9^th LC.  PW1’s evidence further pointed out that D4 had brought along LC documentation to Nan Lung for signature when no LC number had yet been assigned to the documents. 

D3 and D4’s ground 3

65. This ground alleges that the judge erred in directing the jury that in relation to their consideration of the guilt of D3 and D4, they were entitled to take into account D1’s admissions that there were no real commercial transactions underlying the LCs.

66. D1 did not give the evidence.  However, in his cautioned interview, D1 admitted that he had never received any goods from the LC transactions.  Before summarising the incriminating parts of D1’s interviews, the learned judge reminded the jury that D1’s answers in the interviews could not be used against any of the other defendants.  The complaint under this ground is that towards the end of the summing-up, when the judge summarised the prosecution’s case against each of the defendants, and in dealing with the evidence against D3 and D4, he directed the jury in the following terms:

“The other point you may wish to consider is this: it is not disputed by the 1^st accused that there were no goods involved in all the nine LC transactions.” (Appeal Bundle p 40)

67. This, it is submitted by Mr Lok, plainly contradicted the earlier warnings by the judge that the jury must not use any of the answers of D1 in the interviews against the other defendants. 

68. We accept that the judge did mention D1’s said admission when he was dealing with the evidence against D3 and D4.  However, earlier on in the summing-up the judge had unequivocally told the jury this:

“	Now, let us proceed straight to the interviews by the 1st defendant, Mr Tse. Before I take you to the interviews, there are two things I need to remind you of. In the statements during the interviews of the 1st defendant by the police, the statement which the 1st accused made to the police in the absence of the 1st, 3rd and 4th accused, implicating them is not and cannot be evidence against any of them. To put it simply, because when the 1st accused was interviewed, the 2nd, 3rd and 4th accused were not there, right.
	So therefore, it cannot be evidence against the other three. The reason being they had no opportunity to contradict the implications by the 1st accused against them. You must therefore disregard any allegations by the 1st accused against the 2nd, 3rd and 4th accused during the interview. …” (Appeal Bundle p 28)

69. This is a strong direction with the reasons explained to the jury.  The later reference to D1’s admission of there being no goods involved in all the nine LC transactions could have been a slip of the tongue which, it is apparent, went unnoticed by trial counsel or it would no doubt have been corrected.  However, it should not have happened and we agree that this is an irregularity.  It was, however, no part of the case presented on behalf of D3 and D4 that there were genuine underlying transactions with goods as described in the LCs.  Accordingly, we are satisfied that this was not a material irregularity.

Conclusion as to convictions

70. For the above reasons, D1’s application for leave to appeal against conviction must be dismissed.  Regarding the applications made by D3 and D4, because of their ground 3, which identifies a minor irregularity in the summing-up, we grant leave to appeal.  Treating the hearing as the appeal for D3 and for D4, and because the irregularity that is identified was not a material one, we dismiss their appeals.

Sentence

71. In sentencing D1, D3 and D4, the judge took into account the fact that the conspiracy had caused the banks to pay out some $40 million under the LCs that were supposed to be supported by genuine commercial transactions.  The end result was that Nan Lung, of which D1 was the general manager, had suffered a loss of about $26 million by way of bad debts owed by HKTEL and/or D3 and D4.  The judge adopted a starting point of 5 years’ imprisonment.  He took into account the mitigating factors in the following terms:

“	The 1st accused is now 80 years of age. He has been in the airline business for some 40-plus years and I’ve heard from prominent and respected members of the travel industry that he is a man highly regarded. He has never committed any offence before and he has contributed significantly to the airline industry. These I consider to be mitigating factors.
	In so far as the 3rd and 4th accused, I have evidenced before me that before they contravened the law, they were respected members of the community, they participated actively in a church community and various welfare organizations and education institutions. I am told that it is because of the economic downturn that caused them to suffer financially and hence resorted to the scheme.
	This does not excuse themselves from criminal liability, however. Their previous contributions to society – I would look upon them as mitigating factors.” (Appeal Bundle pp 66-67)

72. The judge gave an overall discount of one year to D1 and six months to each of D3 and D4.  

73. Mr Harris challenges the starting point of 5 years’ imprisonment being excessive and wrong in principle.  He submits that the judge failed to consider sufficiently or at all the fact that D1 never received any financial benefit from the scheme and that his only motive was to enable Nan Lung to increase its income by charging commissions or handling fees.  He points out that D2 and D3 were the main culprits of the deception and had taken proactive roles in initiating the fraud.  The major portion of the LC proceeds went to D3 and D4 and their associated companies.  D1 did not receive a single cent or benefit in any way from the scheme.

74. In assessing the appropriate starting point, one has to take into account the culpability of the offender as well as the effect of his offence.  While the motive of D1 seemed to be earning some commission or handling fees for Nan Lung, he had joined D3 and D4 in perpetrating the fraud by making representations to the banks so as to obtain the facilities for the opening of the LCs, and submitting false documents to the banks to induce them to pay on the LCs.  As the general manager of Nan Lung, he was in charge of Nan Lung’s affairs.  Without his participation and effort, the banks would not have granted the LC facilities which caused them to pay out over $40 million on the LCs.  Had Nan Lung not been wealthy enough to repay what it owed to the banks under the LCs, the banks would have suffered badly.  Nan Lung, D1’s employer, has now in turn to bear the loss of $26 million.  The period over which the deception was perpetrated on the banks was about 1½ years involving 9 false LC transactions.  In all the circumstances, we are not persuaded that the starting point of 5 years adopted by the judge was manifestly excessive or wrong in principle.  

75. The fact that D1 never intended to benefit personally from the offence may to some extent reduce his criminality, but far more importantly, it is apparent that D3 and D4 were the main culprits having initiated the fraud.  In this regard, we are prepared to accept that D1, at the age of 80 years, may have been more susceptible to the suggestions of the other applicants, whose social standing seems to have impressed him, to participate in the scheme without any benefit for himself and thinking little about the risk involved for Nan Lung and himself as a guarantor.  After the present case had come to light, D1 retired from Nan Lung and he will apparently not be returning to work.  There is little risk of his re-offending. 

76. In all the circumstances, we consider that the sentence of 4 years’ imprisonment was manifestly excessive.  There were mitigating factors of an exceptional kind in this case which distinguished D1’s position from D3 and D4’s in a marked way.  In our opinion, a sentence of 2½ years’ imprisonment would have been appropriate. 

Conclusion on sentence

77. We, therefore, grant leave to D1 to appeal against sentence, and treating his application as the appeal, we allow the appeal, set aside the sentence imposed by the judge, and substitute for it a sentence of 2½ years’ imprisonment.