HKSAR v. LAI KIN HANG ERWIN AND OTHERS

DCCC 312/2016

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO 312 OF 2016

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REASONS FOR SENTENCE

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THE CONVICTIONS

1.  D1, D3-D8 & D16 were convicted after trial of a charge of conspiracy to defraud (Charge 1).  D1 and D3, in addition to Charge 1, were convicted with D2 of a charge of conspiracy to deal with property known or believed to represent proceeds of an indictable offence (Charge 2).

THE CONSPIRACY TO DEFRAUD CHARGE

2.  The case concerns a “financial intermediary fraud”. 

3.  Between 27 March 2014 and 27 March 2015, members of the public (the victims) received cold calls from unidentified persons, who falsely claimed themselves staff of banks or financial institutions. Most of the victims owned properties that had been mortgaged to a first mortgagee bank or financial institution.  They took out at the same time a second mortgage from another bank or financial institution without notice to the first mortgagee. Some of them also borrowed heavy personal loans or credit card loans.  These people were all under various degree of financial difficulty to repay because of the high interest rate of the second mortgage loan and/or other personal loans.

4.  To win the trust of the victims, the callers would tell the victims sufficient details about them so as to convince them of the authenticity of the callers as an employee of a bank/financial institution.  The callers then use tactics such as accusing the victims of violating the conditions of the existing property mortgage loan by securing a second mortgage on the same property and the adverse consequence of it, or offering a low-interest loan, inducing the victims to go to Wincades International Accounting Affairs Limited (“Wincades”) for debts restructuring or other forms of financial assistance. 

5.  At the office of Wincades, the victims were told by the salespersons that Wincades could assist them to obtain a loan with attractive terms.  They were decoyed to sign a “consultancy agreement” whereby the victims agreed to engage Wincades to apply for loans on their behalf and they would have to pay an extremely high “consultancy fee”.  Empty promises were made that the consultancy fee would not be charged if their applications were unsuccessful. 

6.  The victims were then made to pay up the consultancy fee before the loan they needed (the ultimate loan) was obtained.  This was done by Wincades swiftly obtaining a “transitional loan” at excessively high interest rate for the victims from a money lender recommended by Wincades.  After the victims paid the consultancy fees, they then found it difficult to contact the person responsible for their applications, or were just told to wait, and their applications were not followed up in serious manner.  When the victims asked for refund of the consultancy fee, Wincades put up excuses such as services had been provided or the victims had breached the consultancy agreement.

7.  Wincades in fact had no genuine intention to help the victims to obtain their loans or to repay the consultancy fee.  They did not care about the loan applications.  They only aimed at obtaining the exorbitant consultancy fee from their clients. Eventually all the victims, except one case, were unable to obtain the ultimate loan, nor could they get back the consultancy fee.

8.  The defendants can be classified into 3 categories: (a) the director/shareholder/person-in-control of Wincades, D1-D3; (b) the salespersons, D4-D8; (c) the cold-callers, including D16.

9.  D1, D2 and D3 were signatories of Wincades’ bank accounts with Hang Seng Bank (Account 1 and Account 2 in Charge 2) at different stages.  D1 and D3 were the sole shareholder and director of Wincades at two different stages of the charge period. They had full control of Wincades and its bank account. D1-D3 had knowledge of the fraudulent business in Wincades. D4-D8 were the salespersons who conned the victims to sign the consultancy agreement and pay the consultancy fee.  D16 was a supervisor of the cold callers making their fraudulent cold calls in a room at the office of Wincades.

10.  The 20 victims (in 18 cases) were deceived of a total amount of about $2.8 million, out of which around $1.49 million was deposited in Wincades’ bank account, and the rest was paid by cash: -

Case 1 (PW1) - $640,000 (cash)

Case 2 (PW2) - $150,000 (cash)

Case 3 (PW3 & PW4) - $70,000 (cash)

Case 4 (PW5) - $9,900 (cash)

Case 5 (PW6 & PW7) - $60,000 (cash)

Case 6 (PW8) - $220,000 (cash + $10,000 bank transfer)

Case 7 (PW9) - $100,000 (cash)

Case 8 (PW10) - nil (PW10 declined to pay $100,000 fee)

Case 9 (PW11) - $45,000 (cash)

Case 10 (PW12) - $464,000 (bank transfer)

Case 11 (PW13) - $117,310 ($50,000 by bank transfer)

Case 12 (PW36) - $160,000 (cheque deposit)

Case 13 (PW37) - $60,000 (bank transfer)

Case 14 (PW38) - $192,000 (cheque deposit)

Case 15 (PW39) - $50,000 (cheque deposit)

Case 16 (PW40) - $55,000 (cheque deposit)

Case 17 (PW14) - $100,000 (bank transfer)

Case 18 (PW42) - $351,279 (bank transfer)

THE CONSPIRACY TO LAUNDER MONEY CHARGE

11.  D2 was not charged with the conspiracy to defraud Wincades’ clients.  He was convicted with D1 and D3 of the conspiracy to “launder” the money in the bank account of Wincades.  D2 was neither a shareholder nor a director of Wincades.  He opened the account for Wincades at the Hang Seng Bank with D1 and had been one of the joint signatories of the account until D3 replaced them as the sole signatory of the account on 30 January 2015.  He signed cheques during the period when he was one of the two authorized signatories.

IMPACT STATEMENT OF THE VICTIMS

12.  Impact statements of some of the victims were submitted to the court without objection.  These statements reveal that, on top of the losses of paying the consultancy fee, the financial situation of these victims were seriously disturbed by the new debt raised as “transitional loan” to pay the consultancy fee. 

13.  For instances, on top of the $640,000 PW1 paid for the consultancy fee, he suffered a further loss of $160,000 to pay the exorbitant interest for the transitional loan.  Eventually he had to sell his property to pay off the debt.  Until now, he is unable to buy his own flat.  The lives of his whole family have been seriously affected.

14.  To settle the transitional loan, PW2 had to borrow from another financial institution at a very high interest rate and eventually settled his debts with the assistance of his friends.  He suffered an extra loss of $100,000 for payment of the interests.  He says the incident caused him financial stress and mental distress.  It took him a year to get back to normal life.

15.  PW7 says the transitional loan of $150,000 was borrowed at an annual interest rate of 42%. His wife is a bankrupt.  He is a diabetic, having limited working capacity as he had a toe of his foot amputated and had undergone surgery on his eye twice.  However in order to earn more to pay the interest, he had to do part-time jobs.  As a result, his health condition deteriorated.  He eventually had to borrow from relatives to settle the transitional loan. He is still trying hard to repay his relatives.

16.  PW8 has a brain tumour and a history of three surgeries.  She is losing her memory and her eyesight is declining. She has lost her working capacity.  She could not afford to repay the transitional loan of $420,000 borrowed at an interest rate of 36% p.a. and had to raise further loans from 3 financial institutions.  Prior to the Wincades incident, her indebtedness to bank was about $2.6 million, but her current liability is $4 million.

17.  In the case of PW12, he was induced to borrow a transitional loan for $6.5 million at an interest rate of 38.4% per annum.  Eventually he had to borrow from other financial institutions and relatives.  He suffered a total loss of more than $7 million for interests and expenses during the course.  As a result, his family was put under great pressure.

PERSONAL BACKGROUND OF INDIVIDUAL DEFENDANTS AND MITIGATION

D1 and D5

18.  D1 and D5 are husband and wife, having a daughter who is 2 ½ years old.  Both of them have clear criminal record.  Their antecedent statements reveal that they are aged 39 and 29 respectively.  D1 was a car salesperson when he was arrested.  His counsel, Mr Hemmings, in mitigation submitted that D1 was not the mastermind of the fraud. It was urged that the sentences in Charge 1 and Charge 2 should run concurrently.

19.  On behalf of D5, Ms Chow submitted that D5 suffered from postpartum depression after giving birth to her daughter in January 2015.  To distract her attention, she started to work in Wincades in March 2015 as a salesperson earning $4,000/month basic salary and commission of 5% of “successful consultation”.  She had not worked in Wincades before.  On the day of arrest, she had not yet received any salary.

20.  It was stressed that D5 only dealt with one victim, PW11.  Ms Chow urged the court to adopt a humanitarian approach because D5’s daughter will be deprived of the care of both parents.

D2

21.  D2 is aged 31.  He has a criminal record of 3 convictions not similar to the charges in the present case.  In mitigation, Mr Luk told the court that D2 is a partner of a restaurant earning $30,000 a month.  He is married with a 1½ years old daughter, being sole breadwinner of the family.

D3

22.  D3 is 42 years old, earning $30,000 a month as a warehouse assistant.  He is single.  He has no record of criminal conviction. Ms Ko, counsel for D3, informed the court that he contributed $3,000 monthly to his mother who is suffering from cancer.  Ms Ko reminded the court to consider the principle of totality in sentencing D3.

D4

23.  This 34-year-old defendant also has a clear criminal record.  Mr Li, counsel for D4, told the court that D4 is married with a 17 months old son.  His wife is a housewife.  D4, the sole breadwinner of the family, worked in a trading company.  Mr Li informed the court that the present case was the first prosecution of fraud of this kind.  Mr Li most helpfully referred the court to two sentencing cases[1]. He submitted that the usual starting point for loco London silver fraud was 4 years’ imprisonment.  He said while D4 used the title of “general manager”, he was only doing the job of the “salesperson” which should be the basis for his sentence.  Accepting that there was no undue delay or fault on the Prosecution, Mr Li asked the court to take into account the delay in the proceedings.

D6

24.  D6 is 42 years old.  He has a clear record. Mr Tang, counsel for D6, told the court that D6 had suffered anxiety disorder since 2012.  Since the arrest in the case, he could not get any gainful employment.  He is now in the process of divorce.  Mr Tang reminded the court that, while D6 was involved in dealing with 3 victims, one of them, PW10 was allowed to cancel the consultancy agreement and not required to pay the consultancy fee.

D7

25.  D7 has absconded.  Mr Sze, counsel representing D7 previously at the trial, was present to assist the court on the day of delivery of verdict.  Mr Sze said he could not render anything of assistance to the court in mitigation.

26.  The antecedent statement of D7 reveals that she is 45 years of age.  She is still single.  She has 1 previous conviction for the offence of conspiracy to defraud in 2002.

D8

27.  D8 is aged 29.  He has a previous conviction not similar to the offences in the present case.  His antecedent statement reveals that he is married.  His counsel Mr Lau said he was working on a part-time job earning $11,000 a month.

D16

28.  D16 is aged 31 and single.  He has a clear record.  Mr Chan, counsel for D16, says D16 was working as a decoration worker, planning to get married with his girlfriend.  Certificates were produced to prove that D16 had worked as a voluntary worker in the Auxiliary Medical Service in 2008-9.  It was submitted that D16 was only the supervisor of the “call centre”.  He was not the ringleader and had no direct dealings with the clients of Wincades or any of the victims.

THE FRAUDULENT SCHEME WAS A SERIOUS SCAM

29.  The present case was a heartless crime of dishonesty targeted on property owners who were already under strenuous financial pressure.  Using the façade of an “accounting firm” helping clients to obtain loan, Wincades had no intention to help the victims to secure a loan.  Not only were the victims deceived of exorbitant consultancy fees, they were also decoyed to obtain a “transitional loan” at extortionate interest rate from money lenders recommended by Wincades.  Because of its excessively high interest, the transitional loan put tremendous additional burden to the victims who were already in financial distress.  Having deceived the fees from the anxious property owners, the perpetrators of the fraudulent scheme left the hapless victims struggling with their new debts.  The lives of the victims were seriously disturbed.

30.  There is no tariff for the offence of conspiracy to defraud.  Tsoi Shu, the case cited by counsel for D4, concerns a loco London silver fraud.  In that case, the Court of Appeal said a starting point of 4 years’ imprisonment was usually adopted, the final sentence might have to be increased depending on factors such as the role and involvement of the individual defendant in the fraud, the duration of the fraud and the amount of loss suffered by the victims.  A heavier sentence would be imposed on a defendant who was the mastermind or had a greater involvement with the fraud.

31.  The fraud in the present case was a sophisticated one.  An office was used as a façade of a genuine commercial operation. Cold callers were employed to work in a room at the office of Wincades.  At the police raid, 10 persons were found in this room which was partitioned into 13 booths for fraudulent calls to be made. D4-D8 and other unknown people were engaged as salespersons to lure the victim into signing the consultancy agreement and paying the fees. Other people were employed to “accompany” the victims to go to the money lenders to collect the transitional loans and to go back to Wincades. Debt collector was also engaged when a victim refused to pay the consultancy fee. The scale of the fraudulent operation cannot be said to be small. 

32.  The scam lasted for one year. Wincades was set up as a vehicle to perpetrate the fraud.  It stopped only because of the action of the police.  Solely by adding up the sums paid by the victims in the 18 cases making statements to the police, $2.8 million has been fraudulently obtained.  The victims suffered losses not only of the consultancy fees they had been conned, but also the extortionate interests they had to pay for the transitional loan arranged for them by the scammers. If they cannot afford to repay the loan, their properties might be forced to be sold for the repayment of the loan.

33.  In my judgment, the seriousness of the fraud of this kind is certainly no less than the loco London silver fraud.  Both kinds of frauds were designed to cheat the gullible members of the public. The sentence must have deterrent effect. Anyone who joined in the fraud will expect a serious sentence with imprisonment at a starting point no less than 4 years. The fraudsters who were more involved must receive a heavier sentence.

CULPABILITY OF INDIVIDUAL DEFENDANTS

Charge 1

D1 and D3

34.  The fraudulent activities commenced soon after Wincades was incorporated and its bank account with the Hang Seng Bank opened.  I found that Wincades was established to perpetrate the fraud and the bank account was opened and kept as a vehicle to receive and dispose of the consultancy fee fraudulently obtained from its clients.

35.  D1 and D3 were the sole director and shareholder of Wincades at different stages of the scam.  Wincades was incorporated in Hong Kong on 27 March 2014. D1 was the first and sole shareholder and sole director.  In September 2014, D1 resigned as director and transferred his shares to D3 who became the sole director and shareholder of Wincades.  At the first phase of the operation of Wincades, D1 was a signatory of Wincades’ Hang Seng Bank account, while D3 was the sole signatory of the account in the latter phase.  While I will not sentence them as the masterminds of the scam, I consider that they played pivotal roles in the scheme.  Without their participation, the fraudulent scheme could not get off the ground.

36.  For each of D1 and D3, I adopt 6 years’ imprisonment as the starting point for Charge 1.

THE SALESPERSONS

37.  I will adopt 4 years’ imprisonment as the basic starting point on Charge 1 for any salespersons who joined the conspiracy to work in the front line.  The salespersons who were more involved and caused much greater loss to victim than others have to receive a higher sentence to reflect their higher degree of involvement.

D4 and D5

38.  I take 4 years’ imprisonment as the starting point for D4 and D5.

D6, D7 and D8

39.  D6 handled the applications of PW5, PW8 and PW10 and deceived them altogether around $230,000.  D7 dealt with applications of PW2, PW12 and PW13, deceiving them a total of about $730,000. D8 personally handled application of PW1 and deceived him $640,000.  D8 was also involved in the application of PW2 (mainly dealt with by D7), and application of PW36 (when the original salesperson was said to have left Wincades).  I find these 3 defendants had more involvements in the scam and caused very significant financial loss to the victims.  I will take 4 ½ years’ imprisonment as starting point for each of them.

D16

40.  D16 was not the frontline person in the scam.  However he was one of the two supervisors of the cold callers responsible for making the fraudulent calls to lure the victims into the trap. He was also responsible for training the new callers.  I find that he played a more important role than the ordinary salesperson.  Taking into account that he might only have joined the conspiracy on 2 March 2015 (as he so claimed in his explanation to the police), I take 4½ years’ imprisonment as the starting point for him.

Charge 2

41.  During the charge period for one year, Wincades’ savings account received about $4.7 million.  It would appear that most of the deposits were then transferred to the current account.  In order to avoid double accounting, I would ignore the deposits received in the current account for the purpose of sentencing on this charge. 

42.  In my judgment, the account was opened and maintained for the perpetration of the scam.  The criminal liabilities of D1 to D3 in relation to Charge 2 should not only be restricted to the $1.49 million traceable in the account.  There is no evidence before the court that the rest of the monies received in the account were not proceeds of indictable offence.  I draw the irresistible inference that the remainder of the deposits in the account were also proceeds of the fraud.

43.  D1 and D2 opened the account for Wincades and were signatories of the account until 30 January 2015, when they were replaced by D3. 

44.  From May 2014 to 30 January 2015 (when D1 and D2 were the signatories), the account received a total of about $4.4 million.

45.  While D3 only became the sole signatory on 30 January 2015, I found that he acquired full control of Wincades on 23 September 2014 and he conspired with D1 and D2 allowing them to control the account until he became the sole signatory.  He had agreed with D1 and D2 to use the account for the purpose of dealing with the proceeds of crime.  From October 2014 to March 2015, the account received about $3.1 million.

46.  In sentencing a money laundering case, the sentence passed is primarily to reflect the amount of the illicit money involved.  However in this case, there is evidence to prove that the illicit money was derived from fraud and D1-D3 were aware of the origin of the illicit money. That is an aggravating factor.

47.  The prosecution proceeded against D2 on the basis that he was not a co-conspirator in the conspiracy to defraud. He is to be sentenced on such basis.  His culpability would therefore be treated as lower than that of D1 and D3.

48.  I have taken into account the relevant features identified in HKSAR v Boma Amaso[2] for sentencing in money laundering offence. The predicate offence in the present case was a very serious crime. D1 to D3 all had knowledge of it. These are aggravating features.

49.  For D1 and D3 who were perpetrators of the fraud, I adopt 5 years’ imprisonment as the starting point.  The starting point for D2 would be 4 ½ years’ imprisonment.

ANY REDUCTION OF SENTENCE

50.  Some of the defendants have previous good character.  However I do not think that can justify any reduction in sentence.

51.  I have sympathy for the 2½ years old daughter of D1 and D5, who will lose the care of her parents for some time.  Yet I am afraid that I cannot reduce the sentence on such ground in this heartless crime of dishonesty.

52.  I do not think there was any unreasonable delay on the part of the prosecution.  It is admitted that D3-8 and D16 were arrested in March and April 2015. D1 and D2 were arrested on 20 January 2016.  The defendants were charged on 29 January 2016 and first brought to court on 3 February 2016.  Given the number of victims involved and the need to obtain bank records, the 10-month investigation after the police raid can hardly be said to be unreasonably long.  After the case was transferred to the District Court, the case could not be set down for trial until 10 November 2016 for reasons mainly to facilitate some defendants to apply for legal aid. I cannot find any fault on the part of the prosecution. I am afraid no discount of sentence can be allowed for the delay.

53.  I have taken into account everything said by counsel in mitigation, I can see nothing to reduce the sentence of any of the defendants, including D7 who is absent and unrepresented.

54.  I find that the commission of the offence in Charge 2 was part and partial of the participation of D1 and D3 in the scam.  The sentence in Charge 2 for D1 and D3 will run concurrently with the sentence in Charge 1.

THE SENTENCE

55.  The defendants are sentenced as follows: -

Charge 1

D1 – 6 years’ imprisonment;

D3 - 6 years’ imprisonment;

D4 - 4 years’ imprisonment;

D5 - 4 years’ imprisonment;

D6 – 4 ½ years’ imprisonment;

D7 – 4 ½ years’ imprisonment;

D8 - 4 ½ years’ imprisonment;

D16 - 4½ years’ imprisonment;

Charge 2

D1 – 5 years’ imprisonment; concurrent with Charge 1;

D2 - 4 ½ years’ imprisonment;

D3 - 5 years’ imprisonment; concurrent with Charge 1.