SECRETARY FOR JUSTICE v. GROSSMANN RAINER HORST AND ANOTHER

CAAR 13/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

APPLICATION FOR REVIEW NO. 13 OF 2006

(ON APPEAL FROM DCCC NO. 39 of 2006)

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J U D G M E N T

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Stuart-Moore, VP (giving the judgment of the Court):

1.  The respondents were convicted on 6 November 2006, following a trial before Deputy District Judge Tallentire, on three charges of procuring credit entries in the records of a bank by deception, contrary to section 18D of the Theft Ordinance, Cap. 210, for which, on 20 November 2006, they were each sentenced to 240 hours of community service.  This was followed, on 13 December 2006, by the Secretary for Justice (the applicant) applying for leave to review these sentences.  The application was granted by the Chief Judge of the High Court on 14 December 2006.

2.  The matter now comes before us as an application for a review of sentence pursuant to section 81A of the Criminal Procedure Ordinance, Cap. 221, on the basis that the sentences imposed were wrong in principle and manifestly inadequate.

3.  The facts were largely agreed and in any event relatively straightforward.

4.  In short, the respondents were co-directors of Classic Speed the business of which was the import and export of cars to and from Hong Kong.  One of their customers was Sterling Motors Limited (‘Sterling Motors’) registered in Thailand.  The persons who established Sterling Motors, Krit Uransatien (Mr Krit) and his sister, were both from Thailand.

5.  Sterling Motors had been doing business with Classic Speed since 1999.  Initially, Sterling Motors paid Classic Speed by way of telegraphic transfer for the cars it imported.  Later on, letters of credit were sometimes used.  However, at some stage a financial problem arose between the parties and the respondents found themselves being owed large sums of money by Sterling Motors.  They blamed its owner, Mr Krit (PW1 at trial), for the losses.

6.  On 12 May 2002, Mr Krit, through 3 Thai companies, placed an order for 7 Mercedes Benz from Classic Speed.  The total cost was €521,406 approximately (HK$5,214,060).  A deposit was paid by way of telegraphic transfer and the balance, €487,406, was dealt with by way of letters of credit issued by a Thai bank.

7.  The respondents, in what was described as an attempt to force Mr Krit “to the negotiating table” to reduce his level of indebtedness to them, decided to ship 7 Smart Cars which were considerably lower in value than the 7 Mercedes Benz cars ordered.  False invoices and bills of lading were prepared at Classic Speed and submitted to the shipping company MAERSK Sealand (HK) for completion.  These documents made it appear that the higher value Mercedes cars were being shipped.

8.  On or about 19 March 2003, Classic Speed submitted the false documentation together with the letters of credit to HSBC, its bankers in Hong Kong, for negotiation.  The proceeds were credited to Classic Speed’s account with that bank.  As the judge pointed out, this amounted to a fraud on the bank as the respondents’ actions had “sharply reduced the level of the bank’s security”.  Obviously, if the bank had known of the fraud, it would not have processed the letters of credit.

9.  On 14 April 2003, the 1^st respondent advised Mr Krit by fax that 7 Smart Cars had been shipped to Thailand instead of the Mercedes Benz he had ordered.  Subsequently, the 7 Smart Cars were confiscated by the Thai authorities.

10.  On 23 February 2005, both respondents were arrested.  They were interviewed a number of times.  Both admitted the fraud although the 2^nd respondent did not do so until his 5^th interview.  They claimed they had acted in this way to reduce the debt owed to them by Mr Krit which they said was about €1.8 million.

11.  Both respondents testified at trial and both admitted their participation in the conduct alleged against them but they claimed that they had not acted dishonestly.  They had pursued what they contended was “a legitimate business strategy” and they claimed that HSBC had not been at risk because of their assets which were the subject of guarantees with the bank.  Each respondent had a clear record.

12.  No loss was sustained by the negotiating bank, HSBC, or by the Thai Bank which issued the letters of credit.

13.  However, Mr Krit suffered a loss of €521,406 being the funds he paid to the Thai banks which had issued the letters of credit to enable payment to be made for the 7 Mercedes Benz cars.  The respondents have now repaid this sum so that no loss is outstanding.

14.  The facts we have outlined were reflected in the three charges before the court.  All of these offences were committed on 19 March 2003.  As each charge was similarly particularised, differing only in respect of value, the number of Mercedes-Benz cars referred to and the bills of lading numbers, we need set out only the particulars of the 1^st charge which reads:

“

Grossmann Rainer Horst and Beatson Cosmo Mark-Andrew C.P.H., on or about the 19th day of March 2003, in Hong Kong, dishonestly with a view to gain for themselves or another or with intent to cause loss to another, procured the making of entries in records of the Hongkong and Shanghai Banking Corporation Limited, the entries being (i) a credit entry in the sum of EUR 67,761.40 euro currency to the account of Classic Speed (S.E.A.) Ltd, and (ii) a credit entry in the sum of EUR 28,809.09 euro currency to the account of Classic Speed Ltd, by deception, namely, by falsely representing that an S500L Mercedes-Benz had been shipped to Thailand by Classic Speed (S.E.A.) Ltd. as per Bill of Lading no. HAM 010270.” (Appeal bundle p. 1)

15.  The case for the defence, as we have indicated, was effectively to admit the particulars of each offence but to deny they had acted dishonestly.  The judge summarised the defence as follows:

“

19.

They [the defendants] gave extensive evidence of the problems they had had with Sterling Motors and Mr Krit in particular. They spoke of vehicles going missing, failure by Mr Krit to pay for and accept vehicles he had ordered and difficulty in getting him to discuss issues. The thrust of their evidence was that this was a means of getting him to the negotiating table and it also reduced his level of indebtedness. It was, in their opinion, a legitimate business strategy. Both were of the opinion that what they had done was not dishonest and would not and could not be regarded as such. They felt that with the assets guaranteed to the Hongkong and Shanghai Bank, the bank was never at serious risk.” (Appeal bundle p. 9)

16.  Later in his Reasons for Verdict, the judge stated that the prosecutor had made what he considered to be “a very generous concession in respect of the lack of integrity of [Mr Krit and his wife (PW1 and PW2 respectively)]”.  He continued by saying:

“	… My view is that what was clearly established is there were business problems between the parties. D1 and D2 claimed these to be very much the fault of PW1 and perhaps PW2 to an extent, but the evidence left this at least debatable. However, in view of the generous concession by the prosecution I will give the defendants the benefit of any doubt and view them as the wronged party for the present purposes.
	28.	Therefore I proceed against the background where the defendants, not without justification, feel they have been cheated and financially put at risk by Mr Krit. I also accept that they have taken extensive steps to enter into negotiations with Mr Krit, properly to resolve the situation; also that the cars, subject to the letters of credit, were held in readiness, five in Singapore and two in the UK for shipping, upon resolution of the problems.
	29.	Thus the scheme took shape. Instead of the seven Mercedes Benz’ referred to in the three letters of credit, the defendants resolved to supply seven Smart Cars. Again, there is evidence that the seven Smart Cars had been ordered by Mr Krit. The defendants aimed by this obvious deception to force Mr Krit back to the negotiating table and if that failed then at least his indebtedness to them would be somewhat reduced.” (Appeal bundle p. 12) (Emphasis added)

17.  On the facts, it is difficult to understand why the charges were disputed.  The judge found that both respondents had been dishonest but he described them as “desperate” and “frustrated” and he said that “honesty and integrity were defeated by economic necessity”.

18.  With this background, and the prosecution’s concessions in particular in mind, we found it a little surprising that this review was ever mounted in the first place.  The prosecution at trial had apparently accepted that the main blame lay with Mr Krit and had, by this concession, provided massive mitigation to the respondents which is unlike anything we have encountered in any other letters of credit fraud.  We were also astonished to find that, having embarked on this review, the case has been approached on precisely the same basis as other frauds involving letters of credit by drawing comparisons with other cases where no underlying goods existed at all.  The whole basis on which this case proceeded was that the false representations made by the respondents were designed to get Mr Krit to the negotiating table.  It was accepted that the 7 Mercedes cars did exist and were ready to be sent.  In effect, therefore, the respondents had, by dishonest means, taken the law into their own hands when trying to reduce the debt owed to them by Mr Krit.  However, rightly or wrongly, it had been conceded that this was a short-term device to reduce the level of the debt owed to the respondents by a person who was more to blame than they were for the situation which had arisen.

19.  The judge’s approach to sentence has been heavily criticised by Mr Turnbull on several fronts.  He argued, in particular, that the judge had failed to reflect the gravity of the fraud which had left Mr Krit with a substantial loss which was still outstanding at the time of sentence although, as predicted at that time, it has since been settled by repayment in full.

20.  These arguments would have been sound if this had been a normal fraud of this type but it was, as the judge plainly recognised, anything but the usual situation in which dishonesty of this kind is generally practised.

21.  The judge’s remarks, cited earlier, about Mr Krit’s lack of integrity, as conceded by the prosecution, were echoed in the Reasons for Sentence when the judge, having rightly accepted that severe sentences were usually and routinely imposed for letters of credit frauds, said:

“	5.	However, the present case is wholly exceptional and I must confess, that whilst I do find your actions to have been dishonest, to a large extent, you were driven to such measures by the deeds of Mr Krit and his associates.
	6.	Essentially, … you are honest brokers, respected in business … You are each of clear record and have never been in this type of trouble before and I am sure that you will never be in this position again. [Prosecuting counsel], in his usual fair manner … made generous and sweeping concessions of the honesty - or lack of it - integrity and dubious business malpractices of Mr Krit which threw the very existence of your company, Classic Speed, into doubt.
	7.	In respect of Classic Speed it is apparent from the evidence and the testimonials that it was and is a company with an excellent reputation for business, integrity and service; the company built by yourselves by sheer hard work and flair. This company and your personal positions were threatened by Mr Krit; driven by desperation you two fell from grace. Having committed the offences you then made no efforts to cover those offences up: you were honest with Mr Krit; you approached the bank and you took legal advice. However, at that stage, the offences had already been committed.” (Appeal bundle p. 23)

22.  The judge recognised that the respondents’ company, Classic Speed, had suffered “enormous financial losses [at the hands of Mr Krit]” which were “unlikely ever to be repaid”.  On the topic of the prosecution’s application for $370,000 in costs the judge said, when justifying a reduction in that sum:

“	… costs were incurred largely by your pleas of not guilty though I do accept [defence counsel’s] point, this turned out to be, in effect, an extended Newton hearing, and I agree with that. You will therefore each pay towards the costs of the prosecution $75,000.” (Appeal bundle p. 24)

23.  Mr Keith Yeung appeared for the respondents here and below. We are grateful to him for his very considerable assistance with the facts.

24.  Having regard to all the circumstances, we consider that the judge was justified in treating this as an exceptional case. However, the business world, where letters of credit are concerned, depends upon trust and, when fraud is disclosed, severe sentences are generally to be expected in order to act as a deterrent against this kind of conduct.  We are in no doubt, therefore, that community service orders were, with respect, not appropriate in principle for offences of this gravity.

25.  In our view, sentences of 2 years’ imprisonment should, in the normal course of events, have been imposed which, because of the exceptional circumstances, could properly have been suspended.  Now that the respondents have served the full number of hours of community service they were ordered to undertake, we propose to substitute for those orders concurrent sentences of 18 months’ imprisonment in each case on each of the three charges which will be suspended for 2 years.  This has the effect that each respondent will be liable to serve his sentence only if he commits a further criminal offence punishable by imprisonment during the next two years.

26.  The application is, to this extent, allowed.