HKSAR v. TSE SUI LUEN AND OTHERS

DCCC 350 of 2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE No. 350 of 2006

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REASONS FOR VERDICT

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Introduction

The Defendants

1.  All the defendants were employed by Tse Sui Luen Jewellery (International) Limited, (TSL), at various times during the periods covered by the charges.

2.  D1 is the founder of the company which was publicly listed in 1987. D1 was the chairman of TSL until his bankruptcy in September 2000. D1 was never the Chief Executive Officer of TSL. After his bankruptcy he stayed on with the company as a consultant.

3.  D2 is the son of D1 and was a director of the company in 1996. After his father’s bankruptcy he took over as its Chairman and Chief Executive. Following certain revelations made at a meeting of the Board of Directors of TSL on the 18^th December 2002, D2 stood down from his position as Chief Executive but he stayed on as Chairman of the company.

4.  On the day following that Board meeting, D4 took over as temporary Chief Executive of TSL. He did not sign a contract until the 7^th January 2003. This was a temporary contract for a period of 6 months. According to a prosecution witness Gerald Dobby, PW35, D2 wished to be reappointed CEO of TSL once an investigation into the matters disclosed at the aforementioned Board of Directors meeting had been completed.

5.  D3 became the Finance Director of the company on the 28^th August 2000 and remained in that position until May 2003.

6.  D5 joined TSL in 1986 and worked in the Jewelry Showroom Division of the company. In 1996 he became the General Manager of the Business Promotion Department of the Showroom Division and in March 2000 he was appointed General Manager of the Showroom Division.

7.  Unlike the other four defendants, D5 was never a director of TSL.

8.  D2, D4 and D5 were still in position when the ICAC raided TSL offices in April 2005.

The charges

Charges 1 –8 - The Overseas Companies

9.  The first 8 charges are paired conspiracy charges of offering advantages to agents and false accounting covering the period from the 2^nd August 1996 to the 30^th April 2003.

10.  They all concern the operation of the Jewelry Showroom Division of TSL. In 1996 TSL operated 5 showrooms in Hong Kong. The showrooms were patronized by tourists brought to the showrooms by travel agencies. In order to encourage travel agents to bring tourists to patronize the showrooms, TSL offered them commission based on the number of tourists brought to the showrooms and the amount of money they spent.

11.  In February 1996 TSL showrooms were visited by ICAC officers who searched the offices of TSL and interviewed staff members in relation to alleged illegal commission payments made to employees of a  travel agency.

12.  Following that visit, a group of senior TSL staff were tasked to look into this issue. They devised a scheme called the “James Bond Project” whereby monies were paid to an overseas company purportedly on the basis that the overseas company would procure tourists for TSL showrooms and be remunerated on a head count basis.

13.  The prosecution case was that this was a bogus arrangement. In reality the overseas company provided no services and was simply a money transfer vehicle. Monies sent to the overseas company would be channelled back to Hong Kong and distributed in cash by showroom staff to agents of travel agencies including payments made without the consent of the principals of such agencies.

14.  As a necessary part of the scheme, false accounting documents would be created. False invoices would be supplied to TSL by the overseas companies. These invoices would be used for the preparation of payment requisitions by TSL authorising payments to the overseas companies. These records were kept for accounting purposes.

15.  There would be no record of payments made under this scheme. The arrangement would be commercially advantageous to TSL as the recipients would be more disposed to patronise TSL showrooms than those of other jewelry companies which did not offer this advantage. The false documentation would also enable TSL to claim tax relief in respect of the bogus payments purportedly made to the overseas companies. The scheme would also have tax advantages for the recipients.

16.  Between 1996 and 2003, three overseas companies were used. Between October 1996 and February 2000 TSL used a  company called Worldwide Tour Marketing ( Labuan) Berhad ( Worldwide).  From March 2000 to April 2003 a company called Brighouse Consultancy Ltd ( Brighouse). From June 2002 to April 2003 a company called Cinedell Holdings S.A.(Cinedell) was used in conjunction with Brighouse.

17.  The prosecution case was that all the overseas companies were used for the same purposes and that all defendants should be convicted of the first set of paired charges notwithstanding some conspirators left and others joined at various times. The prosecution submitted further that if the court decided that the evidence did not support that conclusion, then the defendants should be convicted of the alternative paired charges which each relate to the use by TSL of the individual overseas companies.

Charges 9 & 10 - The local promoters –  D2, D4 and D5

18.  These charges allege a pair of conspiracies similar to charges 1 to 8, but by utilization of three local business promoters instead of the overseas companies. The charges cover the period from April 2003 to April 2005. The local companies referred to are Golden Speed Travel Service Ltd (Golden Speed), Best Joint International Ltd (Best Joint) and Well Zen (Hong Kong) Ltd (Well Zen).

Charges 11 to 13 - Conspiracies to Steal Charges

Charge 11  -   D1, D2, D3 and D5

19.  This charge alleges a conspiracy between the 1^st February 2002 and the 31^st July 2002 to steal $500,000 TSL funds for the benefit of D1, under the guise of bonus payments to D5.

Charge 12 – D2 and D5

20.  This charge alleges a conspiracy between 1^st June 2002 and the 18^th December 2002 to steal $882,952 from TSL for the benefit of D2 by using a bogus commission agreement with Best Joint.

Charge 13- D2 and D3 and charges 15 to 18 – D2

21.  Charge 13 alleges between 2^nd April 2002 and the 9^th July 2002 a conspiracy to steal $1,821,954.18 from TSL under the guise of a bonus payment to Mr Wong Chun-Man, Paul, PW39.

22.  Charges 15 to 18 are alternative charges of theft against D2 only relating to the same monies referred to in charge 13. The prosecution argued that if the court did not conclude the D2 and D3 had conspired together to commit this offence, it should consider whether the prosecution had established to the required standard charges of theft against D2.

Charge 14: Inland Revenue Fraud D2, D4 and D5

23.  This charge alleges a conspiracy between 1^st April 2003 and the 11^th January 2005 to defraud officers of the Inland Revenue Department who were conducting an investigation into the true nature of the commissions paid by TSL to the overseas companies as promotion fees.

Background

24.  TSL was founded by D1. D1 left school with only primary education. At the age of 13 he started work as a goldsmith apprentice. From modest beginnings D1 built up the business and in 1987 it was listed on the Hong Kong Stock Exchange.

25.  TSL at its height owned 19 retail shops and 5 showrooms in Hong Kong, manufacturing operations in China, interests in Taiwan, Malaysia and Thailand and was also in the business of jewelry export.

The Showroom Division of TSLJ

26.  The tourist showrooms are warehouse type outlets operated by TSLJ in Hong Kong exclusively for the sale of jewelry products to overseas tourists brought by local travel agents to the showrooms by bus in tour groups. TSLJ operated a showroom type business since before 1984. The showrooms are codenamed.

27.  The first showroom set up at the TSL headquarters in Hung Hom and was codenamed HO. A showroom code-named HK was established around 1988 in Aberdeen. A second showroom codenamed DY was established in Aberdeen in 1990.

28.  The HE and HM showrooms were established in Hunghom, the latter being set up in 1995. The HM showroom closed down in 1997 because of lack of business.

29.  The last showroom to be established was the HC showroom which operated in Hung Hom from 1998. This showroom dealt in pure gold items and was aimed at the tourists from the mainland.

30.  By 1996, the showroom division was responsible for about 25% of the annual turnover of the TSL group. A letter dated 15 October 2004 to the Inland Revenue from TSL signed by D2 and D4, P1178, stated that at that time showroom revenues represented 34% of TSL Group’s total turnover and was a very important part of TSL Group. The letter went on to state that if the TSL group were forced to close its showroom operation it would financially collapse.

The Travel Agents - commissions

31.  The showrooms were exclusively operated for making sales to overseas tourists brought in by travel agents in guided tour groups and not to members of the general public or individual tourists. The prices in the showrooms were higher than those in TSL’s retail stores and products tailored to meet the tastes of the overseas tourists brought to the particular showrooms. Competitive commissions were paid to lure the travel agents to bring the tourists to the showrooms. At the time of the alleged offences, the showroom business had become highly competitive with a number of new showroom operators entering into the market, particularly at the time of the economic recession in Hong Kong in the late 1990’s. From late 1997 tourists numbers started to drop and the business almost came to a standstill in the period February to July 2003 when the SARS epidemic affected Hong Kong.

32.  The arrangement for commission paid by TSLJ was that there was a guaranteed commission based on a headcount basis of $30 per person plus a percentage of any sales by the tourists they led to the showrooms. Fees were also paid in respect of each bus driven to the showrooms. $100 for a large bus and $50 for a small bus.  In addition to commissions being paid to the agencies, commission was also paid to agency managers and tour guides based on a percentage of the sales to the tourists they introduced to TSLJ.

The Tour Markets

33.  TSL ascribed market code-names to tourists according to where they came from. The  “00” market catered for tourists from Korea, “01” tourists who are English speaking, “02” tourists from Japan, “03 tourists from the mainland or Taiwan, “04” local customers of visitors and “05” tourists from the Philippines, Singapore, Malaysia and Thailand.

34.  For the 01 market, the tours would be brought to the DY and HK showrooms in Aberdeen or the HM showroom in Hung Hom which closed down in 1997. Tours belonging to the 02 market would be brought to the HO showroom whereas the HE showroom would deal with tourists in the 03 market.

35.  Prior to 1998 the 05 market was almost negligible. However, by a letter of appointment dated the 20^th October 1998, P10, a Mr Kenny Cheung Kin Wah (Kenny Cheung) was appointed Senior Business Promotion Manager of TSLJ with effect from the 1^st November 1998. The arrangement was that Kenny Cheung would, in effect, be a freelance business promoter and would be entitled on a monthly basis to 5% of the gross sales generated from the sales made to customers introduced to TSL showrooms by him. This appointment greatly increased the 05 market. In December 1998 Kenny Cheung requested that payments due to him were made to his company, Best Joint. His tourists attended the HO showroom. He was largely responsible for introducing tourists from the Philippines to TSL.

34.    There were also other market codes eg 07,08 and 09. Cheung Siu- fai, Allan, PW2, said that these were known as “Fei Tan”. They occurred when some of the tour guides requested payment of extra commission to them. He said the commission was paid to them without the consent of their principals

February 1996 ICAC Investigation

36.  In February 1996 the ICAC conducted enquiries into certain payments made to the staff of a travel agency by TSL. In February 1996 ICAC officers visited TSL and certain staff were interviewed including Leung Yit-kuen, Rayond, PW1, and D5. At that time PW1 was in charge of the showroom division of TSL. This was the first time such payments by TSL had come under the scrutiny of the ICAC. The TSL management were very keen to ensure that commission payments to travel agency staff continued as without their patronage the showroom business would collapse.

37.  TSL decided that a new method of paying commission to agents should be devised.  A series of meetings was held in 1996 to consider the problem. Most of these meetings were attended by Miss Wong Wai kwong, Anita, PW4, the then Finance director, her assistant Wendy Yim, PW5, Maria Lo, the company secretary, Cheung Siu-fai, Allan, PW2, the senior business promotion manager of the showroom division of TSL and  PW1.  PW1 said that Yuen Wai-kuen, Elliot, PW3, the then Chief Executive Officer of TSL, attended some of the meetings at which crucial matters were discussed.

38.  According to PW1, D1 attended some of the meetings. PW1 said D1 said they should do their best to continue with the showroom business. He agreed that D1 left it to the senior management as to how this goal was to be achieved. PW’s 1 and 2 said they recalled that D1 attended some of the meetings but could not recall which meetings he attended. PW1 and PW4 said they kept D1 informed of developments at the meetings.

The Formative Documents

P 11 Copy Letter of consent dated 1^st April 1996 to Concorde Travel

39.  As a result of the early meetings and after taking legal advice, 199 letters were sent by TSL to the travel agents with whom they did business seeking to obtain the consent of the agencies to TSL making commission and other payments to agency staff and their freelance agents. The letters stated that TSL wished to review their existing business agreements so as to permit TSL to pay “commission or allowances or bonus or any other incentives” to agency staff and their freelance agents at TSL’s discretion. P11 is a copy of such a letter. TSL anticipated that consenting agencies would sign copies of the letters to indicate their acceptance of the proposal.

P12 Minutes of a meeting held on the 1^st June.

40.  On the 1st June 1996 a meeting was held at TSL attended by PW3, PW1, PW4, PW2, PW5 and Maria Lo. The minutes of the meeting were taken by PW5 and produced as P12.

41.  One of the purposes of the meeting was for PW2 to give an update on the response by travel agents to the consent letter of the 1^st April. PW2 reported that 173 agencies had signed copy letters indicating that they consented to payments being made to their staff and freelance agents. He reported that the account of one travel agency was cancelled and discussions were being held as to how to handle the two other agencies. He said that as regards the remaining 23 agencies the time for reply had been extended and would be completed before July. It was agreed that PW2 would follow up the on the letters and conclude the matter as soon as possible. It was agreed that any new agencies would be required to consent to their staff receiving commission payments.

42.  In his evidence in chief PW2 said that TSL did not want to lose the business of any travel agencies. If an agency refused to agree to payments being made to their staff TSL would consider the scale of the business. PW2 said that if the scale was small TSL would end the relationship but if large, TSL had no alternative but to accept.

43.  In cross-examination by counsel for D1, PW2 agreed with counsel that agencies which did not agree to have commission paid to their staff had their accounts cancelled. He said the initial purpose of File B was internal TSL tax planning commission B and even now not sure if legal or not. He agreed the initial purpose of commission B was not about illegal bribes. However in re-examination he said commission B was used for making illegal payments to the staff of travel agents.

44.  What was also agreed at that meeting was that TSL were to alter the coding ascribed to their commission payments. At the time of this meeting the various commission payments made to agencies and their employees were coded C1, C2, M and G. C1 and C2 commission payments went to the agencies, M represented payments to managers and G payments to guides. According to PW2 it was decided that the category names M and G “ were too obvious to be a special kind of commission” and it was decided that that M should become C3 and G, C4. Wendy Yim, PW5, told the court that the group did not want people to know what C3 and C4 denoted. PW5 was told to contact the computer department to arrange for the change of the code names. PW2 said that the old M and G codes would include payments some made with and some without the consent of the agencies.

45.  According to PW2, C1 payments were made to agencies usually which would make its own arrangements as to how to share the payments with their tour guides. Payments made to agencies under C2 denoted that agencies would not distribute part of the payments to tour guides. According to PW1 the split between C1 and C2 was decided by the agencies depending on the internal policy of the agencies which might wish to conceal some payments for tax reasons.

46.  As mentioned above, in addition to the payments C1 to C4 there were payments made under the codes 7,8 and 9.

47.  When TSL negotiated commission terms with agencies, an agent commission code/rate maintenance form (code table) was completed setting the agreed commission rates, per capita fee and bus fee.  P2 is an example of such a form. TSL had a computer system known as the AG system to deal with payments of commission and related expenditure. Once the code table had been completed following negotiations between TSL and the agents, the details were fed into the TSL AG computer system. Payments due under such arrangements were set out in daily commission worksheets, AG 201, (Eg P 3) and monthly AG Commission Summary forms, AG 405, (Eg. P23). All these forms show the commission breakdown under the codes C1 to C4 as well as the agreed per capita rates and bus fees.

48.  Paragraph 6 of the minutes (P12) states that PW2 was to follow up and study the setting up of an overseas company to “ serve as the recipient for ‘ the problematic commission’ as soon as possible and details were to be reported before 20^th June 1996.

Overseas companies-“ James Bond” project – Commission B

49.  What was eventually agreed by the management committee was that an overseas company would be used to solve the difficulty of “problematic commission”. Commission payments were to be divided. There would be two AG systems for payments of commission, one called file A and the other file B. According to PW1 and PW4 the purpose of File B was twofold. They were to cover payments made to agency staff whose employers did not consent to such payments and also for payments to staff who refused to acknowledge receipts. According to PW2 the main problem for TSL was the problem of TSL not being able to get receipts from agency staff and freelance agents for payments of commission.

50.  What the management team proposed was that monies payable to staff should be sent to an offshore company and then channelled back to a Hong Kong bank and withdrawn in cash for payment to agency staff. The overseas company would submit debit notes to TSL requesting payment on a head count basis for tourists purportedly sent by the overseas company to TSL. The initial plan contemplated that claims would be made in respect of 250,000 tourists per annum. The management group called this the “James  Bond Project” and the commission payable under this project was known as commission B as opposed to commission A which was paid openly to agencies and staff who were to provide receipts for payment.

51.  A series of meetings was held by the management group. The prosecution produced a number of documents relating to the various meetings held and proposals discussed at the various meetings.

P16 Accounting Flowchart

52.  P 16 is a document prepared by PW2 for the management group setting out his proposal for the accounting arrangements especially for commissions paid to managers and tour guides of travel agencies. The document is undated but PW2 said he prepared this document before the 20^th June 1996 which was the deadline for him to report back to the group as set at the 1^st June meeting.

53.  The document states as its objective:

“ Accounting arrangement especially for commissions paid to managers and tourist guides of travel agencies”

54.  It states that the basic idea is that TSL will cancel the payment of commissions to managers and tourist guides of those travel agencies from its accounts. PW2 said that the first thing that was looked at was the problem of TSL being unable to obtain receipts from travel agency managers and tour guides. PW2 said this problem was difficult to explain from an accountancy point of view as a company expense relating to commission payments. In his evidence in chief he said this would include payments made to staff without the consent of the employer.

55.  PW2 proposed as a “ basic idea” that TSL would make these commission payments to an overseas company as consultant’s fees or commissions. Cash would then be withdrawn in Hong Kong using another overseas company to pay managers and tour guides. In doing so TSL would not be seen to be making payments directly.

56.  “Step 1” of PW2’s proposal was to set up an overseas company in Labuan Malysia, which is an international offshore financial centre. He stated that the procedure for setting up such a company was simple and there were no restrictions on capital and the nationalities of shareholders. Foreign currencies could be remitted in and out freely.

57.  PW2 suggested that the Malaysian company would sign a contract with TSL which would make the overseas company responsible for overseas promotion of its travel business with a view to tourists arriving in Hong Kong to go to TSL for shopping. In return TSL would pay the Malaysian company “ a contact fee”. PW2 stated that the calculation method and job nature was to be set out clearly in the contract.

58.  Step 1,  paragraph 2 of P16 states:

“ the  person-in –charge of this Malaysian company must have the experience and qualifications for the aforesaid job, thus enabling a plausible explanation to be offered to TSL’s accountants for the necessity of paying the said fee”

59.  Paragraph 3 states :

 “ TSL must really remit the sum overseas through a bank to pay the said Malaysian company”.

“ A BVI company, which has no direct relation with TSL as well as the Malaysian Labuan company superficially, will then be purchased. The said company will also open an account with a bank in Hong Kong. Upon receiving a remittance from TSL, the Labuan company will deduct the charge from the sum the following day and then remit it to the bank account of the BVI company.”

60.  Step 3 of PW2’s proposal states:

“Upon the receipt of the aforesaid remittance, cash will be withdrawn for direct payment to the relevant people or for returning to the shroff office for payment in the current ways.  The whole process is then completed whereas the said sums and the real recipients, which being the people of the travel agencies, bear no direct relation to each other, and thus TSL is able to elude the responsibility.”

61.  The document states that for the amounts involved in the operation after the deduction of the known reportable figures from the actual figures for the period between March 95 and February 96 would be $53.5 million.

62.  The document (at 48 F) has a breakdown of how this figure of $53.5 million is calculated. Payments under category M (C3) were $3 million, $ 5million and $4.5 million for Western, Japanese and Korean, Mainlanders and Taiwanese respectively. Under G (C4) the estimates were $5million and $2.5 million for the first two groups. A third type of commission column was included under codes 7,8 and 9. These were the “Fei Tan” payments referred to above. The chart records under this column $2 million for Western tourists and $32 million for those from Japan and Korea [ ie the 00 and the 02 markets which used the HO showroom.]

63.  PW2 stated in the document that if tax on this sum cannot be avoided, the profits tax payable at the rate of 16.5% would be $8.8 million.

64.  P16 records that the proposal envisaged two contracts:

“Contract A –

TSL appoints the Labuan company as its agent for promoting its inbound tour business overseas for a period of three years.

The Labuan company is responsible for referring about 250,000 customers to TSL for shopping each year.

For customers from the Asia region including Japan, Korea, China and Taiwan, HK$300 will be charged for each person.  The number of customers from this region is estimated at 130,000 persons-time each year.

For customers from other region including America, Europe, Australia, Singapore, Malaysia, Indonesia, Thailand and Philippines, HK$100 will be charged for each person.  The number of customers of this sort is estimated at 100,000 persons-time each year.

Costs required for carrying out this contract:-

The preliminary expenses of one million are inclusive of the formation of a Labuan company, a BVI company, a Hong Kong accountant, a Malaysian accountant and consultant’s fees.

Thereafter, a handling charge of 6% will be levied on a remittance each year.  It will be deducted from the money returned after each remittance.

Contract B -

TSL will at the same time appoint the said Labuan company  an agent for its business in South East Asia including Singapore, Malaysia, Thailand, Philippines, Indonesia and Vietnam as well as New Zealand and Australia.  It will be responsible for developing its jewellery retailing business in these places.  The salaries and so on which CHEUNG Siu-fai [PW2] will receive from the company are to be accounted for as the agent’s fee.  This contract can be signed each year.”

65.  PW2’s suggestions as regards the setting up fee and handling fee were not accepted. P13 is a document drawn up by PW3 during discussions between him and PW2. PW3 suggested that there should be no preliminary expenses incurred for the setting up of the James Bond project and that the handling fee should be 4% not 6% with an annual renewal of the consultancy contract.

66.  A flow chart, P14, was prepared by PW5 on the instructions of PW4 bearing a date the 20^th August 1996 and initialled by PW5. The originals of P13 and P 14 were never found by the ICAC. The court was told this flow chart was prepared with a view to setting out how funds were to be arranged for the payments of commission once the James Bond project was implemented. It was envisaged that the process of remitting money by telegraphic transfer to the Labuan company, that company remitting funds to the HK bank account of the BVI and cash being withdrawn from that account and made available for distribution to the managers and tour guides would take about 14 days. The sum remitted to the Labuan company would be the amount of commission due plus 4% to cover the handling charge. The 4% handling charge would be retained in the Labuan company bank account and the rest remitted to the HK bank account of the BVI.

67.  PW5 prepared a flowchart, P15, in relation to the proposed new commission arrangements for the benefit of the Information Technology Department of TSL. There were to be 2 AG systems. For payments under the James Bond project a separate system with its own menu and password was to be created. According to PW5 access to the separate menu and password was restricted. Such payments are referred to in the document as File B payments. Other payments of commission were referred to as File A payments. The commission forms such as the rate table and monthly commission summaries ( AG405) used in connection with File B payments were all to be marked with the word “ Testing” to distinguish such payments from payments made under File A. Daily commission sheets ( AG201) were only for File A.

68.  PW2 prepared a memorandum, P17, dated the 22^nd August 1996 which he sent to PW5 and copied to PW1 and PW4. It is marked highly confidential and contained instructions to PW5 as to how to allocate commission payments under the proposed James Bond project. TSL categorized tourists by reference to different markets depending on their countries of origin, the 00 to 05 markets.

69.  This document shows that the 7,8 and 9 ( Fei Tan) payments were all to go to “James Bond”, ( ie the overseas company). These types of payments can also be seen in Exhibits 14 and 15 under File B.

70.  PW2 prepared a memorandum marked highly confidential, P18, dated the 7^th September 1996 which he sent to PW1 and PW4. The memorandum sets out in table form a list of all travel agents who supply tourists to TSL. It sets out the new arrangements for paying commission under both File A and File B. The last page of the document (page 57 of the Exhibit bundle) contains a summary showing that of the 277 agencies with whom TSL had dealings, managers and tour guides from 163 agencies were to be receive commission under the File B system. PW5 said that she received this memorandum and arranged the information set out to be input into the 2 AG computer systems.

Projects A and B

71.  PW1 produced P19, an undated confidential memorandum which sets out a resolution decided at a meeting in the office of PW3 attended by PW3, PW1, PW2, PW4 and Miss Maria Lo. It records that at that meeting it was resolved that TSL would proceed with “ two projects in order to solve the AG File B transactions at the fee as agreed [thereunder]:

Project A…….Labuan project

Fee agreed is 4% of the amount involved with a minimum guaranty of HK$ 2 million for the first 12 months

Project B……….. Staff Promotion Commission

Fee agreed is 7.5 % of the amount involved and such fee will be paid in cash on a monthly basis

EFFECTIVE DATE ……… 1^st of October 1996”

72.  The memorandum was signed by all who attended the meeting.

73.  It was agreed that the overseas company was to be set up by PW2 who would resign from TSL.  When being cross-examined by counsel for D1 as to how it came about PW2 was to set up the overseas company, PW1 stated that PW2 was the only one who dared to do it. According to P19, PW2 would receive 4% of the monies sent to the overseas company under project A of the AG File B transactions with a guaranteed minimum of $2 million.

74.  PW1 told the court that the reason to divide File B commission into project A and B was because the sums to be paid were so huge. PW4 said that if all the monies were paid to the overseas company it would appear unusual.

75.  It was therefore decided that some of the File B commission should be recorded as being payable to showroom staff as promotional commission. No commission was in fact paid to staff but 7.5% of the amounts notionally paid to them would be paid to the purported recipients to cover their increased tax liabilities. For accounting purposes, the staff notionally paid were required to sign documents acknowledging receipt of the monies.

The business promotion agreement with Worldwide

76.  P20 are the minutes of a meeting held on the 25^th September 1996 by the Board of Directors of TSL. According to the minutes, present were D1, D2, PW1 and PW4. The court was told that there was no actual meeting, it was conducted by circulation of minutes and was referred to as a paper meeting. The minutes were initialled by D2 as director and signed by D1 as chairman of TSL.

77.  The minutes record that it was reported at the meeting that a subsidiary of TSL called Bonaventure ( International ) Jewelry Limited ( Bonaventure) would enter into a business promotion agreement with Worldwide.

78.  PW2 arranged to set up Worldwide as a vehicle to facilitate the execution of the James Bond project.

79.  Under the terms of the business promotion agreement, Worldwide  agreed to contact, liaise, negotiate and co-ordinate with travel agents outside Hong Kong in order to attract and ensure that their clients while travelling as tourists/visitors in Hong Kong will be visiting Bonaventure’s designated showrooms operated by TSL.

80.  The minutes record that it was resolved at the meeting that Bonaventure be appointed as agent of TSL with full power to enter into the agreement for such purpose, the board of Bonaventure be authorized to do all things and to sign all documents in connection with the agreement. TSL resolved to indemnify Bonaventure against any liabilities.

81.  P 21 are the minutes of a paper meeting of the Board of Directors of Bonaventure held on the same date and is in similar terms to P20. The minutes were initialled by D2 as a director of Bonaventure and signed by D1 as its chairman.

82.  P22 are the minutes of a paper meeting of the Board of Directors of Bonaventure held on the 25^th September 1996 tabling the proposed business promotion agreement and resolving the approval of one director of Bonaventure to sign the agreement on behalf of the company. This was initialled by D2 and signed by D1 as chairman. A copy of the business promotion agreement was attached to the minutes. It is dated the 27^th September 1996. The original agreement was produced as P24.

83.  P24 was signed at a solicitors’ office in Malaysia by PW1 on behalf of Bonaventure and PW2 on behalf of Worldwide. PW1 said that it was PW2’s idea to have the document signed in Malaysia to make it “look real”. PW1 and PW2 said that it was never intended that Worldwide would ever provide the services referred to in the agreement. PW’s 1 and 2 said that it was never intended that any commission would be paid in accordance with paragraph 5 which stipulates that commission was to be paid for tourists visiting TSL showrooms on a per capita basis, namely 40USD per adult from Japan, Korea, the Mainland and Taiwan, 15 USD per adult for tourists from elsewhere. PW’s1 and 2 said that monies were paid to Worldwide calculated on a sales invoice basis under the commission B system.

84.   PW2 said when the commission B system was put in place he resigned from TSL by letter but in fact carried on being responsible for the showroom business and liaising with Hong Kong travel agencies. PW1 was in overall charge of the showroom operation but PW2 was directly responsible for the English speaking showrooms, HK, DY and HM. PW2 had received tertiary education and had a good command of English. PW2 said that D5 was directly responsible for the HE and HO showrooms. PW2 said he told D5 about the arrangements for commission B to be paid via overseas companies back to Hong Kong.

85.  PW2 said he continued to be paid by TSL by way of a consultancy fee of $67,100 per month but received his money via a company called Well Star. He said he moved out of his office on the ground floor of the TSL’s Hung Hom headquaters and rented an office on the 12/F of the same building. TSL reimbursed PW2 in respect of the rental payments.

86.  PW2 also took with him his subordinate at TSL, Chris Chan. His job was to calculate the amounts payable under commission B. Chan would receive monthly computer record reports from TSL in respect of each showroom. Based on these reports Chan would issue invoices on behalf of Worldwide to Bonaventure.

Antonni Business Limited

87.  In order to facilitate the transfer of funds from Worldwide’s bank account in Malaysia  back to Hong Kong it was decided that a BVI company with a bank account in Hong Kong should be used. PW2, through the Bank of East Asia, purchased a company called Antonni Business Ltd. PW2 asked a friend called Miranda Choi Hau-yin to act as the company’s representative and open a bank account in Hong Kong. Miss Choi signed a number of blank cheques which PW2 used to withdraw cash from the Hong Kong account

Commission B under Worldwide

88.  Commission B came into operation in October 1996.

89.  P26 is the first debit note prepared by PW2. It is dated the 11^th November 1996 and addressed to the manager of Bonaventure. It covers the month of October. PW2 said he received AG 405 monthly agent commission summary in respect of each showroom for October 1996 and from that he did an approximate per capita calculation. The showrooms received tourists of different nationalities and PW2 calculated the appropriate per capita charge in apparent compliance with the figure stipulated in paragraph 5 of the business promotion agreement.

90.  The amounts were initially stated in US dollars and then expressed in HK dollars at a given exchange rate. The amount of the first debit note was $3.2m odd. The note purports to seek payment for professional services rendered under the business promotion agreement in respect of 7000 Japanese tourists who patronized the HO showroom, 1,075 tourists from the mainland and Taiwan who visited the HE showroom and 6,320 tourists who visited the HK, HM and DY showrooms. The purported total number of tourists for that one month was 14,395. The debit note was signed by PW2. The banking details for Worldwide in Malaysia were set out in the note.

91.  PW2 said he sent the note to PW1 at TSL by hand. The exhibit was later chopped by the TSL accounts department to signify payment.

92.  After PW1 received the debit note he said he sent it to the TSL finance department where a payment requisition was prepared, P27, which is dated the 14^th November 1996. PW1 said P27 was filled in by PW5 and brought to him for approval. He initialled the “approved by” column of the form. After PW1 approved the requisition it would be returned to the accounts department. PW5 said that in the description column of the requisition the words “promotional fee” were written. PW5 said this is what was written in respect of payments under the commission B system. Where commission A payments were involved, “travel agencies commission” would be written in the description column.

93.  When this exhibit was returned to the finance department PW5 initialled “the authorization for payment” column. This authorization denotes that there is money available in TSL funds to meet the requisition.

94.  The finance department section of the requisition form shows that telegraphic transfers were arranged in respect of the payment of the fee. Two were arranged for separate dates in November and two for separate dates in December. The payment dates would depend on the availability of funds to meet the requisition.

95.  PW5 said the journal entries on the requisition were made by staff of the accounts department.

96.  PW4 said that the payment requisition and debit note were kept for accounting purposes. PW4 told the court that she was the CFO of TSL until February 2000 and at that time the auditors were Deloittes, Touche, Tohmatsu, ( DTT). PW 4 said she never told DTT the real reason for the payments to Worldwide.

97.  Once the funds were transferred to the Malaysian bank account of Worldwide, PW2 would be informed by PW1, PW4 or PW5. PW2 then arranged the monies to be transferred to the account of Antonni. PW2 would then fill in the blank cheques signed by Miranda Choi to make cash withdrawals from the bank account of Antonni for distribution by TSL staff and he would also withdraw his 4% commission.

98.  PW2 said that at his office he would give D5 cash in respect of the commission B payments for the HE and HO showrooms. He said he would not obtain a receipt from D5

99.  PW2 said he was responsible for delivering commission B payments for the HK, HM and DY showrooms although for some agencies PW1 would make the deliveries. PW2 said that commission A payments were made by of the commission division of the showroom department. PW2 said that the bulk of the commission B payments were made to the HE and HO showrooms which were under the control of D5.

100.  PW2 said that one of the problems with having to send the money via the Worldwide bank account in Malaysia was that it took too long before the cash was available for distribution. Most of the managers and tour guides expected payment within days of the sales transactions to which the payments related and this led to cash flow problems. PW2 said that if the need arose it was arranged that commission monies could be prepaid by the accounts department and claimed in the next payment requisition. Payment requisition P 952 is an example of where this was done.

101.  In order to alleviate this problem and to save money on the costs of telegraphic transfers, it was decided that payments on the payment requisitions would be by way of cash drawn by PW2. The payment requisition would be stamped with the chop of Worldwide and signed by PW2.

Project B – “Staff promotional commissions”

102.  According to PW2, when commission B was introduced in October 1996, it was decided that because of the large sums of money involved it would be preferable not to have the whole sum remitted to Worldwide. It was therefore decided that an alternative method of releasing cash from the system to cover project B would be to have the payments falsely recorded as staff promotional commission. 19 business promotion managers including D5 participated in the scheme which was known as “Project B”. False documentation was generated showing promotional commission payments to showroom staff. The staff selected would sign the receipts and then receive 7.5 % of the amount shown on the receipt to cover their increased tax liability.

103.  The system was introduced in October 1996. PW2 said he told D5 that such an arrangement was to facilitate payments to travel agency staff.

104.  PW2 said that a payment requisition in respect of this first payment was prepared by a member of the showroom staff, Terry Chan – Ex P33. The requisition is dated the 31^st October 1996 and purports to cover promotional commission for the five showrooms. The payee is shown as cash and the “cash to” column is signed by Terry Chan. PW1 initialled the “approved by” column and PW5 initialled the “authorization for payment” column. The total payment is $1.2million odd . The finance department section shows in the HKD amount column that the amount was to be divided into two cash amounts. One amount was for 7.5% of the total amount which was given to PW2 to distribute to the showroom staff who had signed the staff promotional commission receipts to meet their increased tax liability. The balance of 92.5% was used by PW2 to distribute as commission B.

105.  The 17 signed supporting receipts for P33 were produced as P34. The first of the signed receipts exhibited was signed by D5 in the sum of $177,461 and purports to relate to the HO showroom.

106.  This system continued until the end of September 1997. There were a number of reasons given for its discontinuance. PW’s 1 and 2 said some recipients were concerned about their increased tax liability and that the 7.5% of the total paid to them was insufficient to cover this liability. Another reason was that by the end of September 1997 the showroom business was in decline and there was therefore no need to divide the payments. The effect of its discontinuance was that all commission B payments then went to Worldwide so that PW2 would get 4% of the whole of such payments rather than 4% of the project A payments only. Also in 1997 the HM showroom had ceased business.

107.  The total amount of money paid out under project B was just over $10.8 million of which $10 million odd  purported to be paid to agency staff. The total amount purported to be paid to D5 was $1,297,399.

The HC Showroom

108.  In 1999 it was decided to set up a showroom which would deal in pure gold ornaments. According to PW1 it was agreed that because of the relatively lower profit margin, it was decided that commission of 2% would be paid to travel agents. D5 was in charge of this showroom. According to PW1 it was decided that the commission payments would be disguised as entertainment expenses payable to D5 who would submit false invoices.

109.  The first payment requisition was raised on the 1^st April 1999 for the month of March in the sum of $46,978, P291. The supporting documentation consisted of a series of invoices issued by various restaurants. Books of blank receipt books were seised by ICAC from TSL and it was apparent that many of the receipts had come from these books and were obviously false. The falsity of the documents was not disputed.

110.  PW4 told the court that she discussed with PW1 and D5 the entertainment fees to pay the commission for the HC showroom. She said that at that time D5 knew of the file B payments and had no difficulty in understanding what the file B payments were about.

111.  PW1 was taken by counsel for D5 through the various payment requisitions submitted by D5 in respect of the HC showroom and when compared with the turnover for those months the amounts claimed were just under 1% of the HC turnover. PW1 said he made a mistake as to the time frame and that the amount was increased to 2% at a later stage. It was suggested that the entertainment expense claims were used simply as a vehicle to remunerate D5 by allowing him a percentage of the profits. It was suggested it was a matter for D5 as to how he spent the money. PW1 disagreed that this percentage of profit was intended to remunerate D5 for running the showrooms.

112.  PW4 also gave evidence to the affect that there was this arrangement with D5 concerning the HC showroom. She said that she recollected that an arrangement was made for commission B to be paid limited to 2%.

Kenny Cheung kin-wah

113.  Kenny Cheung was appointed as a senior promotion manager for TSLJ  by a letter of appointment dated the 20^th October 1998 (P 10)

114.  It was agreed that he should bring in or introduce customers to TSL showrooms and was to receive 5% commission of the monthly gross sales to such customers which was to cover any expenses incurred by him.

115.  PW1 said that Kenny Cheung was approached after the showroom business started to drop in 1998. PW1 said that there were discussions between D2, D5 and PW1 as to whether or not they could find someone outside to bring in more business. PW1 said that D5 introduced Kenny Cheung who had worked for a jewelry company which did business with a travel agency which brought in many tourists from the Philippines. This was a market which TSL had not touched before. PW1 said that Kenny Cheung introduced business to the HO showroom and used the company name Best Joint.

Remuneration of PW2 for running Worldwide

116.  The initial terms of remuneration for PW2 under the business promotion agreement between Bonaventure and Worldwide were set out in the Confidential Memorandum, P19, which stated the effective date was to be the 1^st October 1996.

117.  A second confidential memorandum, P35, dated the 2^nd December 1998 varied the terms of PW2’s remuneration. It stated that with effect from the 1^st October 1998 his fee was to be 5% of the “File B” amount plus a fixed amount of $30,000. The fee was to be set at a minimum of $92,500 and a maximum of $167,000 from 1.10.98 to 28.2.99 and shall continue until a new arrangement.

118.  The memorandum was signed by a Kenneth Kiu who succeeded PW4 as CEO, PW4, PW1 and PW2.

119.  That memorandum remained in force until a third confidential memorandum was entered into on the 20^th December 1999, P 39. This stated that with effect from the 1^st January 2000 “ a fixed additional fee of HK$90,000 shall be paid in advance at the beginning of the month regardless of the fluctuation of the normal pax fee.” This memorandum was signed by PW’s 1,2 and 4.

Dishonest actions of PW1 and PW2 in relation to TSL’s commission B funds

120.  From late 1997 onwards the economy of Hong Kong in common with many other Asian countries started to deteriorate. This had significant effects on the showroom business of TSL. The payments to Worldwide dropped and in consequence so did the income of PW2. Also, bonus payments to showroom staff dropped considerably. PW’s 1 and 2 both told the court they had financial problems. Property prices in Hong Kong fell dramatically and both PW1 and 2 said they had invested in the property market.

121.  PW1 said that PW2 admitted to him that he had used Worldwide funds to try to alleviate his personal financial problems. PW1 said he told PW’s 3 and 4 of this and, according to PW1, PW3 said that PW1 would have to sort it out with him otherwise the matter would have to be reported to the police.  According to PW1 this was to be avoided because of the affects on the business of TSL. PW1 said it was decided TSL funds should be used to assist PW2.

122.  PW1 agreed that in or around September 1997 when PW2 disclosed his financial problems to PW1 it was agreed that PW2 would take a loan of $1m from TSL to be repaid interest free. PW1 agreed also that about that time he started to receive payments from PW2 of about $10,000 per month. He said that this was a reward for looking after two travel agents, Express Tours Ltd and Overseas Travel Ltd.

Transfer of the DY and HK Showrooms

123.  In March 1999 TSL disposed of the DY and HK showrooms to a company called Dynamic King. That company was 75% owned by Sander Sau, an employee of TSL and the remaining 25% was owned by TSL. PW1 said it was agreed that TSL would buy goods from TSL and certain members of TSL staff would be kept on. PW1 said when the disposal of the showrooms was negotiated they were not making a profit and TSL had a cash flow problem.

124.  Following disagreements between Sander Sau and TSL, in March 2001, TSL sold their 25% share in Dynamic King. The DY showroom was brought back under the exclusive control of TSL and HK was run thereafter exclusively by Dynamic King.  During the period the DY showroom was under the control of Dynamic King PW2 worked for Sander Sau as a business consultant earning about $30,000 per month plus commission. PW2, who was having difficulties with Sander Sau over the running of the DY showroom, came back to work for TSL at the DY showroom in March 2001.

The End of the Worldwide business promotion agreement – March 2000

125.  According to PW1, when PW2 moved to work with Sander Sau at Dynamic King, there were disputes between TSL and Dynamic King. They were competing for business and according to PW1, D5 was concerned about the performance of PW2 and that PW2 might give information to Sander Sau detrimental to the interests of TSL. PW1 said that they agreed that it was not in the best interests of TSL to continue with the arrangement with Worldwide for dealing with the commission B monies.

126.  PW1 said they discussed finding someone reliable to take over from PW2. He said D5 was concerned that the monies were returned to TSL “ in a safe way”. He said that D5 told him he did not know anyone acquainted with such business matters. PW1 said he discussed the matter with his brother Leung Yuet-hang, Steven, PW17. PW1 said his brother agreed to assist. PW1 said that he discussed this proposal with D5 and D5 did not object.

127.  PW1 said PW4 was aware that the arrangement with PW2 was going to be discontinued. According to PW1, he said that PW4 said that as she was going to leave TSL as she did not want to participate any more she advised PW1 to discuss it with D5. PW4 left in February 2000.

128.  PW4 told the court that she had no idea prior to leaving TSL that PW1 was seeking to set up another overseas company to take over from Worldwide. She said she never advised PW1 to discuss this matter with anyone else.

129.  It was suggested to PW1 that he was a greedy person who had long been keen to replace PW2 and Worldwide in running the commission B scheme. PW1 denied this.

130.  Counsel for D1 took P1 through a series of documents and events in 1999 with a view to establishing that the switch from Worldwide to a company to be controlled by PW1 was planned by PW1 in early 1999 and was motivated by PW1’s greed.

131.  PW1 was referred to the 3 confidential memoranda, P19, which came into effect on the 1^st October 1996, P35 dated 2^nd Dec 1998 and P39 dated 20 Dec 99. These memoranda varied the terms of the business promotion agreement between Bonaventure and Worldwide dated October 1996. 

132.  The second confidential memorandum made provision for a variation of the fee agreement only until 28 Feb 1999. The fee was to be increased from 4% to 5%. PW1 said that the fee was increased to 5% as the business of the company had dropped considerably. The agreement that PW2 was to get $2 million guaranteed was dropped and PW2 was to get a minimum of $92,500. PW1 agreed that the maximum was $167,000 per month which would be equivalent to $2 million per annum but he said that the new figure was not guaranteed.

133.  He agreed that the new arrangement was backdated to October 1998 which was the second anniversary of the Bonaventure /Woldwide agreement. PW1 said that he or the then CEO, Kenneth Kiu, would have told D1 of the new arrangements.

134.  The new arrangement was also to conclude at the end of February 1999. This was the day before the disposal of the DY and HK showrooms to Sander Sau.  PW1 said he could not recall what happened about the fee arrangement between March and December 1999, the date of the third confidential memorandum. He said he could not recall what arrangements were made between those dates.

135.  PW1 was also shown Business Incorporation documents, P 1207, for  Cinedell  which was established in the British Virgin Islands ( BVI) on the 9^th March 1999  in the name of Chow Mei Ling, a lady in the employment of PW1’s younger brother, PW17. PW1 said his brother told him later he had set up this company. The company which eventually took over from Worldwide was  Brighouse  which was not established until 24 Feb 2000, P2106. This first director was Leung Wai Yee, PW1’s younger sister.

136.  It was put to PW1 that Cinedell had been set up by PW1 with a view to his taking over the commission B scheme in March 1999 when the DY and HK showrooms went to Sander Sau’s Dynamic King Company as PW1 feared his income was going to drop and he was short of money. PW1 disagreed. He agreed that Brighouse did eventually take over from Worldwide. He disagreed he told no one that he was behind the company. He said he told D5.

137.  PW1 agreed that in September 1997 he started to receive monthly payments of $10,000 from PW2. He denied that because of this he agreed to make regular advances to PW2. He said the two matters were not linked. He agreed at the time he was having financial problems. PW1 said that PW2 said he should look upon the payments as a reward for looking after the accounts of two travel agents, Express Tours Ltd and Overseas Travel Ltd.

138.  PW1 agreed that when PW2 disclosed his financial problems it was arranged that he should take a loan of  $1million from the company. He said it was expected that the advances made in and around September 1997 would be repaid but they would be all interest free. He said a pledge document was prepared in respect of this loan. PW1 said he had no idea whether D1 knew of the advances but agreed he did not tell D1 about the monies he received from PW2.

139.  He agreed that after Sau took over the DY showroom he received monthly payments from him from April 1999 to March 2000. He said the later stopped when he told Sau he did not want to receive any further payments.

140.  PW1 disagreed that the confidential memoranda P19, P 35 and P39 were confidential in that they were not to be disclosed to D1. PW1 said he could recall having discussed the matters set out with D1 although in his evidence in chief he said he could not recall doing so.

141.  PW1 was taken through the payment requisitions for February to October 1998 all prepared and approved by PW1 and PW4 respectively: P 994,998,1000,1001,1003,1004, 1006, 1008, 1010, 1011 and 1013. The later ones referred to a fixed monthly advance promotion fee of $1million. PW1 said he could not recall the details but PW2 and PW4 told him that they had a common agreement there was to be a fund pool of $1million which had to be set up to support the operation of commission B. He said the decision to create the pool was made by him and PW4.

142.  PW1 said that when deciding to sell the DY and HK showrooms it was taken into account that they were not making a profit and TSL was in need of cash flow. A condition attached to the sale of DY to Sau was that Sau had to buy a certain amount of goods from TSL at one go and secondly he had to assist TSL to maintain the sales staff of the showrooms as TSL could not work out a way to lay them off. PW1 said that was why TSL retained a 25% interest. He said Kiu had intended to sell off all at one go.

143.  PW1 was referred by counsel for D1 to 4 payment requisitions relating to payments in September 1999: P1045, 1046, 1067 and 1068. They were all described as advance payments to PW2 and the  first  two were in the sums of  $300,000 and $200,000. They were all prepared by PW4 and approved by PW1. By this time DY and HK showrooms had  been transferred to Sau so only the HE, HO and HC showrooms remained with the TSL group. The Bonaventure / Worldwide business promotion agreement was signed in October 1996 for 3 years. It was suggested that these four advances were made to PW2 because it was not known if the business promotion agreement would be extended. PW1 said he had no idea.

144.  PW1 agreed that a letter extending that agreement, P38, was only signed by him and PW2. PW1 denied he had a plan at that time to take over the commission B payments from PW2 in the near future.

145.  PW1 agreed that  the third confidential memorandum, P39, regarding the Bonaventure/ Worldwide agreement which set the fixed fee at $90,000 was to commence in January 2000 and was not retrospective unlike the two previous confidential memoranda. PW1 said he could not recall why.

146.  PW1 disagreed that the new confidential memorandum was not retrospective so as not to affect the substantial advances made to PW2 in the previous 3 months.

147.  PW1 agreed that the number of advances to PW2 caused inconvenience for him and PW4. PW1 agreed PW4 left around January 2000 but said he did not know why she left.

148.  PW1 agreed that during January 2000 his brother set up the three BVI’s Evergood, Profitful, and Griston. For each company his younger sister was first director and his elder sister was first shareholder. PW1 said this was all arranged by his younger brother. He said he recalled telling him that the purpose was for monies to be diverted via an overseas company to the bank accounts of the three BVI’s in Hong Kong. PW1 did not recall whether he told him it was illegal or not. He agreed he never told his sister what their roles were.

149.  PW17 and PW 20 told the court that the setting up of Cinedell, Brighouse and the three local BVI’s was at the direction of PW1 not PW17.

150.  The total payments to Worldwide were $60m odd.

Brighouse Consultancy Limited

151.  The minutes of a paper Board of Directors meeting (P 40) dated the 24^th February 2000 reported that a business promotion agreement was to be made between Brighouse and Bonaventure. PW1 was given full power to execute the agreement and do all things in connection thereto. The minutes were initialled by, inter alia, D2 and signed by D1 as Chairman of Bonaventure.

152.  The agreement (P41) is in very similar terms to the agreement made between Bonaventure and Worldwide except for the per capita rates for overseas visitors. PW1 said that notwithstanding the terms of the agreement, payments were made to Brighouse on the basis of showroom sales and were a vehicle for concealing the commission B payments.

153.  The agreement was signed on behalf of Brighouse by Chow Mei-ling (PW19) who worked for PW17 in his transportation company. The agreement was signed at a solicitors office in Macau. PW1 said this was on the suggestion of PW17. PW17’s accountant, Chan kim-fai, Ivan, PW20, said he made the arrangements with the solicitors’s firm in Macau.

154.  PW1 said he would obtain the sales data from the showrooms each month and calculate the amount of the commission B payments. PW1 would also have access to an XL file prepared by the accounts department setting out the total commissions due for the month for each showroom. P25 is an example of such a file. This exhibit is dated the 11^th February 2002 and relates to the HO, HE and DY showrooms. PW1 said the fact that it is headed “ Testing” denotes that it relates to commission B payments.

155.  PW1 said he would supply the information to PW17 who would then submit to Bonaventure a debit note in the same way PW2 had done in respect of Worldwide. The debit note would claim payment for professional services rendered pursuant to the agreement dated the 24^th February 2000. The amount claimed would be broken down on a head count basis split between the various showrooms. P42 is the first such debit note submitted and claimed a fee of just over $1.113million. The debit note provides details of Brighouse’s bank account in Jersey.

156.  PW1 said he would hand the debit note to the manager of the accounts department who at that time was May Ng ( PW8) and that department would prepare the payment requisition. P43 is the first payment requisition in respect of payments to Brighouse. PW1 initialled the “prepared by” and “approved by” columns. He could not recall who initialled the “authorization for payment” column. The requisition would then be handed back to PW8 and afterwards the Finance Department would arrange for the transfer of the monies to the Brighouse account in Jersey. The finance department entries show the payments relate to the HO and HE showrooms.

157.  PW1 said that PW17 would then arrange for the monies to come back to the Hong Kong bank accounts of the three BVI’s which had been set up for that purpose, namely Griston, Evergood and Profitful. PW1 said that the agreed handling fee for PW17 was $90,000 per month. PW1 said PW17 would withdraw cash from each of the accounts and give the cash to PW1. PW1 said he would then hand the cash to D5 who would be responsible for its distribution. PW1 said this arrangement continued on a monthly basis.

158.  D3 joined TSL in the last week in August 2000 as the Finance Director. PW1 said that she performed the duties previously carried out by PW4.

159.  PW1 said that a few weeks after she started she asked him to go to her office and told PW1 that she wanted to know more about the commission being sent overseas. PW1 said that as the conversation started D2 was walking past the office and enquired what they were talking about. PW1 said he spent about an hour explaining to them the background of the commission B system, its development and about the commission arrangements with the HC showroom. He said neither of them expressed any dissatisfaction about what they were told. D3 signed many of the requisition payments in respect of Brighouse in the “authorization for payment” column.

160.  PW1 said the conversation with D2 and D3 took place about two weeks after D3 joined TSL which was at the end of August 2000. Immigration records ( D2-45) showed that D2 was not in Hong Kong between the 7^th and 16^th September 2000.

161.  In September 2000, following the bankruptcy of D1, D2 succeeded his father as Chairman of TSL and also became its CEO. D1 stayed on with TSL on a consultancy basis and retained his secretary, Pauline Cheung.

162.  PW1 said the use of Brighouse to make commission B payments continued until April 2003. The records show that the total amount of money paid to Brighouse was just over $46.5 million.

TSL’s Resumption of control of the DY showroom

163.  In March 2001 when the DY showroom came back under TSL control, according to PW1, PW2 was re-engaged by TSL on a contract basis to be the business promoter for the DY showroom and  was paid a commission of 5% of the gross sales. The payments were made via a company called Wellstar International Investment Ltd ( Wellstar) as PW2 was having serious financial problems. PW2 was a director of Wellstar. Later that year PW2 became bankrupt and he made arrangements for payments of commission to be made to a company called Well Zen ( Hong Kong) Ltd which was controlled by a friend of PW2’s. 

164.  PW2 owed money to TSL from commission advanced to him when he was running Worldwide. It was decided that $3000 per month would be deducted from the commission payments made to Wellstar. After PW2’s bankruptcy payments were made to Well Zen gross and PW2 repaid made the monthly repayments in cash.

165.  PW1 said PW2 was reengaged after discussions with D5. When DY was taken back it was necessary to set up a team of in-house or external promoters as in the previous two years TSL did not do much business with Western tourists. PW1 said the meetings were set up with D1 and D2 and that initially PW2 had asked for a loan of $800,000. This arrangement was not made because of the financial problems with TSL and PW2 was facing imminent bankruptcy. PW2 disagreed he asked for $800,000 as a loan.

166.  PW1 said that after PW2 started as the business promoter for the DY showroom, PW2 was required to complete the rate table forms for both commission A and B. The commission B payments for the DY showroom would be included in the payments sent to Brighouse then chanelled back to the Hong Kong  bank accounts of the BVI’s , Profitful, Evergood and Griston. PW1 said he would later give cash for commission B payments to D5 who would give cash to PW2 to make the commission B payments for the DY showroom. PW1 said he was personally responsible for commission B payments to Overseas Travel Limited and Express Tours Ltd.

167.  According to PW2, he told the court that in March 2001, D5 approached him and told him that he was to be responsible for the running of the DY showroom and asked PW2 to work as the showroom business promoter. D5 does not speak English and DY attracted mainly Western tourists. He said the D5 said that TSL would pay PW2 commission of 5% of the DY sales. The commission was to be split, 2% to PW2 and 3% to D5 who said that it was to pay other business promoters.

168.  The first debit note presented to TSL by PW2 in the name of Wellstar was produced as P47. It is dated the 7^th May 2001 and signed by PW2. The note relates to commission payable for April 2001 for the Dynasty showroom. It states that the total sales generated were $1.9 million odd and claims 5% of that for promotional commission, $97,176. PW2 said that PW1 told him the sales figures and he did the calculation. PW2 said the address shown on the debit note was the address of a friend in Kowloon.

169.  P 49 is the corresponding payment requisition which is approved by D2. The requisition shows that payment was to be by way of cheque given to “ Janet” who is he secretary of PW1. Payments to Wellstar continued until December 2001 and thereafter were made to Well Zen. The monthly deductions of $3000 to repay monies owed by PW2 to TSL  started in June 2001. The first such deduction is shown on payment requisition P50 dated the 5^th June 2001.

170.  Under cross-examination by counsel for D5, PW2 said a Peter Wong Wing kei worked as a business promoter for the DY showroom and he estimated D5 paid him. He agreed D5 seldom went to the DY showroom in Aberdeen. PW2 agreed he was responsible for distributing commission B for the DY showroom. PW2 said that PW’s 1,2 and D5 were not only colleagues but close friends and often talked about their jobs. He disagreed he never discussed changes in the 01 market with D5.

CINEDELL HOLDINGS SA  - June 2002 to April 2003

171.  PW1 told the court that in May 2002 D3 asked him to go to her office. He said that D3 told him that Brighouse was handling a huge sum of money. According to PW1, D3 told him she wanted to use one more BVI to handle the money and asked him to approach D5 to discuss the matter. PW1 said he discussed this matter with D5 and later he approached his younger brother, PW17,  about the matter. PW1 said that on his instructions PW17 formed Cinedell and prepared a business promotion agreement similar to the agreement made between Bonaventure and Brighouse. The evidence that PW17 set up Cinedell was contradicted by PW17 and PW20 the accountant who attended to the setting up of the company.

172.  P102 are the minutes of a meeting of the Board of Directors of Bonaventure dated 31^st May 2002. The meeting was by way of circulation of the minutes. Paragraph 3 of the minutes states that PW1 tabled to the meeting a draft business promotion agreement to be entered into by Cinedell, a company incorporated in the British Virgin Islands and Bonaventure, which would act as an agent of TSL, whereby Cinedell would be appointed to contact, liaise, negotiate and co-ordinate with travel agents/ tours outside Hong Kong in order to attract and ensure that their clients while travelling as tourists/visitors in Hong Kong will be visiting designated showrooms operated by TSL. The agreement was for 3 years effective from the 1^st June 2002. PW1 was authorized to execute the agreement.

173.  The minutes are initialled by D3 and PW1 as directors of Bonaventure and signed by D2 as chairman.

174.  PW1 said that his conversation with D3 about using another BVI took place about 10 days before the paper Board meeting on the 31^st May 2002.

175.  PW1 said he went to execute the agreement at the same solicitors in Macau used in connection with the execution of the Brighouse agreement. His nephew, Chris Ching executed the agreement of behalf of Cinedell. PW1 said that, as with the other similar agreements signed by him, this was not a genuine agreement and it was never intended that TSL would pay the 5.5 USD per adult fee as stipulated in paragraph 5.

176.  PW1 said the accounting system for payment of the commission B under this arrangement was the same as for Brighouse. PW1 would ascertain the monthly commission B payments in respect of the HE, HO and DY showrooms and he would decide how much should go to Brighouse and how much to Cinedell.

177.  Monthly debit notes on Cinedell letter heading were issued by PW17 who signed as authorized signatory using the name “Karl R Kett”. Payment requisitions would be raised to meet the payments requested. The monies would go to a Standard Chartered Bank bank account opened in the Channel Islands on behalf of Cinedell and then transferred back to the three Hong Kong bank accounts of Profitful, Evergreen and Griston.

178.  Some of the payment requisitions are initialled by D4 in the “authorization” for payment column. D4 took over from D2 as CEO to TSL in late December 2002, D2 remained Chairman of TSL.

179.  The arrangement to use Cinedell for commission B payments continued until May 2003. $9.2million odd was transferred by TSL to the Cinedell bank account.

180.  PW1 agreed that Cinedell had been set up long before it was used for commission B payments but he denied that the suggestion to use a second overseas company was made by him and not D3.

The events of 2000-2 re the financial affairs of TSL and the appointment of Anglo Chinese/ The debt restructuring

181.  In early 2000 TSL was heavily in debt.  The company had been badly affected by the Asian financial crisis in 1997/8. PW1 was referred by counsel for D2 to the Annual Report of TSL for 2002/3, D2-40. This report recorded the annual profit and loss position of the company over a five year period.

182.  The report shows that in 1999/2000 TSL made a colossal loss. Despite a record turnover of 2.2 billion dollars there was a loss of half a billion dollars. The turnover was high because of the sale of some properties.

183.  In 1999 D2 met Christopher John Howe ( PW32), a director of Anglo Chinese Corporate Finance Limited, ( Anglo Chinese),  through the introduction of one of their clients. On the 25^th February 2000 Anglo Chinese was engaged as a financial adviser to TSL to look into the company’s financial position and liquidity problems which needed to be addressed on an urgent basis.

184.  PW32 was in overall control of Anglo Chinese. He was assisted by Leung  Chi-cheung, Frederick, PW 33, and Angus Au-yeung.

185.  On the 23^rd August 2000, TSL signed a restructuring agreement with a group of local and international banks, D3-29. The indebtedness of the company at that time was $150 million. Under the agreement the company had to divest itself of properties and all non-core assets. It had to reduce its borrowing by $24 million per annum from the 3^rd November 2000. The company’s retail outlets in Taiwan, Malaysia and Singapore were sold.

186.  TSL was required to appoint independent non-executive directors and a new finance director to restore bank and public confidence in TSL.

187.  PW 32 arranged for the appointment of Clive Dobby, PW35, and Frances Lui as independent non-executive directors. The other two non-executive directors were a Mr Hong Po Kui, Martin and  Mr Chui Chi-yun, Robert.

188.  D3 was head hunted by KPMG to become finance director in late August 2000.

189.  In September 2000 D1 became bankrupt and was replaced by D2 as Chairman of TSL.

190.  In early 2002 it was decided to set up a Remunerations Committee comprising a majority of independent non-executive directors to determine the remuneration of the executive directors. At the first meeting held on the 27^th March 2003, PW35 said that at that meeting D2 said that TSL was “cash –strapped” and it was a difficult time for the company.

Charge 11: Conspiracy to Steal $500,999-  February to July 2002 D1, D2, D3 and D5

191.  PW1 told the court that D1 had ceased to be Chairman of TSL  in September 2000 when he was declared bankrupt. Although D1 resigned he continued to work as a consultant and kept on his secretary. PW1 said D1 carried on very much as he did before his bankruptcy.

192.  PW1 told the court that in February 2002, D3 came to his office and said she wanted to talk to him. She said D1 wanted some money but she could not find any way from the company to assist him. D3 said that as the commission system of the showroom was a bit loose she wanted to find a solution out of this area.

193.  PW1 said that D3 suggested issuing some bonus in the name of D5. She said that because of the financial difficulties of the company the bonus had to be issued on various occasions each month. PW1 said D3 mentioned $100,000 each month would be issued as bonus to D5. D3 said that of the $100,000, $15,000 would be deducted for D5 to pay tax. PW1 said that D3 said that D2 knew of the arrangement and that the total would be $500,000 to $600,000. PW1 said that D3 said that as PW1 was a director it would be a bit troublesome if he were involved and it would be simpler using D5. I noted that at about this time, a Remuneration Committee was being set up to review bonus payments to directors. PW1 said D3 said that as PW1 was D5’s supervisor, he should know about the matter.

194.  According to PW1, D3 told him that the company would issue a cheque to D5 and he was to acknowledge receipt. PW1 was to get the money from D5 in the sum of $85,000 which he was to give to D1.

195.  PW1 said he regarded D1 as his boss. D1 received  $50,000 per month as a consultant. Although D1 was no longer the chairman of the company, on the face of it he did nothing different. He still came to work everyday and occupied the same office. He did not continue to attend Board meetings but would do so when invited. D1’s role was to take care of the production line. He said D1 was very concerned with the business of  the showrooms.

196.  PW1 said he did not object to D3’s suggestion. PW1 said D3 told him to remind D5 about the matter. PW1 said he spoke to D5 and told him what D3 had asked. He said that D5 said since they worked for the company they should work according to instructions. PW1 said he later told D3 that D5 was alright with the proposal.

197.  PW1 said that about 2 days after the conversation with D3, D1 came to PW1’s office, and as far as PW1 could recall he said he was in need of money at that time and asked him to offer assistance. PW1 said he told him it was “OK” and he had already arranged it with D3.

198.  PW1 said D1 told him the money could be paid to him and if he was not present it could be given to his secretary, Miss Cheung Ho lin. PW1 said he later received payments of $85.000 from D5 on about 4 occasions. As far as he could recall he was on a business trip to Malaysia on one occasion and he asked D5 to approach D1’s secretary directly. PW1 said that this arrangement  was over a period of about  5 months from February 2002. PW1 said when he received the $85,000 from D5 when he was in his office. D5 usually delivered the money to his office in cash in a brown envelope. He said he did not open the envelope. He understood $85,000 was in the envelope on each occasion

199.  PW1 said on the first occasion he gave the money to D1 directly. PW1 said he told D1 “this is the $85,000” and left him with the envelope.

200.  The relevant payment requisitions were all initialled by D3 in the “authorization for payment” column.  The requisitions were produced as P97, dated 5 March 2002, P98, dated the 27^th March 02, P99, dated 30 April 2002, P100, dated 30 May 2002 and P 101, dated 4 July 2002. P98, P99 and P100 were initialled by D2 in the “approved by” columns.

201.  All the payment requisitions were described as “ Advance Bonus ( HE-2001/2002)”  The payee is recorded as “issue cheque” on P97, P 100 and P 101. The payee on P98 is recorded as cheque and as cash on P99.

202.  The cheques relevant to P97  and P 98 ( P1336 at page 7123) were signed by PW1 and D3. The payee for P97 is D5. P98 is a cash cheque.

203.  The cheques relevant to P99, P100 and P 101 ( P1336) were signed by D2 and D3 and the payee was D5.

204.  PW1 said he knew of no other reason why an advance bonus would be given to D5.

205.  PW1 agreed that he and D5 had annual bonus schemes which he calculated. He was shown copies of such for the years 2000 to 2002, D2-11 to 14. All the schemes were approved by D2 and passed to D3 with the instruction to check if there were sufficient funds. In some cases D3 said payment should be deferred but in no case did she reject payment.

206.  When cross – examined by counsel for D5, PW1 said he did not know why it was suggested the bonus should go to D5 rather than to PW1 direct or why the money had to go through him to D1. PW1 said that if that could be done he would have less work to do. In his evidence-in – chief he had told the court that D3 told him that as PW1 was a director, it would be preferable to use D5.

207.  PW1 denied that D5 knew nothing about this and received the bonus and kept it for himself.

The evidence of Kennes Ho, PW 41, in relation to these 5 payments

208.  She joined TSL in 1988 as a clerk. In 1990 she was promoted to her current position in the Human Resources Department. She looked after payments of salary and general administration work

209.  She said that she ensured employees received their commission payments but she was not responsible for the calculation of bonuses. She said she would receive a completed payment requisitions from the Finance Department with a list of staff members and how much commission to be paid. Based on that information she would usually prepare an autopay.

210.  The witness identified the 5 payment requisitions relevant to this charge. She said she prepared these requisitions on the instructions of D3 without any supporting documentation. She said she prepared and completed the various parts of the requisition as instructed by D3. The “authorization for payment” columns were initialled by D3 and three were approved by D2. She said all the payments were made to D5.

211.  Under cross-examination by counsel for D3, she agreed that employee commission is calculated outside the Human Resources Department by the head of the division concerned. She agreed that the payment requisition is normally prepared by the departmental head and the CFO or CEO authorizes the payment. In March to July 2002 the senior officers were D2 and D3. The  payment requisitions were then sent to the HR department as they had custody of the company cheques. PW 41 said the payments of commission were normally done by way of autopay. The arrangements for the payment of bonuses or commissions were administered by the HR Department as they were sensitive matters. Staff bonuses were confidential matters which had to be kept confidential. The Human Resources department also prepares the annual returns of emoluments.

212.  PW41 said she had no idea that D3 was unable to approve bonus expenses. PW41 said the cheques in relation to these transactions which were signed by PW1 were signed by PW1 after D3 contacted him and told him PW41 would bring him the cheque to sign. She said that PW1 would have an idea they were bonus payments for D5. PW 41 denied she made this up.

213.  It was put to PW41 that D3 gave her calculation sheet which approved these payment requisitions. PW41 was adamant no supporting documents were given to her.

214.  PW41 said the original payment requisitions were required to be filed in the accounts department and she retained copies of the payment requisitions. Original supporting documents are filed in the Human Resources department and not filed in the accounts department.

215.  It was put to PW41 that she had lost the copies of the relevant payment requisitions with the attached supporting documents. PW41 was adamant she had not. She said she gave a copy of the relevant requisitions to a firm of solicitors when making a statement to them about these matters. PW41 said she had retained a copy of the requisitions at her office. She repeated that  said she had never been shown any supporting documents.

216.  The evidence of PW41 was adjourned for her to locate her copies of the relevant documents. When the PW41 was recalled to give evidence some days later she produced her copies of the payment requisitions. P1370 A-E. Counsel for D3 withdrew his suggestion that she had lost them.

217.  It was put to PW41 that on or around the 26^th March when the second instalment was due, D3 called her on the telephone and asked her to make out the a payment requisition and cheque for D5 as the original supporting documents in respect of these payments were retained by her. PW41 repeated that D3 had given her no supporting documents.

218.  PW41 said it was unusual to prepare the requisitions without the supporting documents but D3 told her that she had them. She said that it was not unusual for her to have them in respect of senior staff members. PW41 said she did not know where D3 filed them and she never asked her for a copy.

219.  PW41 was cross-examined in detail about various entries on the payment requisitions and cheques. She denied she had been careless in her handling of these matters save to the extent that her failure to obtain a signature in acknowledgement of receipt for exhibit P1360 (page 7170 of the Exhibits bundle) might be regarded as not following good accounting practice. She said that where various changes were made on the requisitions, for instance, the change from cheques to cash or crossed cheques to uncrossed cheques she did so on the instructions of D3.

220.  Under cross-examination by counsel for D5 PW41 agreed it would not be unusual for her not to have the bonus calculation sheet for the payment requisitions P 97 to 101 because her understanding was at the time they were kept by D3. She said if she had been supplied with the supporting documents she would have made a copy.

Charge 12 Conspiracy to steal-  D2 and D5-  June to Dec 2002- $882,952 for D2

221.  PW1 said that in June 2002 D2 came to his office and said he was in financial difficulty. He said D2 said it was not enough to assist D1 only.

222.  PW1 said D1 told him he had to buy back D1’s share in a fund institution. He said he had been called upon to make various payments as well as interest payments. PW1 said D1 requested him to discuss it with D5 to see if $100,000 could be arranged to be paid to him monthly. PW1 said he was quite surprised and did not know what to do. He said he told D2 he would discuss it with D5 according to D2’s request.

223.  PW1 said he discussed the matter with D5. He said he told him what D2 had said to him. PW1 said they had a quite a lot of discussion and  decided that they would try their best to arrange payments of $100,000 per month to D2.

224.  PW1 said they considered that if they were to increase the commission payments to travel agencies it would be very complicated. It was impossible to increase the sum on commission A as confirmation from the recipients was required.

225.  PW1 said that if they focused on Commission B they had to make quite a lot of changes on the testing rate forms.Later they considered whether the commission paid to business promoters could be increased.

226.  PW1 said they considered they might be able to increase the business promotion fees payable in respect of the DY showroom. At that time PW2 used the company Well Zen to receive his commission of 5% from the net sales of the DY showroom. PW1 said that the problem with this idea was that neither PW1 nor D5 wished PW2 to know anything about TSL’s dealings in relation to D1 and D2.

227.  PW1 said that later on, D5 proposed that he would ask  Kenny Cheung to replace PW2 as the promoter in DY showroom. They could sign a new agreement with Kenny Cheung and the promoter’s fee would be increased to 10%. He said that they roughly calculated that the increase would raise about $100,000 to $200,000 per month. PW1 said that D5 had to reach a consensus with Kenny Cheung.

228.  Kenny Cheung was an outside promoter for the HO showroom and his fees were paid to his company Best Joint. PW1 said it was agreed that  Kenny Cheung should not know the real reason for the payment. PW1 said D5 approached Kenny Cheung and an agreement was reached.

229.  PW1 said that Kenny Cheung got nothing out of the arrangement.

230.  On the 2^nd August 2002 a business promotion agreement (P 106) was signed between Bonaventure and Best Joint whereby Kenny Cheung was to receive 10% of the net sales of the DY showroom as “ Consultant commission”. The agreement was signed by PW1 for Bonaventure and Kenny Cheung for Best Joint. PW2 said he never saw Kenny Cheung work at the DY showroom. He said he met Kenny Cheung before Kenny Cheung joined TSL as he managed a jewelry company. PW2 said Kenny Cheung came to work for TSL through the introduction of D5 and worked in the HO showroom.

231.  PW1 said D5 had to explain to Kenny Cheung as to possibly working with PW2. What was proposed was that Best Joint would get 10% from TSL, then he had to arrange 5% to PW2 and the remaining 5% was handed to D5 who would give it to D2.

232.  PW1 said he mentioned to D3 that Best Joint would take over as the business promoter of the DY showroom and the commission would increase from 5-10%. He asked her to arrange the legal documentation. The legal department at that time was under her supervision

233.  PW1 said that Best Joint did not provide the services for the DY showroom referred to in the agreement. It was understood that of the 10% payable to Best Joint, 5% would be given to Well Zen. It was understood that they would continue to provide promotion services for the DY showroom.

234.  At the time of this agreement, there was in force an agreement made on the 20^th October 1998 ( P10) whereby Kenny Cheung was appointed a senior business manager  and as such entitled to commission of 5% of gross sales to customers introduced to TSL by Kenny Cheung. These customers went to the HO showroom in Hung Hom not the DY showroom in Aberdeen.

235.  PW1 said that each month after the signing of P106, he received a monthly report in respect of figures for DY showroom from the accounts department. He then prepared a report showing the 10 % to be paid to Best Joint. Having received the report, debit notes were prepared in the name of Best Joint by his secretary Janet Yeung. PWI would see them and payment requisitions were prepared.

236.  A monthly report, a debit note signed by Kenny Cheung and payment requisition for the month of July 2002 were produced as P107-9. PW1 said his secretary would contact Kenny Cheung to collect the cheque. PW1 understood that according to the agreement Kenny Cheung would give the cash to D5 who would pass on half to PW2 and the other half to D2.

237.  P109 is a monthly report for July 2002 showing the amount of commission payable to Best Joint in respect of the DY showroom in the sum of $273,078.  It is the same format as for Wellstar and Well Zen monthly report documents. P 107 is the Debit Note for Best Joint dated 3^rd August 2002 for $273,078 on Best Joint letter heading and addressed to Bonaventure for PW1’s attention and states “please pay the amount being promotional commission for July 2002”. It is signed by Kenny Cheung.

238.  P107 is the Debit Note for Best Joint dated 3.8.02 for $273,078 on Best Joint letter heading and addressed to Bonaventure for PW1’s attention and states “please pay the amount being promotional commission for July 2002”. It is signed by Kenny Cheung.

239.  PW1 said when he received the monthly report he would ask his secretary to make a photocopy for Kenny Cheung or tell him the contents. A debit note would be generated and come to TSL, either to him or his secretary

240.  Once the debit note was received, Janice Yeung would prepare the payment requisition. P108 is a payment requisition dated 2 Aug 2002 and the payee is Best Joint. It corresponds with the debit note, P107. The description is “commission refer to attached debit note”. The department is printed as  “DY” and indicates the cheque is to collected by Janet Yeung. PW1 approved the requisition.

241.  PW1 said he did not participate in the distribution of the money. PW1 said that according to the agreement, D5 would split the money equally between PW2 and D2. PW1 said the arrangement continued for a number of months.

242.  Payment requisitions P110-121 were produced covering the months of August, September and November 2002. Two of the “authorization for payment” columns in the debit notes were initialled by D3. The cheque books were kept by the accounts department.

243.  PW1 said that on the 18^th December 2002, there was a Board meeting held by TSL where D2 made certain disclosures concerning monies he had received. PW1 said that a few days after that meeting, D5 approached him and said that D2 did not want the payments to continue. PW1 said that he and D5 decided to send a letter to Best Joint to end the arrangement. The letter dated the 29^th November 2002, P123, stated that “the sales performance had not arrived (sic) to the expected target” and that therefore the commission rate was to be reduced from 10% to 5%. PW1 said they decided to backdate the letter to before the disclosure. PW1 said that it was his understanding the 5% commission for the DY showroom referred to in the letter would go to PW2 who was still providing services for that showroom.

244.  When D2 was interviewed by the compilers of the KPMG Forensic Report and by the ICAC he told them that he did receive money from Kenny Cheung but this was by way of loan which he later repaid. Kenny Cheung supplied a statement to the KPMG to the same effect.

245.  PW2 said he never saw Kenny Cheung work at the DY showroom. He said Kenny Cheung commenced work as a business promoter in 1998. He said he came to work for TSL at the HO showroom through the introduction of D5. PW2 said that the arrangement whereby he received 5% of the DY sales ceased in July 2002. PW2 said that as regards the 5% he received from TSL he paid 3% to D5. In July 2002 the arrangement was changed and he received 2% from Best Joint directly. PW2 said Kenny Cheung was the person in charge of Best Joint and as far as he knew Best Joint carried on no promotional work for the DY showroom. He said he carried on his promotional work for the DY showroom as before.

Board Meeting of the 18^th December 2002

246.  Christopher Howe of Anglo Chinese, PW32, told the court that late on the evening of Saturday the 14^th December 2002, D2 came to see him at this home. He said D2 was very upset about the future of the company. PW32 said D2 wanted to tell him about money he and his father had received which ran counter to advice Anglo Chinese had given him as to how to conduct his business if his company was to be rescued. PW32 said he had had a conversation with D3 concerning TSL’s relationship with certain BVI companies. PW32 said the function and commercial purpose of these companies had not been properly explained to him. PW32 said the BVI’s appeared to make no commercial sense and D3 had previously told him they were tax planning schemes set up by DTT.

247.  PW32 said that D2 told him that he had received cash in a brown envelope as had his father D1.  D2 said he had received $80,000 to $100,000 per month for over 4-5 months. D2 said his father had received a larger amount of money over a period of years. PW32 said that D2 told him the source was from the BVI’s and D2 also mentioned a bonus due to a colleague which D2 had received. The colleague was Paul Wong, the senior executive in TSL’s China operation. He said that D2 mentioned the amount as being around $1.2million. PW 32 said that by the end of the meeting D2 had become hysterical and was in floods of tears.

248.  I bore in mind that the alleged utterances of D2 concerning D1 were hearsay and inadmissible against D1.

249.  PW32 could not recall D2 talking to him about a company called Sino Sources which had dealings with the TSL China operation and was owned by Simon Wong, the brother of Paul Wong, who ran the TSL ‘s China operation.

250.  PW32 said that having discussed these matters with D2, D2 agreed to make full disclosure to the TSL Board of Directors and the TSL advisory team consisting of solicitors from Herbert Smith and Co, KPMG, and Anglo Chinese.

251.  A meeting was held on the 17^th December at the offices of Anglo Chinese. Draft minutes of the meeting were produced, P1297. The meeting was attended by D1, PW35,  Mr Lui, Grant Jamieson of KPMG, Joanna Claydon of Herbert Smith and the three representatives of Anglo Chinese.

252.  Part A of the minutes dealt with commission paid by TSL to BVI companies and certain employees of TSL. The minutes show that TSL had paid commissions of approximately 2 million per month to overseas travel agents who registered as BVI companies, for directing tourist groups to the showroom of TSL in Hong Kong since 1995/6.

253.  The next item stated that D1 had received approximately $80,000 per month from this arrangement.

254.  The minutes state that D2 had received an aggregate of approximately  $100,000 in the past 3-4 months from this arrangement. The minutes also record that part or all the bonus of approximately HK1 million paid to Mr Paul Wong went to D2. In the notes the possibility of false accounting, conspiracy to default or theft and that the whole incident might lead to ICAC investigation.

255.  The minutes note that a full Board meeting was to be held the following day to resolve, inter alia, the situation as regards payments of commission to overseas BVI companies, D2 and D3 to explain their involvement, if any, in the payments of commission, the appointment of a deputy Chairman and CEO, the appointment of KPMG to compile a forensic accounting report, and the authorization of KPMG to inform the bankers of the matters discussed at the meeting.

256.  This Board meeting of the 18^th December 2002 figured prominently in the evidence of many of the prosecution witnesses. At this meeting D2 made disclosures concerning certain financial transactions.

257.  Minutes of the meeting were produced, P 1278. According to the minutes it was agreed at the meeting that “a forensic investigation be carried out in relation to the commission payments made to local and overseas travel agents it having appeared that the monthly Hong Kong dollar payments to which [D2] had referred at the commencement of the meeting may have emanated from the commissions pool and may have been effected through a company or companies incorporated in the British Virgin Islands. The investigation would also enquire in the RMB 2 million “ bonus” which had apparently been intended as a payment to Mr. Paul Wong.”

258.  At that meeting it was also resolved that an independent sub-committee of the board was appointed comprising four independent non-executive directors of the Board to carry out investigations and prepare “ appropriate report on the Company’s affairs”.

259.  KPMG was authorized “to inform HSBC as the co-ordinating bank for the Bank Creditors of the company about the Company’s affairs.”

260.  At a Board meeting held the following day the TSL Board accepted D2’s decision to step down as Chief Executive Officer of TSL. He was replaced in that position by D4 but D2 stayed on as Chairman of the company.

261.  The accuracy of the minutes of the meeting of the 18^th December 2002 was disputed by D2 at the time and he refused to sign them. The minutes were eventually agreed upon without his signature. The minutes were not a full record of what was said. The minutes record that they were not a verbatim account of the discussions which took place at the meeting and purported to be a simple summary of matters discussed.

262.  The minutes show the D2 initially took the chair and informed the board

“between July and November 2002 he had apparently procured for himself from showroom staff sums of money between $60,000 to $180,000 per month.”

“He had apparently given himself a “bonus” of RMB 2 million in April 2002 out of the Company’s China business.”

263.  PW1 said he disagreed that at the meeting D2 had disclosed he had received an inappropriate loan from Kenny Cheung.

264.  According to PW1, D2 told the meeting that he and his father had taken away money from the company. No other witness testified that D2 said anything at the meeting about his father having taken money away.

265.  PW1 told the court that the night before the meeting D1 telephoned him and asked him if the directors would hold a meeting the following day. He said that D2 would mention the theft by them during the meeting. He said that D1 told him that D2 was crazy by believing in Jesus too much. PW1 said that D1 told him that D2 would telephone him and he was to be careful as to what he said as D2 would make an audio recording.

266.  PW1 said about 15 minutes later, D2 telephoned him and told him he was going to disclose everything at the meeting and that PW1 should not be afraid as it would be alright.

267.  After the meeting on the 18^th December, D2 wrote to TSL via his solicitor, Andrew Ng, P880, explaining, with supporting documents, his receipt of the Paul Wong bonus. D2 said he had delayed the handling of Mr Wong’s bonus and had retained possession of it because he had been kept very busy by a number of urgent and important matters which had arisen between July and November 2002. He said he later contacted Paul Wong but he declined to accept payment. The amount of the “bonus” was repaid in January 2003.

268.  Gerald Clive Dobby, PW35, said with regard to the minutes of the meeting held on the 18^th December 2002, that when he signed the minutes of the meeting, P1278, he could recall what happened at the meeting and the minutes reflected what took place at that meeting. PW 35 said he could recall D2 sitting at the top of the table. PW35 said D2 “ said what he said with note-takers there” and it made quite an impact. PW 35 said he was not aware that Herbert Smith had refused permission for D2 to look at its notes of that board meeting. He said he was not aware of hostility between D2 and Herbert Smith.

269.  PW35 agreed that a public announcement (Ex D2-35) was approved unanimously after careful consideration of all the events following on from the disclosures at the December 18^th Board meeting.

270.  Leung Lok-kei, Anny, PW36, is a solicitor and was formerly employed by Herbert Smith as a trainee solicitor in their corporate department under Joanna Claydon. She attended the Board meeting on the 18^th December with Claydon and Mark Johnson, the senior corporate partner of Herbert Smith. She said she knew nothing about TSL before the meeting and was there to take notes. She was not familiar with all the persons present and was assisted by a diagram she drew with the assistance of Joanna Claydon showing where people sat. She said that after the meeting she drew up draft minutes the final version of which was approved by her boss, Mark Johnson. She said they also used the much fuller notes taken by Joanna Claydon.

271.  PW 36 agreed that in her notes of the meeting the words “procured for himself” shown in the first point disclosed by D2 do not appear. In the witness’s note the word “transaction” appears.

272.  PW36 recalled that D2 disputed the accuracy of the minutes. She said she could recall D2 coming to the offices of KPMG to inspect the manuscript notes. PW36 said she could not recall D2 being told to stop making a copy of the notes.

273.  PW’s 33 and 34 both recall D2 telling the board that he received monies from a showroom staff member. PW34 recalled going with D2 to the offices of Herbert Smith to look at some notes but could not recall Herbert Smith were reluctant to show the notes to D2. PW34 recalled there did appear to be some hostility between D2 and PW35.

274.  Manuscript notes taken by Joanna Claydon at the 18^th December meeting were produced as Exhibit D2 –24. The notes record that D2 disclosed at the meeting a “personal tx [transaction] with showroom staff”. PW32 in cross examination said he could not rule out as a possibility that D2 had not used the term “personal transaction” or “personal dealings’ when D2 spoke to him on the 14^th December. PW 32 also agreed with counsel for D2 that the wording of the minutes was unfair to D2.

275.  D2 was also concerned about a letter drafted by  Herbert Smith to the Stock Exchange about the matters disclosed  at the 18^th December Board meeting. Listing rules required the disclosure of price sensitive information. A draft letter was discussed at a Board meeting on the 23^rd December. D2 had reservations about its accuracy and sent an e-mail to Mark Johnson of Herbert Smith stating he would soon have information which he hoped would substantially change the directors’ impressions of the disclosures, D2-43B.

Termination of Brighouse and Bonaventure – The Local Promoters Charges 9 & 10

276.  The day after the Board meeting on the 18^th December 2002, D4 replaced D2 as Chief Executive Officer of TSL and KPMG were  retained to prepare a forensic investigation report into matters raised at the meeting.

277.  PW1 said that he contacted D2 to discuss what attitude they should take as regards the KPMG investigation and to what extent they should disclose information. PW1 said that a few days after D4’ s appointment a meeting was arranged by D2 in PW1’s office with D4.

278.  PW1 said he explained the whole flow and the organisation of the commission system since the ICAC investigation in 1996. He said he told D4 about Worldwide, Brighouse and Cinedell and about illegal commission payments being made without the consent to the staff of travel agencies. PW1 said that D4 said this was a normal arrangement which appears in other trades. PW1 said the meeting lasted for two hours.

279.  PW1 said that D4 suggested that he should write down the whole work flow of commission so PW1 could present it in a fluent way when he met KPMG officers and that he should disclose everything.

280.  PW1 identified a copy of a letter he wrote to KPMG dated 16^th January 2003 enclosing inter alia, the Worldwide and Bonaventure agreement, Board minutes relating to the Brighouse and Cinedell business promotion agreements, selected commission reports, an example of Table A and Table B (testing). PW1 said he obtained these documents from TSL records.

281.  PW1 said he prepared a flow chart, P122, headed “Flow Chart of The  Overseas Promotion Fee ( Table B)” which he provided to KPMG. He said he showed this report to D4 for him to have a look. This evidence was not challenged. He said that D4 amended the document mainly focusing on the presentation and wording. PW1 said that D4 did change something in the document but he could not recall what it was.

282.  This document deals in detail with the TSL commission payment system and spells out clearly the difference between commission Table A and Table B ( testing).

283.  Paragraph 1 of  the flow chart PW1 describes Table A payment as being “ the amount payable to the Travel Agent as evidenced by a written contract between TSL and the applicable Travel Agent. This contract deals with the commission rate, time of payment,etc, and the payments under such are known as ‘Table A’ payments.”

284.  In the chart, PW1 describes Table B as “ the amount payable to employees of the like ( normally tour guides) of the travel Agent as negotiated between the business promotion manager of TSL and the employee directly to ensure that the travel tours contracted for come to TSL first or second to give TSL the opportunity to maximise the amount spent by each passenger ( PAX) contracted to be brought by the Travel Agent to TSL. This is not evidenced in writing nor is it normally disclosed or normally known to the Travel Agent”.

285.  Paragraph 2 deals with the “ Nature of the Commission Payment”

“Table A – Commission payment agreed and accepted by the Travel Agent

Table B- Additional commission payments which are not known to the management of the travel agent.”

286.  Paragraph 4 states that Table B payments are made by “T/T” through the BVI companies.

287.  Paragraph 5 states that for payments under Table B, a Commission Payment report is generated by the accounts department at the end of every month. For both Table A and B commissions are calculated from the commission system which relates back to the tour information entered into it.

288.  Paragraph 6 states that the method of payment for Table B commission is “based on information ( i.e. entitlements due to employees or the like of the travel agent) contained in the monthly commission payment report and statement for Table B entitlements,[ PW1’s] office will prepare data and tell [D5] to inform Brighouse, Cinedell and Best Joint to prepare their invoice for the month”.

289.  Paragraph 7 states that “based on the information provided to promoters by [D5] , an invoice will be prepared by the promoters and delivered to TSL account department to pay”.

290.  Paragraph 8 states that for supporting documentation of the invoice from the promoters, PW1’s “office will prepare supporting ( number of PAX visiting TSL from the Travel Agent/ Average spend etc )and keep for the  reference of TSL”.

291.  Paragraph 9 states that  the “Business Promotion Manager of TSL will receive payment for the promoters equal to the amount of their respective invoices less commission. The BPM will then distribute the funds received from the Promoters to the relevant parties entitled to the same in accordance with their entitlements as set out in the commission rate table originally agreed by the BPM of TSL ( approved by[ PW1]) and calculated by TSL’s commission system”.

292.  Paragraph 10 states that “when determining its cost to do business with a particular Travel Agent, TSL looks at the total cost as set out under Tables  A and B as this is the real cost to it to secure that Travel Agents business. TSL manages such costs to within defined and market parameters to ensure that its business with agents remains profitable after taking into account all payments required to secure such business ( promotion fees, tips , Table A  and B payments etc.)”

293.  PW1 was shown Exhibits P1142 and 1162, payment requisitions for Brighouse and Cinedell dated the 6^th May 2003. He said the “authorization for payment” columns were initialled by D4. These were the last payments for Brighouse and Cinedell.

294.  On the 28^th February 2003 TSL received the KPMG forensic investigation report, P1293, which had been commissioned following the Board meeting of the 18^th December 2002. The report concluded that “the three BVI’s used by TSL since 1996 did not actually perform the services outlined in their business promotion agreements and they appeared to be money transfer vehicles to facilitate payments from TSL to travel agencies”.  Only 8 copies of the report were made and the recipients were required to return the copies they received to KPMG. Receiving the report were D2, D3 and PW1( D4 received the report on their behalf), PW35, F. Lui ( an independent director), PW34, Martin Hung ( an independent director), Herbert Smith ( Martin Johnson), Anglo Chinese ( PW32).

295.  D2 and D4 were sent a copy of the second draft of the KPMG report on the 24^th February 2003 by PW29 ( Mike Watson).

296.  On 29^th July 2003 D2 and D4 signed a letter to the auditors ( P1307) confirming they had reviewed and evaluated the KPMG report. The letter states that having reviewed and evaluated the findings highlighted in the Forensic Report they concluded there had been no

“ b  irregularities involving any member of management, or  employees who have significant roles in the system of internal control”

297.  At the time the report was sent to TSL, commission B payments had virtually stopped due to severe economic downturn caused by the outbreak of the SARS epidemic. Showroom sales, which are dependent on tourists trade, had almost ground to a halt.

298.  PW1 told the court that at that time there were several meetings concerning the restructuring of the commission system principally involving him, D2, D4 and D5. He referred to those persons as “the core team”. PW1 said he felt the principal issue to be addressed was the tax issue. At the time there was an ongoing investigation by IRD into claims for tax deduction by TSL concerning promotional commission fees paid to the BVI’s.

299.  PW1 said that KPMG at that time were the company’s auditors and it was agreed that a copy of the forensic report should be sent to the auditors.

300.  The auditors report for the year 2002/3 was published on the 29^th July 2003 and contained a qualified opinion stating that “HKD 22 million had been paid by TSL to business promoters but the management of TSL had been unable to provide sufficient audit evidence as the nature of the sums paid to such business promoters”. This was the first time there had been such a reservation concerning the accounts of TSL.

301.  On the same day, D2 and D4 represented by letter to KPMG (P1306) that they had reviewed and evaluated the findings of the KPMG report and stated that Brighouse, Cinedell, Best Joint, Well Zen and Golden Speed were not related to TSL.

302.  PW2 of Well Zen had been with TSL for several years and Kenny Cheung of Best Joint was the person who had allegedly loaned money to D2 which D2 said was inappropriate and had been repaid. This matter was dealt with at length in the KPMG Forensic Report.

303.  PW1 said that D4 suggested that TSL should not use offshore companies for commission B payments. They should be made via limited companies registered in Hong Kong. PW1 said the duty of finding the promoters was given to D5. PW1 said there was no intention to discontinue the commission B payments. However under the new arrangements to be made the calculation would be made according to a percentage of the sales, rate tables would no longer be used. PW1 said that based on sales records promoters would hand commission B to business promotion managers  who would distribute the cash amongst the relevant managers and tour guides.

304.  PW1 said that for local promoters D5 suggested Kenny Cheung of Best Joint, PW2 of Well Zen and Wong Siu-wai of Golden Speed Travel. Wong siu-wai was in charge of a travel agency which provided business to TSL. PW1 said that Wong brought in tourists but provided no additional promotional services. PW1 said he had no direct dealings with Wong. This was done by D5.

305.  It was agreed that Well Zen would be appointed the promoter for the DY showroom with commission of 12% of the sales.

306.  Best Joint would be appointed business promoter of the HO showroom with a promotion fee of 20% in respect of the Philippine market and 7% for other tourists.

307.  Golden Speed was to be appointed as business promoter of the HE showroom with a commission rate of 8.5% of the sales.

308.  PW1 said these amounts included commission B payments, handling fees and a tax subsidy.

309.  PW1 was shown P124, the minutes of a Board of Directors meeting of Bonaventure on 2^nd July 2003. The minutes are initialled by PW1 as director and D2 signed as Chairman. This was a meeting by way of circulation of minutes. The minutes refer to a draft promotional agreement between Bonaventure and Well Zen. The agreement was to commence on the 1^st May 2003 for a period of three years. PW1 and D4 were given authority to execute the agreement on behalf of Bonaventure.

310.  The agreement itself, P127, is dated the 4^th July 2003 and provides that the promoter shall be paid a promotion fee of 12% of the net sales of the DY showroom and a fixed monthly fee of $40,000. The commission payable to the promoter of the DY showroom was originally 5% after the DY showroom came back to TSL control in March 2001. The promoter was PW2. On the 2^nd August 2002 the commission rate was increased to 10% and paid to Best Joint (Kenny Cheung). This arrangement is the subject matter of charge 12. By  a letter dated at the end of November 2002 the commission rate was reduced to 5%.

311.   The agreement, P127, is signed by PW1 and D4 on behalf of Bonaventure and PW2 on behalf of Well Zen. PW2 said he never discussed the agreement with D4.

312.  P125 and P 126 are similar minutes to P 124 but refer to the agreements to be entered into by Bonaventure with Golden Speed and Best Joint respectively. The minutes are also initialled by PW1 and signed by D2.

313.  P128 and P129 are the agreements entered into by Bonaventure with Golden Speed and Best Joint respectively. They are in similar terms to P127 and both are signed by PW1 and D4 on behalf of Bonaventure.

314.  P128 relates to the HE  showroom and the promotion fee is 8.5% of the net sales and is signed by Wong Siu wai on behalf of Golden Speed.

315.  P129 relates to the HO showroom and is signed by Kenny Cheung on behalf of Best Joint. The promotion fee is 20% of the net sales to visitors from the Philippines and 7.5% in respect of other visitors.

316.  PW1 said the fees in reality covered commission B payments, and handling fee and a tax subsidy to cover the promoters’ increased tax liability.

317.  PW1 was shown P130, a letter to Best Joint on Bonaventure letter heading dated the 28^th April 2003, effective 1^st May 2003, copied to D4. This letter terminated the existing business promotion agreement entered into with Best Joint on the 2^nd August 2002, P106.

318.  PW1 said these agreements were varied by further agreements signed on the 28^th April 2004, P 131/2/3. These agreements reduced the commissions payable. In respect of Well Zen the reduction was 2%. For Golden Speed it was 1% and for Best Joint the reductions were 2% in respect of the Philippine market and 1% in respect of other tourists. The agreements were signed by PW1 and D4 on behalf of Bonaventure. D5 witnessed the signatures of Wong siu-wai and Kenny Cheung.

319.  PW1 said these arrangements remained until he left TSL in April 2005.

320.  PW2 said that PW1 informed him that TSL would have a new arrangement and would arrange local companies to handle the arrangements of the special commission. TSL would appoint local companies to deal with File B commissions. TSL would pay the local companies an amount to cover non-confirmed commission. If the local company was successful in reducing File B commission it could keep that sum as its reward.

321.  PW2 said that after the commission had been paid, 70% of the remainder would be handed to D5 and shared between D5 and PW1, 40% and 30% respectively. The remaining 30% was kept by him. PW2 said he discussed this matter at a meeting with PW1 and D5. PW2 had told the court that before this arrangement when Well Star or Well Zen received 5% commission, 3% of this would be given by him to D5

322.  PW2 said the 12% figure was reached with PW1 on estimating the expenditure on commission involved.

323.  PW2 said the sum Well Zen received each month was calculated by him. Janet Yeung handed him a worksheet each month and based on that PW2 would prepare his debit note to Bonaventure.

324.  PW2 said that fixed monthly fee of $40,000 payable under the agreement between Bonaventure and Well Zen was payable to Associated Tours. He said this agency refused to acknowledge receipt of commission. He said he gave the money to D5 who gave it to PW1 who gave it to the agency. This was one of the agencies handled by PW1.

325.  PW2 said the 12% fee payable under the agreement was to cover File B payments and his promotion fee.

326.  A number of invoices and related payment requisitions were produced in relation to payments made by TSL under the agreements reached with Well Zen, Best Joint and Golden Speed.

327.  PW2 also produced a summary of file B payments made by him and Well Zen bank reconciliation records (P814 to 835)

328.  Under these arrangements the amounts paid out to by TSL  between May 2003 and February 2005 to Golden Speed, Best Joint and  Well Zen were $26,012,791, $9,819,263 and $8,325,250 respectively.

Charges 13 Conspiracy to Steal $1,821,954 from TSL between 2^nd April 2002 and 9^th July 2002 – ( against D2 and D3). Charges 15-18 alternative theft charges against D2

329.  These charges relate to an alleged theft of money from TSL for the benefit of D2, under the guise of bonus payment to Paul Wong, PW39.

330.  PW39 was the former president of TSL Jewelry group in the Mainland China. The holding company for TSL Jewelry in China was Infinite Assets Corporation(IAC). PW39 held 7.5% of its shares through a company called Mellot which he owned with his wife.

331.  PW39’s terms of employment and remuneration were governed by an employment contract. Since January 1998 he was entitled to a monthly salary of $113,800 and a bonus at the rate of 3.5% based on the net profit of the audited account of IAC in each financial year. The financial year ended on the 28^th February except in leap years.

332.  On the 3^rd July 2001, PW39 resigned from TSL and gave them the required three months notice, P892. He actually stopped work in August as he took some time off. PW1 said that at that time he did not expect any bonus nor did anyone inform him he would be given any bonus.

333.  PW39 said that in October 2001 he attended a lunch in Hong Kong with D1, D2, D3 and Mr Qi to discuss TSL China matters. At the lunch D3 gave him a letter titled “Re Final Payment” dated 10^th October 2001, P1228. The letter stated he was entitled to $78,173 and a cheque for that amount was handed to him. D3 asked PW39 to sign a copy of the letter by way of receipt.

334.  PW39 said on the 6 March 2002 he returned a signed copy of the letter to the TSL asking Rachel Chow about the status of the discretionary bonus referred to in the letter. He supplied his mobile telephone number and email address, (P1229).

335.  On or about the 27 March 2002 he said he had a telephone conversation with D3 in which she informed him that he could collect a cheque. He said he arranged with D3 to meet her in his car outside the TSL headquarters. D3 met him and handed him a cheque, numbered 033909, in the sum of $100,000 payable to him dated the 28 March 2002 (P1336). PW1 said that prior to receiving the cheque he had been provided with a bonus schedule (P886 ) showing he was not entitled to any bonus. PW39 said D3 had informed him the bonus should be zero but because the company considered he had been working there for a long period of time the company gave him a discretionary bonus as an appreciation for his services. At that time PW1 said he did not expect to receive any more money from TSL.

336.  A TSL payment requisition (P879) was prepared (approved by D2 and prepared by D3) on the 27 March 2002 to make the payment of the HK$100,000 to PW39 and can be seen in P879. There is a reference to cheque no. 033909 and “PW”.

337.  PW39 agreed that on the 27^th March 2002 he had attended a luncheon meeting with D2, D3 and Mr Qi in relation to the sale of his interest in IAC to Mr Qi. He denied that he had been given the cheque for $100,000 at that meeting by D3 and was told that there would be more to follow. PW39 was adamant that D3 gave him the cheque in an envelope that evening and that no words were spoken.

338.  PW 35 (“Gerald Dobby”) was a member of the TSL Remuneration Committee with D2 and D3 which met at 4.00pm on the afternoon of the 27^th March 2002. He said that D2 had proposed the TSL China bonus.  He said he sat on the international level and so was not aware of people’s bonuses and so he relied on others to make sure the bonus pool was distributed in a fair and equitable manner He said the CEO and CFO should be in a position to approve the amounts. He said this was the first remuneration committee meeting and they were feeling their way. 

339.  The minutes of that meeting, P 1303, show the amounts of profit for TSL China, 2000-2001 as $81 million and for 2001-2002  $40 million.

340.  On the 27^th March 2002 a “calculation of bonus” document, P887, was signed by D2 and D3. This purported to provide a bonus of $1,921,953 for Paul Wong. On this document there are some manuscript entries: RMB 500.000 (2/4), 500,000 (3/4), 850,000 (11/4) and 154,150.

341.  These entries are consistent with the dates and amounts recorded in four payment requisitions, P879. The first three requisitions are dated the 2^nd, 3^rd and 11^th April and the fourth is dated the 9^th July 2002. All the requisitions are approved by D2 and the “authorisation for payment” columns are initialled by D3.

342.  PW39 said that after receiving the cheque for $100,000 from D3 on the evening of the 27^th March 2002 he heard nothing further about any bonus payment until he met D2 on the 19^th December 2002.

343.  At the 18^th December 2002 Board meeting, D2, made certain disclosures which were subsequently looked into by KPMG at the request of the TSL board. One of those disclosures related to an alleged bonus payment which had been approved in March 2002.

344.  PW39 said that on the 19^th December, D2 contacted him on his mobile phone and arranged to meet him at the Harbour Plaza Hotel in Hunghom that same afternoon. PW39 also received an e-mail from a secretary from TSL stating that D2 wished to contact him, P881. D2 told PW39 on the phone that the company was going to give him some bonus and wanted to audit the numbers with him.

345.  PW39 said they met at the hotel as arranged and D2 came with D1. PW39 said that D2 told him that he had used his name to obtain some money from the company, approximately $2million. PW 39 said that D2 proposed that they share the money. PW39 said that he told D2 he would take legal advice. He said he felt it was not normal. PW39 asked D2 to provide him information about the bonus and D2 said he would fax it over. PW39 said he did not agree to share the money with D2.

346.  PW39 said that later the same day D2 sent him an e-mail with information about the bonus, P882/3. PW 39 said he was unable to understand the references to “add-back”. PW 39 said that after he consulted a lawyer he decided not to accept the “bonus”.

347.  PW39 said that on the 20^th December 2002, D2 sent him an e-mail asking him to confirm the bonus calculation and to provided details of his bank account for payment, P884, and later phoned him to ask for his bank details. PW39 said he refused the bonus and D2 asked him to put it in writing. PW39 faxed a letter to D2, P885.

348.  PW39 said in evidence that he refused to accept the bonus because right from the beginning to the end he did not expect to receive any further payment of bonus. He said he did not consider it appropriate to accept the bonus.

Interviews with the ICAC

349.  D2 when he was interviewed by the ICAC, P1268, about the payments admitted that D3 gave him the sums recorded in the first three requisitions in cash in Hong Kong dollars. As for the final payment D3 gave him a cash cheque. This cheque was cashed by a relative of D2.

350.  D2 told the ICAC he said that after receiving the money it was put away, it was locked up. He said he did not give it to PW39 as it was very difficult to contact him, because he said PW39’s wife was suffering from cancer (counter 595 -601). D2, in his record of interview, P 1268, said he asked his mother to cash the cash cheque. P1282, as he was very busy ( counters 620-695)

351.  D2 said that earlier on Paul Wong had been given a bonus of $100,000 (counters 699 to 711). D2 said at that time Paul Wong was in a rush to go to the United States so it was not mentioned that there would be a further bonus. He said the sum hadn’t been worked out (counters 712-3). D2 said that at that time he had financial burdens (counter 776).

352.  D3 said in her interview with the ICAC, P1271, that she had calculated the Paul Wong’s bonus and made payment (counters 1186-1190). She said Paul Wong had called to press for his bonus (counter 1634). She said he did not press just her but also Human Resources (counter 1664). She said she paid him $100,000 as a preliminary calculation (counters 1672-1682). She said she gave Paul Wong the cheque in the restaurant saying “you take this first” (counter 1790). She said the Remuneration Committee did not approve the $100,000 to Paul Wong. She said “ Er it was because we knew in our hearts, we clearly knew that it was wrong”. (counter 2001-4)

353.  In her second interview, P1274, she said Paul Wong pressed for his bonus (counter 198). She said she gave the money to D2 in cash saying it was Paul Wong’s bonus ( counters 278 –286) on three occasions ( counter (290). She said the last payment of the Paul Wong bonus was a cheque in July ( counters 498-524) which she gave to D2 ( counter 596).

354.  In her third interview, P1272, she said D2 was in urgent need of money (counter 641). She said she could not explain why she wrote cash rather than the name of Paul Wong on the cheque, P1282 (counter 14538C).

Evidence of the Financial advisers and Board Members regarding charges 13,15 –18

355.  PW32, Christopher Howe, said that when D2 came to his home on 14^th or 15^thDecember 2002 D2 told him that he had paid the bonus of Paul Wong to himself.  He thought D2 said the bonus was around $1.2 million.

356.  PW32  said he met D2 again at the office of Anglo Chinese together with Frederick Leung on 16^th December.  PW32 said that D3 repeated what he had said at PW32’s home.

357.  PW33, Frederick Leung, said he attended a meeting with PW32 and D2 at the office of Anglo Chinese on the 16^th December 2002. He said that D2 gave a brief summary of events which included that a bonus of $1.5 million which was to be paid to Paul Wong, had been given to D2.  In cross-examination by counsel for D2, PW33 said he understood the bonus was supposed to be for Paul Wong but somehow it had come into Tommy’s hands and he took it.

358.  PW32 said a meeting was held with D2 and the non-executive directors and others on the 17^th December 2002. PW32 said D2 repeated what he had said previously.

359.  PW33’s account of the 17^th December meeting was the same as that of PW32.

360.  PW32 said there was a TSL Board Meeting on the 18^th December 2002. P1278 are the minutes of the Board Meeting prepared by PW36, Annie Leung. The minutes include the entry:

“Mr. Tse initially took the chair and informed the board of the following …

(ii) he had apparently given himself a “bonus” of RMB 2 millions in April 2002 out of the Company’s China business; …”

361.  PW1 said that at the Board Meeting on the 18^th December 2002, D2 said that he took a bonus of RMB 2 million.  The money was from China.  He said it was another person’s bonus, Paul Wong.  PW1 signed the minutes of the meeting, P1278, and at the time of signing he felt the minutes truly reflected what happened during the meeting.

362.  PW34, Robert Chui, a non-executive director attended the Board Meeting on the 18^th. He said that he recalled D2 saying at the start of the meeting that in April 2002 he had taken RMB 2 million from the company and that he had taken it from the operation of Mainland China and it was for a bonus. He said he initialled the minutes because he was satisfied they accurately represented what happened during the meeting.

363.  PW35, Gerald Dobby, a non-executive director of TSL. He attended the Board Meeting on the 18^th December. He said that he signed the minutes as he believed they accurately reflected what was said at the meeting. D2 said he had given himself “a loan” of RMB 2 million out of the company’s China Business. In cross-examination by counsel for D2, he said D2 was not emotional at the Board Meeting and he had heard D2 say it before on the previous evening.

364.  PW36 Annie Leung was a trainee solicitor with Herbert Smith . She said she was instructed to attend the Board meeting to take a note. She said the minutes reflected what D2 said although it was not a verbatim account.

Charge 14: Conspiracy to defraud IRD officers between 1^st April 2003 and11th January 2005 – D2, D4 and D5

365.  TSL had received correspondence from the IRD concerning commission payments to Splendid Tours and Travel Ltd and PC Tours and Travel Ltd for the period 1993 to 1998 for which there were said to be no acknowledged receipts.

366.  TSL received a further letter dated the 1^st November 2001 from the IRD addressed to D3 ( Ex D3-44) concerning these commission payments and asking for any information or documents substantiating the payments. That letter refers to previous letters from TSL dated the 26^th October 2001 and the 2^nd March 1999.

367.  TSL resolved to appoint DTT as their tax consultants to deal with this matter. DTT sent a letter to the IRD dated the 28^th February 2002, P1233, informing them that they had been appointed by TSL as their tax representatives and seeking an extension of time to reply to the IRD letter of the 1^st November. Leung Wai-wah, Christina, PW 40, a qualified accountant with DTT was one of the DTT staff responsible for handling this matter.

368.  DTT had been TSL’s auditors until August 2001 when they were replaced by KPMG.

369.  The initial meetings and correspondence between TSL, DTT and the IRD focused on the discrepancy between the amount of commission paid by TSL and the amount of such commissions admitted by travel agents to have been received by them. D3, her assistant Lawrence Lai and Janet Woo attended many of such meetings on behalf of TSL. In the meeting notes of a meeting between TSL and DTT dated the 20^th August 2002, D3 is recorded as having expressed concern over the difficulties encountered in obtaining acknowledgement of receipt of commission payments from tourist agents. D3 is recorded as stating that requiring tourist agents to acknowledge receipt results in their bargaining for higher commission rates or losing agents.

370.  TSL were concerned about the IRD issuing a protective assessment on estimated profits of $134 million going back to the year of assessment 1995/6.

371.  DTT were trying to reach a compromise with the IRD before January 2003 fearing that proactive assessments with substantial payments would be issued. DTT emphasized the precarious financial position of TSL and the arrangement TSL had reached with the creditor banks.

372.  PW40 agreed when cross-examined by counsel for D1 that the enquiries by the IRD related to commission payments to travel agencies and not to promotion fees paid by TSL.

373.  PW40 said she was assigned to deal with the matter and was assisted by her sub-ordinate LO Ka-ying, Colleen, PW42, who took notes of all meetings she attended. PW40 said she reported to her supervisor Cheng Siu-wai, Ignatius, a special consultant with DTT. Also one of the senior partners of DTT, Kaiser Kwan, attended some of the meetings and was kept informed of developments.

374.  PW40 said that the qualified opinion by the KMPG auditors in their report dated the 29^th July 2003 relating to promotion fees in the tax year 2002/3 was mentioned by a senior IRD assessor. PW40 agreed that the qualified opinion did not relate to commission payments made by TSL to travel agents.

375.  The statement of accounts issued by DTT to TSL, P 1173, refers to  a meeting on the 13^th August 2003 at which the issue of the qualified opinion was discussed. PW40 agreed this was the first time she became aware of the qualified opinion. PW40 agreed that after DTT became aware of  the KPMG Auditors Report dated the 29^th July containing the qualified opinion the IRD enquiries started to focus on the payments made to  the business promoters referred to in the qualified opinion.

376.  A letter was sent by DTT to the IRD dated the 4^th November 2003, P1374 which refers to Brighouse and describes the company as being a promoter outside HK. PW 40 agreed that this was the first time this was the first time this company had been mentioned in any of the records of dealings with the IRD.

377.  Promotional fees to outside unrelated companies had been mentioned as early as August 2002 at a meeting attended by PW40 and D3, Lawrence Lai and Janet Woo, P1172.

378.  From August 2003, D2 and D4 became more proactive as regards the IRD enquiry. At the meeting on the 11^th August 2003 approaches to be taken with the IRD were discussed. D2 and D3 both attended the next meeting with DTT where there was further talk about a settlement with the IRD in view of the financial situation of TSL.

379.  DTT sent a letter to the IRD dated the 4^th November 2003 stating that in 1999/2000 due to the poor economic environment TSL consulted Brighouse in early 2000 to liaise and co-ordinate with travel agents outside Hong Kong. Supporting documentation including the business promotion agreement was sent with this letter. The letter was approved by Lawrence Lai for TSL.

380.  On the 20^th November 2003 D2 and D3 attended a meeting with DTT where promotion fees paid to promoters were discussed.

381.  Four days later a further meeting was held attended by Lai, PW1 and D5 where this matter was again discussed, P1192. Thereafter there is correspondence between TSL, DTT and IRD. A list purporting to show details of agents whose tourists were arranged by Brighouse to visit TSL showrooms was sent to the IRD. An e-mail, P 1177, dated 4^th Feb 2004  supplying DTT with these details was copied to D2 and D3.

382.  LI Mei- foon, PW56, is an assessor of the IRD. Prior to 2005 he was an assistant assessor. He told the court that in 1996 IRD commenced an investigation into the tax affairs of a local travel agency. He said he came to know about payments made by TSL to this agency and a file was opened in respect of this matter. He was assigned as a case officer and Poon Kwan-keung as the assessor. Their senior was Miss Lai Yuen-yee.

383.  PW 56 said that in 1998 the IRD issued a letter to TSL concerning their commission expenses. He said the IRD found them not that willing to provide information so they opened a separate case file in respect of TSL.

384.  PW56 said that in February 2002 they received a letter from DTT saying they had been appointed as the tax representative of TSL.

385.  On the 14^th August 2003 there was an interview between the IRD and DTT represented by PW40 and her supervisor Mr Cheng with regard to the tax years 1995 through to 1999. The IRD had proposed disallowing 19% of the commission payments TSL alleged to have made. This would incur a tax liability of $11m. Mr Cheng stated that TSL were having serious liquidity problems after the SARS period and were negotiating new terms with their bankers to repay loans. Mr Cheng told the IRD that he was instructed to settle the case with a total tax and penalty not exceeding HK5m.

386.  Officer Lai drew the attention of DTT to the auditor’s qualified opinion in respect of $22million commission payments in the 2002/3 account and expressed concern if similar payments were made during the years under review. Mr Cheng said he was not aware of this issue.

387.  On the 6^th October 2003 PW56 had a telephone conversation with Mr Cheng  (P 1236 ) with regard to certain discrepancies which he had noted in information supplied concerning commission paid to sales agents in the year 2001/2. According to TSL accounts the amount paid was $92,890,706. However in a letter from TSL to the IRD dated the 29^th April 2003 the commission paid to tour companies was $66,673,661, a discrepancy of $26,217,045.

388.  In a letter to the IRD from DTT dated the 4^th November 2003, P 1237, DTT states that the 92million HKD claimed included a substantial amount of promotion fees ($17.5million odd) paid to the promoter for the year.

389.  The letter states that due to poor economic environment in 1999/00, in order to boost sales, TSL engaged Brighouse in early 2000 to liaise and co-ordinate with travel agents outside HK to promote and attract tourists to visit TSL showrooms in Hong Kong. Documents in support were enclosed including the business promotion agreement between Bonaventure and Brighouse. PW56 said this was the first time the IRD had been told about Brighouse or promotion fees.

390.  A meeting was held between DTT and the IRD on the 7^th November 2003 at which Brighouse and its role as a promoter of TSL was discussed. The IRD requested further information.

391.  A further meeting between the same parties was held on the 15^th January 2004 and DTT agreed to supply the contact persons of Brighouse, P 1176 and P 1239.  Officer Lai said she could not discuss settlement without looking at all the relevant documentation and asked DTT to respond to the letters issued to them since May 2003.

392.  On the 28^th January 2004 DTT wrote to the IRD giving the contact details of PW2 as being the Brighouse contact person.

393.  On the 4^th February 2004 Lawrence Lai sent an e-mail to PW40 with a list of agents used by Brighouse, P 1177. This e-mail was copied to PW1, D2, D4, and PW 43.

394.  On the 12^th February 2004 a meeting was held between D2, D4 and representatives of DTT, P1194. PW 42’s handwritten note records that D4 said that expenses are genuine for all types of commission.

395.  At the request of TSL, on the 20^th February 2004, an interview was conducted at the offices of the IRD attended by D2 and D4 for TSL. PW40 and Cheng attended from DTT. As is the practice in these matters, the IRD prepared notes of the interview. The notes were subsequently sent to the “callers” (the interviewees) for examination and if agreed for signature within 30 days. P1242 is a letter dated the 18^th October 2004 from DTT to the IRD with the amended notes of interview. That letter is accompanied by a letter dated the 15^th October 2004 from TSL management signed by D2 and D4.

396.  Paragraph 4 of the interview note records the surprise of D4 when TSL were requested to pay $1.2million odd pursuant to the additional protective profits tax assessment for the year 1997/8. D4 confirmed that all commission and promotion fees were paid to unrelated third parties which did not have any other relationship with TSL Group or TSL management. D4 therefore opined they should be deductible.

397.  In relation to the promotion fee, D4 opined that they had been paid for many years and he saw no problems in claiming for such payments. He said that TSL engaged promoters to influence outbound agents to influence the inbound agents to bring tourists to TSL.

398.  Paragraph 13 records that D4 referred to the qualified opinion in the KPMG auditors report of the 29^th July 2003. He stated that TSL should have deserved an unqualified report. He said that as TSL had to release the audited annual reports for filing to Hong Kong Stock Exchange within certain time limits, TSL did not have enough time to search for the supporting source documents. D4 said that as TSL incurred substantial losses for the year ended 28 Feb 2003, he considered the qualified opinion in the audit report would not jeopardize TSL’s business further, D4 agreed to approve and release the audited financial statements notwithstanding the express reservation made by the auditor.

399.  Paragraph 14 records that the assessor raised the point that the business promotion agreement was signed by a subsidiary. D2 stated that it was commercially viable to use a subsidiary to sign such agreements. D2 said there was another business promotion agreement entered into with another business promoter for those early years but it took some time to locate the said agreements for the officers’ perusal.

400.  Paragraph 15 records that D4 said showroom business had dropped 95% during SARS the previous year, hence the management amended the terms of the business promotion agreement to the effect that payment to promoter was based on certain a percentage of showroom turnover instead of the head count of the tourists multiplied by certain fee per head.

IRD INTERVIEW WITH  PW2

401.  On the 15^th January 2004 at a meeting between IRD and DTT, the IRD requested that they be supplied with the contact person of Brighouse within 2 weeks.

402.  On the 28^th January DTT informed the IRD by letter that PW2 is the contact person, P 1240. On the 30^th January the IRD wrote to PW2 requesting an interview, P 753.

403.  On the 17^th February PW2 had a meeting with DTT concerning promotion fees paid by TSL to Worldwide and Brighouse, P 1176.

404.  On the 23^rd February PW2 appointed DTT as his tax representatives, P752. PW2 said that PW1 told him he should pay for his representation first and he would be reimbursed by TSL.

405.  By letter dated the 23^rd February 2004, D4-42, the IRD requested an interview with PW1.

406.  PW2’s interview with the IRD took place on the 3^rd March 2004. On the 29^th April 2004 the IRD sent PW2 a note of interview, P1245. The covering letter from the IRD requested that the notes be signed and returned to them with any corrections within 30 days.

407.  On the 20^th December 2004 DTT returned the corrected interview note to the IRD, P 1180.

408.  The amended note records the following statements of PW2:

Paragraph 6: PW2 stated he was the contact person in Hong Kong for Brighouse which was a limited company incorporated in the BVI. He emphasized he was not a director or shareholder of the company. He said the company comprised many foreigners and since it had closed in 2003 he was no longer in contact with them and did not know their names. He said the contact person was a Malaysian called Jayne The. He stated what was the purpose of the Brighouse

409.  Paragraphs 13 to 17 concern his dealings with Worldwide. PW 2 said he signed a Business promotion agreement with Bonaventure on behalf of Worldwide. PW2 said there were about 4 shareholders and directors in the company. He did not know who they were. He said his job in Worldwide was similar to his job in Brighouse, he was the contact person at TSL. He said he was paid several $10,000 per month which was collected by his wife who was his then girlfriend in Malaysia. He told the IRD that inbound agents had to rely on outbound agents such as Worldwide and Brighouse for tourist referrals. He said Brighouse and Worldwide promoted TSL to outbound tour agents making sure even before the tourists arrived in HK they would visit TSL showrooms. He said that generally the commission rates offered by to travel agents by jewellers ranged from 20 to 80%. As long as commissions given to overseas tour agents and local tour agents generated reasonable profits, TSL was not concerned to whom the commissions were given. PW 2 said he no longer had contact with the persons in charge of Brighouse and Worldwide.

410.  At paragraph 18, PW2 is recorded as stating that Wellstar was owned by him in the past. He told the IRD it was set up to purchase property but after the market collapsed it accepted commission from TSL and Dynamic King Jewelry as a reward for tourist referrals.

411.  PW2 told the IRD he was a business consultant with Well Zen. That company introduced overseas travellers to TSL.

412.  On the 15^th March 2004, DTT sent to the IRD a report entitled “ Tse Sui Luen Jewellery Company Report on Review of Promotion Fees Paid to Outbound Promoters”(the Deloitte Report). The correspondence was copied to TSL, P 1247.

413.  Part 1 states that the aim of the report is to provide detailed information on payment of promotion fees with Brighouse being taken for review purpose.

414.  It states that the purpose of the review is to facilitate the IRD to determine the deductibility of the promotion payments. It states that since the records are voluminous, the records of transactions in November 2002 were selected for illustration and analysis purposes. The report stated that the information and records were supplied by the management of TSLJ.

415.  On page  3  of the report under the heading “Agreement and Operation” the  services purportedly rendered by Brighouse are set out. This reiterates the services to be provided as set out in the business promotion agreement.

416.  Part VI of the report deals with promoters’ remuneration. It states that

“tours information, including names of inbound travel agents, number and name of tourists, and dates of visiting TSLJ’s showrooms were passed by outbound travel agents to TSLJ.

TSLJ’s staff counted the number of tourists who visited the showrooms and checked with the tours information previously passed to TSLJ

Summary on number of tourists ( PAX) actually visited TSLJ’s showrooms through Brighouse’s efforts….were prepared monthly and approved by the Showroom Director

The Summary was passed to Brighouse at the beginning of the following month. As provided in the Agreement, any discrepancies with the range of 10% variance between the records of Brighouse and TSLJ, the latter’s records prevailed.”

417.  Page 6 of the report states that for the services rendered TSL paid promotion fees on head count basis.

418.  Part VI  of the report is headed “conclusion”. It states that

“…in view of the distinctive showroom business operations and highly competitive market it is justifiable for TSL to employ the services of outside promoters to whom promotion fees are paid. They possess the essential expertise and networks for the arrangement and procurement of overseas travel agents to bring in or introduce tourists to visit TSL showrooms. The success of the showrooms business relies solely on the promoters /travel agents to bring in tourists”.

It goes on to state “ that without promoters TSLJ would have no customers and would be unable to operate its showroom business. It states that the use and payment of promoters to secure overseas tourists to visit its showroom is a fundamental and vital part of the business…..

TSLJ cannot operate its showroom business without the use of promoters, and the thin net profit margin now being earned from the showroom business due to the intense competition, if a certain amount of the fees paid to promoters now or in the future were disallowed by the IRD, then this would make the business unprofitable and force TSLJ to close down, which in turn would cause the financial collapse of the TSL group”.  

IRD Interview with PW1

419.  During the IRD investigation, PW1 was identified as the person in charge of showroom operations and the IRD indicated on the 23^rd February 2004 that they wished to interview him, D4-42.

420.  On the 5^th March 2004 DTT sent a fax to the IRD, P 1249, which refers to an attached letter dated 4^th March 2004 appointing DTT as PW1’s tax representatives. They were present when he was interviewed

421.  PW1 was interviewed by the IRD on the 22^nd March 2004, one week after P 1182, the Deloitte Report, had been sent to the IRD. Notes of the interview, P 1248, were sent to PW1 and DTT on the 28^th May 2004 and returned to the IRD with amendments on the 14^th December 2004, P1183. 

422.  Paragraph 22 of the interview notes deals with topic of  “Promotion fee to Business promoter”

423.  PW1 said TSL started to engage promoters in 1996/7 and there had been no such expenditure before that. He said that they noticed that the business of showrooms was stagnant so they decided to do overseas promotion through a group of middlemen doing promotion work overseas.

424.  He told the IRD that the Anju Jewelry in Central also made payments to overseas promoters for persuading overseas travel agencies to visit their showroom. He said they also paid commission to local tour agents.

425.  PW1 told the IRD that the use of overseas promoters would increase the sales volume of TSLJ.

426.  Paragraph 25 records the interviewing officer Miss Lai asking why Worldwide was chosen and what TSL knew of its background.

427.  PW1 said there “were a batch of middlemen providing this kind of service in the market since a long time ago. When TSL needed the service he looked for suitable group of middlemen. The Hong Kong  contact person was [PW2], a former business comptroller of TSLJ who left in 1996. Through PW2 he met 2 persons in Malaysia Miss Cheng, Jam and a German called Frank aged 50 something who visited HK several times over the past years.

428.  Paragraph 26 of the notes make further references to Jam and Frank.  Miss Lai asked if the background of Worldwide had been checked and if they did not why they believed Worldwide had power to influence overseas tour agents to visit their showrooms. PW1 said that commission was paid on a per capita basis so no loss would be incurred if Worldwide failed to refer any tourists to TSL

429.  Paragraph 28 states that regarding the list of overseas tourists referred by Wordwide, PW1 said the list was faxed to TSL showrooms through PW2. Every month Worldwide sent a debt note to TSL through PW2, but the promotion fee was paid to Worldwide directly by TSL.

430.  At paragraph 29, PW1 indicated that Brighouse was a limited company registered in the British Virgin Islands.  PW1 said that the nature of its promotion fee was the same as that of Worldwide. He said PW2 was the contact person of both companies. He said he believed the two companies were probably owned by same group of persons. PW1 said he did not know shareholders or directors and did not know Chow Mei-LING

431.  At paragraph 32, Officer Poon pointed out the vacuum of several months between the start of Brighouse and the end of Worldwide. PW1 said he did not notice but Worldwide continued to work for TSL during the period. PW1 said TSL did not need to concern itself how the promoters operated. They were only concerned with the end result.

432.  At paragraph 33 Officer Poon asked if PW1 was shareholder and he said he was not nor did he have any direct or indirect interest in Brighouse or Worldwide

433.  At paragraph 34, PW1 deals with the local promotion companies appointed in 2003. PW1 is recorded as saying that because of SARS, business had dropped sharply and around June 2003 new companies were appointed to promote the business of the company. The way of calculation of commission was changed from a per head basis to a percentage of sales.  PW1 said 3 local companies, Best Joint, Golden Speed and Well Zen, were appointed to handle the tourists from 3 main areas.  Well Zen for the European and American countries, Golden Speed  for mainland tourists and Best Joint for the Japanese and Korean market.

434.  PW1 was asked why were chosen and what their backgrounds were. PW1 said the contact persons of the three companies were all engaged in the tourist industry and just like with Worldwide and Brighouse, TSL did not concern itself as to how they operated as long as they brought tourists to TSL. PW1 ‘s tax representative from DTT, Mr Cheng, indicated that he could provide several brief introduction leaflets of Shanghai China International Travel Agency Company Limited printed on the mainland on 18 Nov 2003 stating a visit would be arranged to the TSL showroom. This was put forward as the influential power of the promotional fee.

435.  At paragraph 37 PW1, was asked about the Auditors report for year 2002/3 and the  reservation in that report concerning the payment of $22 million in promotion fees.When giving evidence PW56 agreed with counsel for the prosecution that PW1 said that it was probably because they were pinched for time they could not gather sufficient documents to fully explain the case to the auditor for quelling their concern. The notes of interview were amended to read “the auditor was doubtful because the then documents of record were probably not sufficient”.

Further Correspondence with the IRD

436.  On the 24^th March 2004, DTT sent a letter to the IRD, P 1250, approved by D4, giving a breakdown of promotion fees paid to Brighouse for 2002/3 totalling $13.5 million, with supporting documents.

437.  On the 8^th April 2004 the IRD wrote to PW2, P 1251, requesting information and documents with regard to Worldwide requesting details of his arrangement with the overseas promoters and copies of any correspondence.

438.  The letter also referred to original notice of Profits Tax assessment for Worldwide for 97/8 requesting PW 2 to attempt delivery of the notice on Worldwide.

439.  In response to that letter DTT on the 30^th April 2004 wrote to the IRD, P1252, providing the correspondence address and responsible persons, Mr Meyer and Miss Teh . The letter states that the promoter dissolved about a year after the termination of its services with TSL. The letter also stated that PW2 was unable to contact persons on a trip to Malaysia in April 2004 when he attempted to serve on Worldwide the IRD notice.

440.  The IRD requested information and documents under s.51(4) IRO about Brighouse and made enquiries about the new Hong Kong promoters.

441.  DTT responded to those enquires by letter on the 9^th June 2004, P1254. The letter states that because of SARS TSL took the opportunity to use new promoters and review the promotion arrangements to try and save further costs, improve the system and strengthen the accountability.

442.  The letter went on to state that in view of keen competition and driving forces towards thin profitability management took the view business promoters could not be dispensed with.

443.  The letter referred to local promoters with outbound connections to provide promotion services to ensue the payments of promotion fees were for more value-added services both in the sense of effectiveness in communication and the strengthening of accountability particularly during hard times

444.  The letter stated that in order to control costs by making them relative to revenues generated by their agents, the basis of calculation of promotion fees was changed from a pax fee to a percentage of net sales to secure profitability generated from the services of the promoters.

445.  Enclosed with that letter were the relevant business promotion agreements, details of the promoters and supporting documents

6^th August 2004 IRD site visit to TSL

446.  IRD officers, at the request of TSL, visited the TSL showrooms on the 6^th August 2004. From TSL, PW1, D2, D4 and Janet Woo attended. There were three representatives from DTT.

447.  PW56, Li Mei Foon, the IRD assessor told the court he kept notes of visit to TSL and prepared a note of interview, P2483, which was sent to TSL for confirmation or amendment and correction.

448.  PW 56 said that at the outset, PW1 ushered the officers on a walk round the showrooms to explain the showroom operations. The officers were taken to the HE, HC showrooms and then the HO showroom on the first floor of the building. In the HO showroom PW1 pointed out Kenny Cheung. He told the officers that he was the managing director of Best Joint, one of the TSL promotion companies. He said it was his role to oversee the tour guides and ensure that TSL products were promoted.

449.  PW56 said that after the tour of the showroom, they were taken to the TSL conference room where they were addressed by D4.

450.  PW56 said that in his opening remarks, D4 said the showroom business for tourists was very competitive and the profit margin was getting so slim that TSL only achieved 2% profit from showroom sales in these years. Officer Lai said main crux of the case was why TSL had to engage outbound promoters to induce the inbound travel agent companies whereas TSL still paid the agent commission to inbound tour companies at the same time.

451.  D4 said that from the business point of view, the main issue was whether TSL had sufficient tourists to attend the showrooms. So long as the relationship between the total cost incurred and the total revenue earned could be established, he did not see why the deductibility of the promoter’s fee should be denied for profits tax purpose. In the market of jewelry retailing, all companies were searching for as many tourists as possible, hence TSL had no choice but to employ outbound promoters in order to secure a stable  source of tourists.

452.  PW56 said that Mr Cheng (from DTT) expressed that the IRD’s concern might relate to the head count basis of promoter’s fee as well as why the outbound promoters were overseas companies.

453.  Officer Lai said on the basis of presently available information and documents, the linkage between agent commission and promoters fees could not be established.

454.  PW56 said that regarding the basis of the promoter’s fee, PW1 recalled that when TSL firstly engaged promoters during the year of assessment 1996/7, all tourists from China possessed high purchasing power because of limited quota of 1500 per day. As the purchasing power per head was high in that period, TSL did not care about computation of promoter’s fee based on head count. PW1 supplemented that the basis of promotion fee was originally proposed by the outbound promoters.

455.  PW 56 said that the investigators asked if Worldwide was the first promoter engaged by TSL . PW1 confirmed that it was and that prior to that TSL engaged in-house staff ( e.g. PW2) and some freelance promoters to do the promotion jobs. The officers asked if the tourists introduced by the outbound promoters could visit the showrooms of competitors. PW 1 replied that as the outbound promoters were already remunerated with the promoter’s fee based on head count of the tourists, the inbound travel agents were only permitted to bring their tourists exclusively to TSL showrooms. In case the inbound travel agents brought the tourists to the competitors’ showrooms, TSL would lodge complaint to the outbound promoters and stop paying the promoter’s fee.

456.  PW56 said that they enquired if there were any papers or documents of tour information faxed by PW2 on behalf of Brighouse or faxed by Brighouse. PW1 replied that TSL did not keep such papers or documents once TSL and the outbound promoter mutually agreed on the total number of tourists for calculation of promoter’s fee payable to the outbound promoter. PW1 explained there were piles of fax sheets every month and they did not have sufficient space to store them.

457.  PW 1 confirmed that not all tourists brought by inbound travel agents were counted in the calculation of promoter’s fee payable to the outbound promoter. Only those inbound travel agents on which the outbound promoters had influence to bring the tourists to TSL showroom would be counted in the calculation of promoter’s fee.

458.  PW56 said that Officer Lai requested an early reply to the outstanding enquiry letters such as the very basic and primary source documents, e.g. trial balances, for the relevant years. PW56 said that D4 expressed his discontent with the IRD enquiries. He complained that there were rounds of enquiries without any ending. He commented that there should be an end to the case and TSL had proposed to add back certain percentage of commission payments as a compromising settlement. D4 wondered at the need for general ledgers or trial balances when the focus of the IRD was on the expenses and documentary proof about the expenses.

459.  At paragraph 21 of the notes of meeting, D4 is reported as saying that the system had been in place for over 10 years and even before and after he joined TSL in December 2002. He failed to see any problem in paying promoter’s fee and agent commission. He pointed out that ,having considered TSL had accommodated more that 100,000 tourists every month, there might be a situation that TSL did no t keep every piece of paper for verification. However he considered that the system engaged by TSL was sufficient enough to show the correct profits of TSL. He said he was already under great pressure from various parties including shareholders, bankers, creditors and IRD etc.

460.  PW 56 said that Officer Lai advised D4 that the officers needed the relevant information and documents to support TSL’s claim on deductions.

461.  PW56 said that Mr Cheng of DTT supplemented that IRD should admit that not all documents were ready for inspection. Hence, TSL proposed to add back 6% of commission payments to settle the case. He suggested officers submitting TSL’s proposal for consideration by the IRD seniors.

462.  The officers referred to page 7 of the Deloitte Report and requested for the segmental and financial analysis covering all the years of assessment from 1995/6 to 2002/3 including, turnover of showrooms, trading gross profits of showrooms, promotion fee and agent commission. Officers said that only incomplete data for the years of assessment from 1997 to 2002 had been provided.

463.  PW 56 said that Mr Cheng agreed to supply all the information and documents within one month.

464.  PW56 said they then visited the showrooms of other companies in Hunghom.

465.  After the showroom visit, TSL wrote to the IRD on the 15^th October 2004, P 1178. The letter was signed by D2 and D4. Enclosed with the letter were the amended notes of the interview D2 and D4 had with the IRD on the 20^th February 2004.  The letter sought to further explain the purpose of TSL’s meeting with the IRD held on the 20^th February 2004 and draw the attention of the IRD to matters mentioned during the meeting but omitted from the IRD notes of interview.

466.  The letter stated that the main purpose of the meeting was to address the company’s concern as to the slow progress of the resolution of the dispute with the IRD, and D4’s feeling that the IRD did not “ fully understand or appreciate the nature and basic fundamentals which underpin the operations of the showroom business operated by TSLJ ( i.e. the  relationship between revenues and expenses) and therefore the reasons why the expenses [ the IRD were investigating ] are fully deductible……’’

467.  The letter went on to explain the financial position of the TSL group and the importance of the showroom business to the group’s liquidity.

468.  The letter referred the Restructuring Agreement dated the 3^rd August 2000 between TSL and its creditor banks. It pointed out that as at the 29^th February 2004 the group owed $248 million under that agreement, that as at the 31^st August 2004 the arrears on the instalments amounted to $31.8 million and the group would be unable to meet the further instalment of $6 million due in November.

469.  The letter stated that the group had relied heavily on trade creditors and suppliers credit to meet its losses and repayments and that  debt had increased dramatically from $176 million to $346 million. The letter stated that TSL was able to continue its operation due to the support and forbearance of its creditors.

470.  The letter pointed out that the showroom business, while only  marginally profitable, created desperately needed cash flow to support the group financially and the group cannot survive without this cash flow.

471.  The letter stated that “ due to fierce competition from other showroom operators since 1999, the net profit margin of the showroom business had decreased to between 2% and 3% . If any of the TSLJ’s commission payments to travel agents and promotion fees to outbound business promoters are disallowed as a tax deduction, then this business will become unprofitable and so will have to be ultimately closed by the TSL group as it can not make a profit if its major expense in deriving its assessable income is partly or wholly denied as has been suggested by [the IRD].”

472.  The letter went on to state that showroom revenues represented 34% of the TSL group’s total “ turnover year to date” and are a very important and necessary part of TSL Group. “For year 2004/5, the TSL Group is budgeting for turnover for showrooms of HK$371 million of budgeted group turnover. If TSL Group is forced to close its showroom business ( due to the disallowance of deductions for commission payments to travel agents and promotion fees to outbound business promoters) then it would financially collapse.”

473.  The last bullet point of the letter reads as follows:

“ Part of the current liquidity problems at TSL Group were caused by the fact that the showroom business was closed during SARS last year ( April to July 2003) and, due to the loss of cashflow from this business during that period. TSL Group was not able to repay its banks and had to further extend it credit with suppliers. The closure of the showroom business would just be a rerun of the SARS closure but with a permanent fatal affect on TSL Group’s financial position and that of the banks”.

474.  On the 28^th October 2004 DTT wrote to the IRD, P1327, and referred to the site visit and information requested by IRD on that visit. The letter stated that at the meetings in February and August 2004, D4 had fully explained special features of TSL showrooms and the traditional trade customs. Fees paid to promoters were necessary and essential because showroom business needed enormous and constant flow of tourists and all travel agents and promoters were unrelated third parties and payments of commission and fees were carefully monitored by their internal system. The letter stated that their client considers their claims to be valid and legitimate.

475.  PW56 told the court that if the IRD had discovered in its investigation that the services alleged to have been provided by Brighouse to TSL had not been provided, sums paid by TSL to Brighouse as promoters fees would not have been allowed as a deductible item.

476.  PW56 agreed when cross - examined by counsel for D1 that the first time the IRD knew of the payment of promotion fees to outside promoters was when they received the letter from DTT dated the 4^th November 2003 which referred to a payment to promoter of $17.5 million. He agreed that this was a few months after the release of the auditors report for 2002/3 on the 29^th July 2003 which contained the qualified opinion concerning such payments.

477.  Under cross-examination by counsel for D4 in relation to promotion fees to Brighouse, PW56 said that if the IRD discovered services not provided by Brighouse for promotion fees they would be disallowed.

478.  PW56 agreed that if TSL had a tax loss carried forward for previous years then this would be set off against the add-back, the disallowed promotion fees, to determine if any tax was payable.

479.  PW56 produced a one page summary, P 1178, of the profit and loss affect if the payments to promoters were disallowed as a tax deduction. This showed that due to losses in 1998/1999 and 2000/2001 there was no tax impact. The total tax undercharged was $5.846 million.

480.  PW 56 agreed that in June 2004 TSL offered a settlement of $5million.

DIRECTIONS

481.  I reminded myself that the prosecution brought these proceedings and are required to prove guilt beyond reasonable doubt, the defendants have nothing to prove.

482.  The defendants elected not to give evidence. They have a right to remain silent and no adverse inference can be drawn against them for doing so.

483.  All the defendants have clear records. This is relevant to the issues of credibility and propensity. D2 and D3 were interviewed under caution. They also made statements to the TSL Board of Directors and the compilers of the KPMG forensic report.  A letter written by solicitors on behalf of D2 was produced, P880. The statements were mixed and I accepted the exculpatory statements as being admissible as evidence of their truth. Also a person with a clear record is more likely to be telling the truth and less likely to offend. There was also evidence of positive good character in relation to D3 and D4 from a number of prosecution witnesses. D3 and D4 had been head-hunted for their positions at TSL. They came with impeccable credentials and several witnesses of standing who share their fields of expertise have spoken to their probity and integrity.

484.  There was also evidence of positive good character from a minister of religion who gave evidence on behalf of D2.

485.  I reminded myself that where defendants were alleged to have made admissions or made statements which related to other defendants they were not admissible as evidence against the other defendants.

486.  I reminded myself that where the court seeks to draw an inference from proven facts, it can only do so if the inference it seeks to draw is the only inference that can be reasonably drawn from facts proven beyond reasonable doubt. Any inference drawn must be an irresistible inference.

487.  Certain witnesses referred to notes of meetings for memory refreshing purposes. Some of these notes were put before the court to enable the court to follow the evidence more easily. I reminded myself that the notes are not evidence of the facts contained in them. They are relevant only to this issue of consistency.

488.  Where there had been cross-examination of witnesses about their previous witness statements, parts of the witness statements of some of the witnesses were put before the court for inspection. I reminded myself that these were not produced as evidence of the truth of their contents but for the purpose of comparing the evidence of the witnesses in court with what they said in their statements.

489.  Certain reports were exhibited, for example the confidential report prepared by KPMG dated the 28^th February 2003, P1293. The document contains hearsay statements and the and the opinions stated in them are not findings of fact binding on the court. They were relevant to show what information was available to the defendants who read them. D2 and D3 relied on the mixed statements attributed to them in the report. They were admissible as evidence of their truth. The prosecution did not seek to rely on the comments on the report attributed to D5 and I disregarded them. A number of counsel cross-examined PW1 about what he said to the compilers of the report. It was suggested he lied to them and gave them incomplete information.

490.  A number of witnesses were named as co-conspirators in the charges and gave evidence under immunity. Whilst I bore in mind S.60 of the Criminal Procedure Ordinance Cap 221, which abrogated the corroboration rule in respect of alleged accomplices, I treated their evidence with caution and warned myself of the danger of accepting their evidence without very strong supporting evidence.

491.  PW1 in particular figured prominently in many of the offences and had involved members of his family in his criminal enterprises. His family members had also been given full immunities. He and his family stood much to gain from co-operating with the ICAC. There was overwhelming evidence of their involvement in criminal enterprises. I was also satisfied that he was untruthful as to the extent of his gain from them and lied about other matters.

492.  I noted that he made a number of statements to the ICAC. In respect of his cautioned statement in particular there were contradictions between that statement, his later non-prejudicial statements and his evidence in court. He repeated a number of times when cross-examined about these inconsistencies that when he was first interviewed he had reservations as to what and how much he should reveal to the ICAC.

493.  I was aware that PW1 in particular must have been keen to show to the ICAC his value as a witness not only for his own benefit but also for the benefit of those he had brought into his criminal enterprises. There were significant differences between PW1 and his brother PW17 and PW20 (the accountant) as to the roles of PW1 and PW17 in the setting up of the various overseas companies. I took this into account when evaluating his evidence.

494.  There was also evidence in relation to PW1 and other witnesses that they had participated in memory refreshing exercises with ICAC officers. In my view those exercises, particularly in relation to PW1 overstepped the mark of what is permissable. The ICAC officers should  read and digest the Court of Appeal’s decision in HKSAR v. Lee Wing kan [2007] 3 HKC 368 and the statement of the Court of Final Appeal in the application for leave to appeal that decision [FAMC] 28/2007.

495.  I was particularly cautious to look for support for PW1’s evidence where it purported to implicate others.

496.  I was also very concerned in relation to PW1 and PW17 that the court had not had the full picture as regards the benefits they had received from their dishonest activities. The ICAC had not obtained bank statements in relation to the accounts of Brighouse and Cinedell. The ICAC could not have obtained this evidence by warrant as the accounts were overseas but this information should have been obtained and could have been obtained through the witnesses. This is a matter in respect of which there should have been full disclosure.

497.  I bore in mind that the witnesses were giving evidence about events and conversations which occurred several years before the trial and several years before they gave their statements to the I CAC. There were many inconsistencies between their recollections of these events and conversations.

Law

498.  All defendants were charged with being members of statutory conspiracies. The prosecution must prove beyond reasonable doubt that each defendant agreed to join the conspiracy, intended to commit the criminal offence which is the object of the conspiracy, and had the requisite mens rea of that offence.

499.  In R v. Anderson [1986] 1 AC 27, Lord Bridge set out what must be proved in  respect of a statutory conspiracy, at p.39 D-F

I have said already, but I repeat to emphasise its importance, that an essential ingredient in the crime of conspiring to commit a specific offence or offences under section 1 (1) of the Act of 1977 ( i.e. Criminal Law Act 1977) is that the accused should agree that a course of conduct be pursued which he knows must involve the commission by one or more of the parties to the agreement of that offence or those offences. But, beyond the mere fact of agreement, the necessary mens rea of the crime is, in my opinion, established if, and only if, it is shown that the accused, when he entered into the agreement, intended to play some part in the agreed course of conduct in furtherance of the criminal purpose which the agreed course of conduct was intended to achieve. Nothing less will suffice, nothing more is required.

500.  Section 1 (1) of the Criminal Law Act is in the same terms as s.159A of the Crimes Ordinance ( Cap 200).

501.  In R v. Saik [2006] 2 WLR 993, Lord Nicholls discussed s.1(1) of the Criminal Law Act 1977 at para.4:

Thus under this subsection the mental element of the offence, apart from the mental element involved in making an agreement, comprises the intention to pursue a course of  conduct which will necessarily involve commission of the crime in question by one or more of the conspirators. The conspirators must intend to do the act prohibited by the substantive offence. The conspirators’ state of mind must also satisfy the mental ingredients of the substantive offence. If one of the ingredients of the substantive offence is that the act is done with a specific intent, the conspirators must intend to do the prohibited act and must intend to do the prohibited act with the prescribed intent.

502.  To establish whether or not a particular defendant was a member of the alleged conspiracies, the prosecution had to establish in respect of each defendant beyond reasonable doubt the following:

Conspiracy to offer advantages

There was an agreement between the named conspirators to offer advantages to employees of travel agents. The defendant agreed with one or more of those persons to offer advantages. The defendant intended to offer advantages. The defendant  had the mens rea of s. 9(2)(b) of the Prevention of Bribery Ordinance: intending the person receiving the reward or advantage to show or having shown favour to TSL in relation to their principals’ affairs or business.

503.  I bore in mind that as the charge was a conspiracy to offer advantages, the prosecution had to prove inter alia, that the defendants knew that the commissions were to be paid to the employees of travel agencies without lawful authority or excuse. No burden is placed on the defendants : Lam Yuk Fai, Steve v HKSAR (2006) 9 HKCFAR 281.

Conspiracy to commit false accounting:

504.  The prosecution must prove to the required standard:

A.  there was a conspiracy between the named conspirators to commit false accounting

B.  the defendant agreed with one or more of the named conspirators  to commit false accounting

C.  the defendant intended to commit the offence and

D. the defendant  had the mens rea of s.19(1)(a) of the Theft Ordinance:

(i)  dishonesty

(ii)  with a view to gain for himself or another, or with intent to cause loss to another

505.  The test of dishonesty is set out in the leading authority of R. v. Ghosh [1982] QB 1053 CA. Lord Lane concluded that there were two aspects to dishonesty, the objective and the subjective, and that the tribunal of fact, in determining the issue, would have to go through a two-stage process before it could convict a defendant. The court said

“In determining whether the prosecution has proved that the defendant was acting dishonestly, a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest. If it was not dishonest by those standards that is the end of the matter and the prosecution fails. If it was dishonest by those standards, then the jury must consider whether the defendant himself must have realized that what he was doing was by those standards dishonest.”

506.  This test has been applied in Hong Kong as correctly stating the law: HKSAR v. Goh Swee Yan [2000] 3 HKLRD 342, CA

507.  Knowledge of the law on the part of the defendant is immaterial. Hong Kong Archbold 2007, at paragraph  36-13, states:

“ If what the alleged conspirators agreed to do was, on the facts known to them, an unlawful act, they cannot excuse themselves by saying that, owing to their ignorance of the law, they did not realize that it was a crime. If, on the facts known to them, what they agreed to do was lawful, they are not rendered artificially guilty by the existence of other facts, not known to them, giving a different and criminal quality to the act agreed upon: Churchill v. Walton [1967] 2 AC 224 HL, given effect to in section 159A (2) of the Crimes Ordinance Cap 200.”

Conspiracy to Defraud IRD – Charge 14

508.  The prosecution must establish beyond reasonable doubt that there was an agreement, dishonestly, to defraud the IRD officers by deceiving them so as to induce them to act contrary to their public duty. The test for dishonesty is as laid down in the case of R. v. Ghosh.

509.  I bore in mind that I had to consider the evidence against each defendant separately and on each charge separately.

The Prosecution Witnesses

510.  The prosecution accept that within the prosecution case there are inconsistencies and contradictions which the court must consider.

511.  Many of the prosecution witnesses gave evidence under immunity and their evidence must be approached with caution.

512.  The evidence of PW’s 1 and 2 in particular had to be examined very carefully as they were involved in criminal activity beyond the scope of the scheme as devised by the TSL management. They clearly saw the scheme as an opportunity to make money for themselves and took full advantage of the situation.

513.  PW1 actively concealed the role of his family in the setting up and running of the scheme.

514.  There are conflicts between the evidence of PW1, his brother PW17 and the accountant, PW 20, as to who was responsible for running and setting up the BVI’s.

Memory refreshing

515.  The ICAC engaged in extensive memory refreshing exercises particularly with PW1 and PW2. These exercises went beyond what is permitted. I took this into account when considering their evidence.

516.  PW1 said the memory refreshing exercises took place from 15 May 07 to 13 Aug 07, and were conducted by ICAC officers PW71, (ICAC officer in charge of the case and who took PW1’s second and third non-prejudicial statements) and Kevin Cho (also one of the officers in charge of the case).   PW1 said that during the hours of memory refreshing they would read his statements “on several occasions” to him, and sometimes he would read them. Then they discussed what was read. They also looked at exhibits. 

517.  PW2 said the sessions were “just like revising for homework”.  PW71 told him “to have revision and revision”, but said they were not “coaching” him. During the sessions PW71 asked him to read his statements, and sometimes he asked him questions on the statement, “just like a kind of examination”. If he did not recall what he said in the statement, he would be reminded of what he said in his statement.

PW 71

518.  PW71 described how he conducted memory refreshing exercises.  He said there were ICAC guidelines for memory refreshing  

519.  In respect of PW1, he said he and Kevin Cho spent 14 sessions with PW1, lasting a total of 23¼ hours

520.  He said that he read every paragraph of PW1’s 2^nd and 3^rd non-prejudicial statements, then summarized some paragraphs while PW1 summarized others, then they discussed the summaries together.

521.  In respect of PW2, he said he spent 6 sessions with PW2, totalling 10- hours. He said he read some paragraphs of PW2’s six non-prejudicial statements, summarised every paragraph and  then discussed the summaries with PW2. PW 71 said that over the 6 sessions he repeated this exercise with each non-prejudicial statement, reviewing some parts once, and other parts twice. He said he reminded PW2 what he said in his statements.

522.  In respect of PW3, he said there were only two memory refreshing exercises lasting a total of 1- hours. He said he first read the whole statement and then did a summary of each paragraph to strengthen his memory.

523.  PW39 had memory refreshing exercises with Kevin Cho on 3 occasions shortly before he gave evidence. He told PW39 he should concentrate on the parts of his statements dealing with the meeting on the 19^th December 2002 between PW39 and D2.

524.  In R. v. Momodou [2005] 2 All ER 571, Judge LJ discussed the problems and dangers of “witness training” or “coaching” at para.61 (p.587g-j):

There is a dramatic distinction between witness training or coaching, and witness familiarization.  Training or coaching for witnesses in criminal proceedings (whether for prosecution or defence) is not permitted.  This is the logical consequence of well-known principle that discussions between witnesses should not take place, and that the statements and proofs of one witness should not be disclosed to any other witness.    The witness should give his or her own evidence, so far as practicable uninfluenced by what anyone else has said, whether in formal discussions or informal conversations.  The rule reduces, indeed hopefully avoids any possibility, that one witness may tailor his evidence in the light of what anyone else said, and equally, avoids any unfounded perception that he may have done so.  These risks are inherent in witness training.  Even if the training takes place one-to-one with someone completely remote from the facts of the case itself, the witness may come, even unconsciously, to appreciate which aspects of his evidence are perhaps not quite consistent with what others are saying, or indeed not quite what is required of him.  An honest witness may alter the emphasis of his evidence to accommodate what he thinks may be a different, more accurate, or simply better remembered perception of events.  A dishonest witness will very rapidly calculate how his testimony may be ‘improved’.  These dangers are present in one-to-one witness training.  Where however the witness is jointly trained with other witnesses to the same events, the dangers dramatically increase…

[62]   This principle does not preclude pre-trial arrangements to familiarize the witness with the layout of the court, the likely sequence of events when the witness is giving evidence, and a balanced appraisal of the different responsibilities of the various participants…

525.  R. v. Momodou was applied in HKSAR v. Lee Wing Kan [2007] 3 HKC 368.  In that case the ICAC officer, who was not the statement taking officer, summarized the statements of two witnesses, Mr Chan and Mr Ng, during the “memory refreshing exercise”.  The Court of Appeal felt “some degree of alarm”, as had the trial judge. [para.64] Stuart-Moore VP said at paras.67-68:

It has long been permissible for witnesses to be allowed to refresh their memories from their statements prior to trial.  If it were otherwise, the trial process could be turned into an unnecessary test of memory.  Here, Mr Chan and Mr Ng were able to refresh their memories and, but for one factor, there could be no criticism of anything which occurred.  This sole factor was that there was a departure from a straightforward exercise in memory refreshing which occurred when the investigating officer decided to provide the witnesses with a summary of each paragraph in their statements.  One possible danger in the adoption of such a practice, as Mr McCoy pointed out, is that witnesses may feel compelled to agree with the summary given to them and to adopt it in their testimony later whether or not the phraseology used in the summary had been strictly accurate.  Another problem associated with any relaxation of the present rules in this regard is the difficulty which almost inevitably arises in drawing the line between what it may or may not be permissible for an officer attached to a law enforcement agency to discuss with a witness who has earlier made a statement and who wishes to refresh his or her memory before giving evidence at trial.  It is quite clear that the training or coaching of witnesses is not permitted as distinct from “witness familiarisation” about the court process which is permitted.  This was described in R v Momodou at page 588, para. 62. 

Of course, if the witness expresses concerns about the accuracy of any previous statement, it would be prudent in such circumstances for the officer to take a further statement correcting the error in the earlier version.

In the present case, we do not consider, however laudable the motives of the ICAC officer undoubtedly were, that summarising each paragraph of the witnesses’ statements in the manner described by the judge was appropriate.  In our view, this practice must stop.

526.  In the application for leave to appeal to the CFA, Lee Wing Kan v. HKSAR FAMC 28/2007 (18 September 2007), Chief Justice Li said at paragraph 8, “The Court of Appeal rightly condemned this practice, stating that it must stop.”   

527.  I bore in mind that the memory refreshing exercises carried out by the ICAC officers in respect of PW1 and PW2 commenced in May 2007 and even later in respect of PW 39. This was after the Court of Appeal gave its judgment in March 2007. 

528.  There were also inconsistencies brought out between matters asserted in different statements by the same witness.  PW1 in particular was  extensively cross-examined on such matters, especially in relation to the first interview with the ICAC conducted under caution on the morning he was taken to the ICAC offices. PW1 said repeatedly that at that stage of the investigation he had reservations as to how much what he should tell the ICAC.

529.  PW1, in relation to charge 14 gave evidence as to an alleged  meeting with D4 at a time D4 was not in Hong Kong.

530.  The court does not have to accept the whole of the evidence given by a particular witness. It can accept part of the evidence and reject other parts of it.

531.  I bore in mind when considering the evidence of the prosecution witnesses that it covered a long period of time, involved a considerable number of people and a vast amount of documentation. I bore in mind that much of the evidence of these witnesses was supported by other witnesses, documentary evidence and circumstantial evidence. I  considered the totality of the evidence.

532.  Many of the witnesses referred to the management when setting up the commission B system saying that is should be done in a legal way “on the face of it”

533.  PW2 in the document which deals with the proposed accounting arrangement for the “ James Bond Project”, P16, refers to TSL’s payments of commission to managers and tour guides of travel agencies being made via the overseas company so that “ TSL will not be paying those commissions directly”. It states that the person in charge of the overseas company must have experience and qualifications enabling “a plausible explanation to be offered to TSL’s accountants for the necessity of paying the fee”. Step 3 of the document states that “ the whole process is then completed whereas the said sums and the real recipients, which being the people of the travel agencies, bear no direct relation to each other, and thus TSL is able to elude responsibility.”

534.  Anita Wong, PW4, made reference on a number or occasions that documents shown to her by defence counsel appeared to be legal “on the face of it” or that certain conclusions could be drawn according to the documents being presented to her in isolation. She prefaced a number of her replies to questions about documents with the phrase “according to this document”.  I was careful not to approach events or documents in isolation. One had to look at events and documents in the context of the overall situation.

PW1

535.  As I have already stated, the evidence of PW1, in particular, had to be treated with the utmost caution.

Immunity

536.  PW1 was giving evidence under full immunity. PW1 was very much involved in the meetings which led to the setting up of the commission B system. He admitted committing a number of offences in relation to funds diverted through the overseas companies. He and his brother were major beneficiaries of the commission B system.

537.  PW1 was never arrested. He was treated differently from other suspects right from the start. After accompanying the ICAC officers to their headquarters in April 2005, PW1 and his girlfriend joined the “Witness Protection Programme”. They depended on the ICAC for protection and financial support. He was allowed to retain funds and even deal in shares.

538.  Shortly after the visit to his home by the ICAC, he handed over to them $1million. No further proceeds of the offences were recovered. The ICAC did not obtain bank statements relating to the overseas companies.

539.  PW1 acknowledged that he considered himself to be in very serious trouble when he was spoken to by the ICAC. He had told the KPMG Forensic investigators what I accepted to be the true role of the overseas companies. He acknowledged that he would have to establish his usefulness to the ICAC before they would consider granting him an immunity.

The evidence of PW1 in relation to the setting up of Brighouse and Cinedell

540.  There was contradictory evidence given by PW1 on the one hand his brother PW17 and the accountant PW20 on the other hand as regards the setting up of Brighouse, Cinedell, Griston, Profitful and Evergood.

541.  PW1 said the arrangements to set up these companies were made by his brother and his accountant, PW20. PW1 said he did not know in what jurisdiction the companies were nor could he recall the names of the last three companies. He said PW17 arranged for the setting up of the overseas bank accounts and to have the Business promotion agreement signed in Macau.

542.  PW1 also said his brother arranged for the setting up of Cinedell and arranged for PW1’s nephew, Chris Ching, to sign the agreement on behalf of Cinedell in Macau.

543.  PW1 said he did not want to be seen to be involved with the new overseas companies because he was not sure if it would conflict with the listing rules or TSL internal guidelines.

544.  PW1’s evidence was in conflict in particular with the evidence of PW20 who gave evidence that PW1 was very much involved in the  arrangements for setting up the overseas companies and he regarded PW1 as the beneficial owner of Cinedell and Brighouse.

545.  The Cinedell Bank account, D2-32, showed that PW1 conducted jewelry business with Kong Kong Jewelry Ltd, a company connected with Sander Sau. PW1 agreed he received dishonest payments from Sander Sau.

546.  PW1 and his brother PW17 were unable to explain large sums of money remaining in the Brighouse and Cinedell bank accounts after these companies ceased operation.

Dishonest Transactions

547.  PW1 agreed that from about 1998 to the time the DY and HK showrooms were sold to Dynamic King he received stolen money between $10,000 and $20,000 from PW2.

548.  He received bribes from Sander Sau of Dynamic King and when he operated Hong Kong Jewelry Company.

549.  PW1 by means of a secret arrangement with PW2 stole TSL commission money from May 2003 up the time of the ICAC raid in 2005.

550.  PW1 concealed from TSL the involvement of his family with Brighouse and Cinedell and the benefits they received.

551.  PW1 evaded tax in Hong Kong and Canada.

Lies told by PW1

Board Meetings

552.  PW1 attended Board of directors meetings in February, May and September 2002. He never mentioned at those meetings the use of BVI companies and the payment of commission B.

553.  At the board of directors meeting held on the 18^th December 2002, PW1 told the board that Brighouse and Cindell were organized by an ex-employee and that he was not sure who advised on commission B. He also said that at that time the commission payments were organized by showroom staff. He did not mention his role.

KPMG Forensic Report

554.  PW1 told KPMG that commission B was set up to assist travel agencies manage their tax liabilities and that Brighouse and Cinedell did work for TSL. He made no mention of his role or the role of his family members.

KPMG Auditors

555.  PW1 did not tell the auditors about the true roles of Brighouse and Cinedell

DTT

556.  PW1 did not tell them about his involvement with Brighouse and Cinedell, nor did he say what his role was as regards the setting up of Worldwide. He tried to make out that commission payments to those companies were made for legitimate commercial reasons.

557.  PW1 gave evidence of a meeting with D4 in relation to charge 14 at a time when D4 was not in Hong Kong.

IRD

558.  The information given by PW1 to the IRD was consistent with what he told DTT.

ICAC

559.  PW1 admitted he lied to the ICAC in the video recorded cautioned interview. He told the ICAC he had received no benefit from the commission system. He said the setting up of Worldwide was due to PW2 leaving TSL. He said the $118,000 found at his home belonged to his girlfriend.

Inconsistencies

560.  There were many occasions when the evidence of PW1 was inconsistent with the evidence of other prosecution witnesses.

561.  The accounts of PW1 and PW2 in relation to the discontinuance of TSL’s use of Worldwide and the setting of the successor BVI’s are inconsistent.

562.  When the local promoters were being set up in 2003, PW1 said it was D5 who contacted promoters and later came back suggesting appointing Well Zen, which was run by PW2, Best Joint and Golden Speed. PW2 said it was PW1 who approached him and negotiated with him about the terms of appointment of Well Zen.

563.  PW1 said the management did not intend to stop commission B when the local promoters were used. PW2 said PW1 told him the promoter had a duty to reduce unconfirmed commissions to travel agencies and if successful the amount would become a reward to the promoter.

564.  There were discrepancies between PW1 and PW2 as to discussions about the percentage calculations for the file B amount when the local promoters were used. PW1 said D5 negotiated with PW2 whereas PW2 said he only discussed the percentage calculation with PW1.  It was only after that that D5 asked him to return 70% of the remaining sum to him.

565.   I took into account the evidence adduced in cross-examination of PW1 by counsel for D1 in relation to TSL’s dealings with Mr Pirapokin, the proprietor of Overseas Tours Ltd. It was submitted that this was an illustration of D1’ s lack of awareness of the details of the commission B system. PW1 agreed that in 1999 Pirapokin sought the assistance of D1 to assist his company in evading tax on TSL commission payments. PW1 agreed that D1 did not tell Piropokin face to face he would assist him but PW1 said that D1 did ask him when they were alone why no such arrangement was made. I found the evidence of PW1 concerning this matter to be ambiguous.

566.  This cross-examination was also directed to show that at that time C1 and C2 payments were not included in the commission B system. The defence counsel argued that use of commission B for such payments was started by Sander Sau at the DY showroom and only subsequently adopted by TSL. PW1 disagreed with this but was unable to point to any documents which supported his contention. I noted that very few  “Testing” documents were produced. By “Testing” documents I refer to the code rate maintenance forms and monthly agent commission summaries (AG 405). Such documents would not be retained by TSL as accounting documents.

PW’s 17,18 and 19

567.  PW17 and 18 are the brother and sister of PW1 respectively and PW19 is an employee of PW17. I found them all to be evasive witnesses

568.  PW17 told the court his transportation company was in financial difficulties. He earned more than $3.2 million in handling fees which he did not declare to IRD.

569.  PW1 said in respect of the 30% share of the secret money that D5 obtained from PW2 from 2003 onwards, he spent some and turned the rest over to his brother for safekeeping in the BVI accounts. PW17 said in evidence that he had not transferred any of this money to the accounts of Cinedell and Brighouse. This was contradicted by his first non-prejudicial statement. PW17 said he had forgotten about this.

570.  He was asked to produce bank statements for the two accounts. The Cinedell account ( D4-17), showed a balance of $246,000 and PW17 said this was from his China business operations. He agreed he had never mentioned this to the ICAC. His answers concerning monies held in the Cinedell and Brighouse accounts were evasive.

571.  I had no doubt that PW1 saw TSLJ’s use of overseas companies as an opportunity to enrich both himself and his family. I did not believe his explanations as to the circumstances in which Brighouse took over from Worldwide. I was sure he arranged matters so that a company controlled by him would be used for the money transfers.

572.  I noted what PW1 said about the decision to use PW2 to set and run the first overseas company, Worldwide. He told the court that PW 2 was selected as no one else dared to do it. TSLJ also needed someone they could trust to ensure the monies came back to TSL.

573.  Once the scheme was up and running, both PW1 and PW2 took full advantage of the opportunities for self enrichment provided. After all, there were no checks of the fund flow. It was apparent the senior management of TSL did not want to know the details of precisely who was involved in the overseas companies or exactly how it arranged its affairs. What the senior management was concerned about was that the payments to agencies and their employees should continue so as to enable them to maximise their profits from this lucrative side of their business. I had no doubt that the senior management of TSL were fully aware of the role played by the overseas companies and were prepared to let PW1 and PW2 handle the details.

574.  Despite the monies received from these funds both PW1 and PW2 ran into financial problems. PW2 in particular was in acute financial difficulties around 2000 and went bankrupt the following year.

575.  I was quite sure that PW1 saw the opportunity to take over from PW2 and control the movement of funds and it was for that reason he arranged with his brother for Cinedell to be set up and later Brighouse. He did not disclose the involvement of his family to TSL.

Brief Overview of   and Observations on the Evidence

The Overseas companies

576.  In February 1996 ICAC officers raided the offices of TSLJ in connection with an investigation into payments made by TSLJ to travel agents which were alleged to have contravened the Prevention of Bribery Ordinance. PW1 and D5 were interviewed.

577.  The senior management of TSLJ thereafter set up a series of meetings with a view to devising a scheme whereby secret commissions  paid to travel agency employees could not be traced back to TSLJ. I was sure these discussions were held on the instructions of D1. The then Chief Executive Officer, PW3, the Finance Director, PW1 and PW2 were significantly involved in these discussions.

578.  These discussions led to the implementation of an audacious scheme. TSL management decided to set up an overseas company which was to be used solely as a money transfer vehicle. Under the scheme, millions of dollars each year were to be sent to the bank account of this overseas company and then transferred back to Hong Kong for secret distribution by TSL showroom staff to agents of travel agencies. The commission was known as commission B.

579.  The amount of money to be sent overseas was to be calculated on the basis of sales in the showrooms. Showroom staff negotiated rates of commission with the agents and completed rate forms showing the agreed rates of commission.

580.  The overseas company would submit false invoices or debit notes claiming fees for professional services rendered for arranging tourists from overseas to visit TSLJ showrooms. The claim purported to be made on a per capita basis.

581.  The debit note would be submitted to TSLJ, a payment requisition form would be completed and the TSLJ accounts department would arrange for the sum claimed to be remitted to the bank of the overseas company.

582.  The money would then be remitted back to a local Hong Kong bank. The money would be withdrawn in cash and distributed to the travel agency employees.

583.  A separate accounting system was set up to deal with these payments. Forms dealing with these payments were amended to include the word “testing” to denote that the payments involved were commission B payments. The TSL information technology department had to devise a computer system to deal with the accounts. The new system devised had a separate access and password.

584.  Resolutions were passed by the Boards of TSL and Bonaventure relating to the business promotion agreements to be entered into between Bonaventure and Worldwide which were initialled by D2 and signed by D1. The meetings to effect these resolutions were by way of circulation of minutes.

585.  When the system was put in place it was anticipated that the annual amount to be transferred would be in the region of $53.5 million. The debit notes to be issued by the overseas company would relate to approximately 250,000 tourists purportedly sent by the overseas company to TSL showrooms – see P16.

586.  Shortly before the scheme got off the ground it was decided that because the sums involved were so huge, a second method was to be used for concealing payments to travel agents. A much cruder scheme was devised, it was known as Project B. Monies paid via the overseas company were referred to as project A. Project B payments were disguised as payments of promotional commission for showroom staff.

587.  When commission B payments started monies were sent to both the overseas company and to showroom staff. In the first month of the operation of the commission B system $3,219,149 was sent to Worldwide and $1,279,306 was ostensibly paid to showroom staff as promotional commission. The showroom staff concerned all signed false documents relating to these payments.

588.  Project B was discontinued after one year. In excess of $10 million had been diverted using this scheme. D5 signed receipts showing he had received in excess of $1.29 by way of this method.

589.  Between October 1996 and February 2000 $60 million had been diverted through Worldwide.

590.  When the HC showroom was set up in 1998 TSLJ purported to pay D5 entertainment expenses for which he supplied false documentation.

591.  In 2000, Brighouse took over from Worldwide. The minutes relating to the resolutions approving the agreement between Bonaventure and Worldwide were signed by D1 and initialled by D2 on the 24^th February 2000, P40.

592.  Between March 2000 and April 2003 the sum of $46.5 million was diverted via Brighouse.

593.  In June 2002 Cinedell was used as a further money transfer vehicle. The Board Minutes relating to the approval of this agreement are signed by D1 and initialled by D3.

594.  Between February 2002 and April 2003 the sum of $9.2 million was diverted via Brighouse.

595.  Between October 1996 and April 2003 a total sum of $115.7 million odd was paid to the overseas companies.

596.  On the 18^th December 2002 a Board meeting was held at which certain disclosures were made by D2 and a discussion took place about the use by TSLJ of  the BVI’s. D2 was obliged to step down as Chief Executive of TSL  and was replaced by D4. D2 stayed on as Chairman to TSL. KPMG Forensic were commissioned to prepare a report concerning certain matters disclosed at the 18^th December Board Meeting.

Table B Flowchart, P 122

597.  Shortly after D4 took over as Chief Executive Officer of TSL, PW1 supplied D4 with a flow chart relating to the payment of the overseas promotion fee, Table B. The chart stated there were two components to commission payments. Table A deals with commission payable to the travel agents which is evidenced in writing. The amount is determined by written contract between TSL and the applicable travel agent.

598.  It states that Table B is the amount payable to employees of the travel agent as negotiated between the Business promotion Manager of TSL and the employee directly to ensure that the travel tours contacted for come to TSL first or second to give TSL the opportunity to maximize the amount spent by each passenger contracted to be brought by the travel agent to TSL. “ This is not evidenced in writing nor is it disclosed or normally known to the travel agent. This is known as “Table B” payment.”

599.  Part 2 of the document reiterated that Table B denotes additional commission payments which are not known to the management of the travel agent.

600.  Part 5 stated that for Table B payments, a Commission Payment Report and Statement is generated by the Accounts Department at the end of every month.

601.   Part 6 dealt with the method of payment. It stated that PW1 would prepare the data and tell D5 to inform Brighouse, Cinedell and Best Joint to prepared their monthly invoice.

602.  The document went on to state that the promoters would prepare their invoices on a per capita basis and deliver it to the TSL Accounts Department to pay. It stated that the Business Promotion Manager ( BPM) of TSL will receive payment from promoters equal to the amount of their respective invoices less commission. The BPM will then distribute the funds received from the promoters to the relevant parties entitled to the same in accordance with their entitlements as set out in the commission rate table originally agreed by the BPM of TSL, approved by PW1 and calculated by TSL’s commission system.

603.  The document concluded:

“ When determining its cost to do business with a particular travel agent, TSL looks at the total cost as set out under Table A and B as this is the real cost to it to secure that Travel Agents business. TSL manages such costs to within defined and market parameters to ensure that its business with agents remains profitable after taking into account all payments required to secure such business ( promotion fees, tips, Table A and B payments etc)”

604.  I took into account that references to D5 or the Business Promotion Manager were hearsay and inadmissible against D5.

KPMG Report Forensic Report 28^th February 2003, P1293

605.  This report confirmed that the BVI’s were money transfer vehicles. At paragraph 3.3 of the report, PW1 is reported as stating that the commission B system was set up in 1996, for the purpose of assisting Travel Agents in managing their tax liabilities and to influence the pecking order in which tour groups visited jewelry showrooms.

606.  The compilers of the report were supplied with P122, the flow chart prepared by PW1 and read by D4. At paragraph 6.1.6 the report quotes from that document the definition of commission B. In that document Commission B is defined as follows:

“….(it) is the amount payable to employees or the like ( normally tour guides) of the Travel Agent as negotiated between the Business Promotion Manager of TSL and the employee directly to ensure that the travel tours contracted for come to TSL first or second to give TSL the opportunity to maximize the amount spent by each passenger (PAX) contracted to be brought by the Travel Agent to TSL. This is not evidenced in writing nor is it disclosed or normally known to the Travel Agent. This is known as “Table B (Testing) payments.”

607.  In late February, D4 was the recipient of the draft and final KPMG reports. The report was also supplied to D2 and D3.

KPMG Audit Report dated 29^th July 2003

608.  This report was qualified as regards payments purporting to be payments of commission paid by TSL to overseas business promoters. PW69, a KPMG auditor, told the court that when compiling this report, TSL management provided them with the original KPMG Forensic report for their review but they were not allowed to make a copy.

609.   In relation to the Forensic Report, the Auditor’s comments were:

“The Review Report is inconclusive but certain internal control weaknesses were identified.  In light of these issues identified, the Board of Directors have reviewed and discussed this transaction arrangement and they were not aware of any fraud involved in these transactions and these promotion fees paid were genuine payments and it was arisen in the ordinary course of business to generate tourist sales business to the Group’s showrooms”. [P1313] ( emphasis added).

610.  It concluded:

“There is no evidence of significant misstatement in the completeness, existence and accuracy of commission expenses.  However, a qualified opinion arising from the limitation of audit scope is included in the auditor’s report.”

611.  D2, D3 and D4 initialled payment requisition documents or and signed cheques in respect of payments to both Brighouse and Cinedell until they were no longer used for commission B payments.

The Public Announcement dated the 2^nd October 2003 – D2-35

612.  This announcement states that it was published by order of the Board, Tse Tat Fung, Tommy. The final section of the announcement deals, inter alia, with the system whereby sales commission is paid to travel agents who introduce tourists to its retail showrooms. The announcement stated that the system was examined by KPMG Forensic who identified “ certain internal control weaknesses” in connection with such payments. The  phrase “ certain internal control weaknesses” was borrowed from the auditor’s comment on the KPMG Forensic report, P1313.

613.  PW32 stated when cross-examined by counsel for D2, that a public announcement by any listed company carries with it a heavy responsibility in terms of clear and unequivocal disclosure. The document was drafted by Anglo Chinese, vetted by Herbert Smith and approved by all the directors of TSL. D2 was chairman of the TSL Board and D4 was a director.

The Local Promoters

614.  When the decision is made to discontinue the use of overseas companies, agreements were entered into with three local companies on generous commission terms. One of the companies Best Joint is a company which, according to P122, was involved in the arrangements for payments of Table B commission.  P122 was given to D4 and KPMG Forensic and it was attached to their report as attachment 6.

615.  Best Joint is run by Kenny Cheung who had been involved in financial dealings with D2 in July to December 2002. During that period the promoter’s commission of the DY showroom was doubled and switched from Well Zen to Best Joint, a company which had nothing to do with the DY showroom.  Well Zen is run by the bankrupt PW2 who had been involved with the commission B system for most of the period it was in place. When he went bankrupt TSL agreed to switch his commission payments from Well Star to Well Zen.

616.  The commission payments to the local promoters commence at a time of acute financial hardship for TSL. Payments to the local promoters from May 2003 and February 2005 total in excess of $44.12 million. The KPMG Audit Report dated the 29^th July 2003, P1294, stated that as at 28^th February 2003, TSL’s outstanding Hong Kong bank borrowings amounted to $249 million. There is a complicated, undocumented arrangement, whereby monies paid to promoters are distributed on a percentage basis to other TSL managers or promoters. I had no doubt whatsoever that the illegal payments to employees of travel agencies did not suddenly stop when TSL ceased using the overseas companies.

The Conspiracy to Steal Charges – Charges 11 to 13

617.  For the purpose of this overview, I propose to deal with the charges in chronological order, Charges 11,13 and 12.

Charge 11.

618.  PW32 said when D2 came to visit him at his home on the 14^th December 2002 he mentioned he had received money and his father had received money in the same way. This is hearsay so far as D1 is concerned and inadmissible against him.

619.  Payments by way of advance bonus each of $100,000 were purported to be made to D5 on the 5^th and 26^th March, the 30^th April, 30^th May and 4^th July 2002.

620.  All of the cheques in respect of the payments were signed by D3, two were signed by PW1 and three by D2.

621.  All the payment requisitions were initialled in the authorization for payment column by D3. D2 approved three of them.

622.  No supporting documents for this bonus payment were produced. PW41, whose evidence I accepted, said she was never shown any supporting documentation by D3 when D3 asked her to prepare the cheques.

623.  PW41 was requested to draw up the cheques at the request of D3.

624.  The bonus payment would have to have been authorized and signed by D2.

625.  The first two payments are made before the first meeting of the Remuneration Committee which met at the end of March 2002.

626.  On any view the payment is extremely generous.

627.  D2 was in difficult financial straits. TSL was struggling to meets its commitments under the debt restructuring arrangement. At the first meeting of the Remuneration Committee PW35 said D2 told the meeting that TSL was strapped for cash.

628.  Cheques relating to these payments are paid into the account of D5, P1335. At about that time D5 withdraws in cash from his account in excess of $22 million.

Charge 13

629.  This charge relates to monies allegedly stolen by D2 under the guise of a bonus payment to PW39.

630.  Large amounts of a cash were given by D3 to D2 on the 2^nd, 3^rd and 11^th April ( RMB 1.85 million ). On the 9^th July 2002 D3 handed D2 a cash cheque. D3 when interviewed by the ICAC cannot explain why she gave D2 a cash cheque rather than a cheque payable to Paul Wong. The cheque was cashed by D2’ s maternal aunt.

631.  D2 told Herbert Smith in a letter from his solicitor, P880, he was too busy to contact PW39. D2 told the ICAC D2 was difficult to contact and he kept the cash locked away in his safe.

632.  Paul Wong said he was never contacted by either D2 or D3 about the bonus between the 27^th March 2002 and the 19^th December 2002, the day after the board meeting disclosures by D2.

633.  Paul Wong was never sent the bonus calculation, P882, until after he saw D2 on the 19^th December.

634.  The  bonus calculation contains a number of add-backs which PW39 was unable to understand.

635.  On any view, these add- backs are very generous to PW39.

636.  D3 was having problems with PW 39 in connection with a complicated share transfer deal she was negotiating with AIG in connection with TSL China. Relations between D2 and PW39 were strained.

637.  D2 told the ICAC PW 39 was difficult to get hold of yet on the 19^th December he is able to reach him by mobile phone and on the same day an e-mail is sent by a secretary at TSL to PW 39. In the very comprehensive letter sent by D2’s solicitor to TSL solicitors dated the 8^th January 2003, P880, there is no such explanation offered.

638.  D2 did not sign on the payment requisitions to acknowledge receipt of the cash. In the letter from D2’s solicitor,P880,  it was explained that the Finance Director did not ask him to sign for receipt of the money as the money was intended for Paul Wong who should acknowledge and sign on the payment requisition form at the time of receipt. The explanation is offered in the letter that the non-payment of the money to Paul Wong was because D2 had to attend to a number of urgent and important matters which had arisen between July and November 2002 which kept D2 busy and delayed the handling of the money. The letter states D2 kept the money in his safe “ in the form of cash received” by D2 and was not used by D2. I reminded myself this letter was hearsay and inadmissible in so far as it related to D3.

Charge 12

639.  This charge concerns payments between July and December 2002 of cash totalling $882,952 allegedly channelled to D2 via Kenny Cheung of Best Joint.

640.  On the 2^nd August 2002 Bonaventure and Best Joint signed a business promotion agreement in relation to the DY showroom, P106. The commission rate is 10% as opposed to the previous commission rate of 5% paid to PW2 who operated that showroom. Kenny Cheung appeared to have no connection with the DY showroom which catered for Western tourists. Kenny Cheung dealt with Asian tourists who patronised the HO showroom.

641.  Kenny Cheung prepared five monthly debit notes relating to this agreement which he submitted to Bonaventure for the attention of PW1. The total amount claimed in the five notes is $1,765,902.

642.  A letter dated the 29^th November 2002 was sent on Bonaventure letter heading to Best Joint stating that with regard to the Business Promotion agreement of the 2^nd August 2002, that as from the 1^st December 2002, the rate of consultant commission was to be reduced from 10% to 5% as the sale performance had not arrived “to the expected target of the company”.

643.  Under caution D2 admitted receiving money from Kenny Cheung but said it was a personal loan for $600,000 in cash because he had some personal financial burdens and that he had given Kenny Cheung post-dated cheques to pay him back.

644.  Despite this matter being the subject of an investigation by KPMG following the Board of Directors meeting on the 18^th December, D2 is very vague when interviewed about this matter by the ICAC.

645.  He admitted he received $600,000 from Kenny Cheung and stated it was a personal loan. He said it should be in 2003. Initially he said he could not remember if it was borrowed on one occasion. He then said it was paid to him altogether but a few questions later said perhaps it was on different occasions.

646.  D2 said he did not know where Kenny Cheung got the cash from and it was given to his as a favour. Kenny Cheung was an acquaintance of his family. He said he thought at the time Kenny Cheung worked for TSL and only found out later he was not a member of staff. He said he was like a promoter. In P122, PW1 identified Best Joint as one of the promoters who prepared  their monthly invoices based on information derived from the monthly Commission Payment reports for commission B.

647.  When the ICAC officer pointed out that Kenny Cheung was a shareholder and a director of a company called Best Joint, D2 said this was Kenny Cheung’s personal business he could not quite remember, he did not have much knowledge of it. When it was pointed out that Best Joint was a promoter of TSL, D2 said that’s possible. When the officer said Kenny Cheung was the boss of Best Joint, D2 said:

   “I don’t, I don’t , I don’t know this company”

648.  D2 said he did not remember that TSL had a contract with Best Joint.

649.  D2 provided KPMG Forensic with a letter from Kenny Cheung which clearly states Kenny Cheung is a director and shareholder of Best Joint which is an agent promoter retained by TSL. He stated that he  attended TSL’s offices daily but is not an employee of TSL.

650.  On the 27^th December 2002, D2 sent PW1 and e-mail to PW1 asking for details of the directors and shareholders of Brighouse, Cinedell and Best Joint, D2 17. I was satisfied so that I was sure that this was a disingenuous attempt by D2 to distance himself from the commission B scheme.

KPMG Forensic Report P1293

651.  D2 said the monies received from Kenny Cheung were a loan. He said he had not “clarified to Christopher Howe” whether or not he borrowed the money.

652.  D2 said he that Kenny Cheung passed money to him but that he had then passed some money on to his father. He said he had passed money to his father as his father had creditors who had to be paid as well and he had not mentioned this to Kenny Cheung when he borrowed the money. D2 said that out of each cash payment received he had kept $100,000 to pay his own creditors and given the rest to his father. In instances when the cash received was less than or equalled $100,000 none was passed to his father.

653.  The statement handed by D2 to KPMG purporting to be the statement of Kenny Cheung states that between July and November 2002, he personally lent to D2 the total amount of $600,000 by was of 5 cash payments ranging from $80,000 and $180,000.

654.  I bore in mind that what D2 told KPMG concerning D1 was hearsay and inadmissible against D1.

Charge 14 Conspiracy to defraud IRD officers

655.  PW1, PW2, D2 and D3 all attended meetings with DTT and the IRD. All were present at various times when lies were told to both DTT and the IRD as to the true purpose and function of the overseas companies. The lies told were very consistent.

656.  PW56 gave evidence concerning the IRD interview with D2, D4 and representatives from DTT on the 20^th February 2004, P1241. With regard to the qualification contained in the KPMG Audit report, D4 told the IRD that TSL management deserved an unqualified report. He said that TSL management had insufficient time to locate the supporting source documents.

657.  PW1 attended an interview with the IRD on the 22^nd March 2004, P1248, before the notes of interview in relation to the interviews with D2 and D4 were sent out by letter dated the 23^rd April 2004. When giving evidence PW56 agreed with counsel for the prosecution that PW1 said that it was probably because they were pinched for time they could not gather sufficient documents to fully explain the case to the auditor for quelling their concern. The notes of interview were amended to read that the auditor was doubtful because the then documents of record were probably not sufficient ( my emphasis).

Deductions from and Observations concerning Evidence set out above

658.  After the introduction of the commission B system, lying became a matter of TSL corporate policy.

659.  Counsel for D2 in his submissions relating to charge 12, stated that numbers don’t lie, PW1 does. However, TSL, over a period of several years, created a vast amount of accounting documentation that did lie. It was expected that PW1 and others involved in the commission B scheme would perpetuate the corporate lies.

660.  These documents came into being to facilitate the accountancy arrangements necessary for the commission B system to operate. The system that was introduced by senior TSL management including the then Chief Executive Officer and the Financial Director. Although there was a separate accounting system for commission B payments the management accounts showed one figure for all commission paid.

661.  Every business promotion agreement entered into by TSL with an overseas company was endorsed by a resolution of the Board of the company signed by its chairman.

662.  This system was sufficiently sophisticated to fool the TSL auditors until KPMG carried out its audit in 2003. Their report dated the 29^th July 2003, P1294, states that TSL had recorded selling expenses of $292 million for the year ended 28 February 2003 of which $22 million was payable to business promoters. The report goes on to state that management had been unable to provide sufficient audit evidence as to the nature and the amounts payable to business promoters during the year ended 28^th February 2003.

663.  This statement appears notwithstanding the KPMG auditors had had sight of the KPMG forensic report which states that the BVI’s were money transfer vehicles and includes excerpts from P122, the flow chart prepared by PW1, explaining that commission B allowed the payment of commission to travel agents which is not evidenced in writing not is it normally disclosed to the Travel Agent.

664.  The audit report states that consequently, KPMG were unable to satisfy themselves as to whether such transactions were properly reflected in the TSL financial statements. This conclusion was reached after the audit team had had access to the KPMG forensic report, P1293, which described the overseas companies used by TSL as money transfer vehicles.

665.  At the time of the KPMG  Forensic investigation there were ongoing IRD investigations. TSL were represented by DTT for the purposes of that investigation. The information supplied to DTT and the IRD by the TSL management was completely at odds with what TSL told the compilers of the KPMG Forensic report. What D4 tells DTT and the IRD is also completely at odds with the information supplied to him by PW1 in the flow chart P122.

666.  The Public Announcement made by TSL dated the 2^nd October 2003, D2-35, misrepresented the findings of the KPMG forensic report with regard to the system whereby commission was paid by TSL to travel agents introducing tourists to its jewelry showrooms. The independent sub-committee set up in December 2002 to look into the disclosures made by D2 at the 18^th December 2002 Board meeting and the payments of commission to third party agents concluded that there had not been any wrongdoing. There was, in my view, clear evidence of wrongdoing disclosed in the KPMG Forensic report.

667.  That report stated the services outlined in the business promotion agreements entered into by Bonaventure and the BVI’s  appear not to be those actually performed by the BVI companies, the BVI companies appearing to actually be money transfer vehicles to facilitate payments from TSL to travel agents (para 3.4.2 of the forensic report).

668.  The Forensic Report also repeats what is set out by PW1 in the flow chart, P122, supplied to the compilers of the report when he defines commission B payments as being commission paid which is not evidenced in writing, nor is it disclosed or normally known to the Travel Agent ( paragraph 6.1.6 of the report).

669.  It was submitted by counsel for D4, that although the evidence established that D4 received a copy of the KPMG report and its draft, there was no evidence that he read it. D4 had taken over as CEO of a publicly listed company which was facing a crisis. I had no doubt whatsoever he would have given the report his urgent and detailed attention. He also approved the subsequent public announcement which refers specifically to the report.

670.   In my view, looking at the totality of the evidence, it is inconceivable that persons holding the positions the defendants held with TSL could not have known that large amounts of money were being sent by TSL to overseas companies purporting to fees for promotional services rendered by those companies. For most of the period involved, TSL was in great financial difficulty and in 2000 entered into a debt restructuring agreement with its creditor banks. Cash flow was being strictly monitored.

671.  Having come by that knowledge, D1 to D4 as directors of this publicly listed company would have been under a duty to monitor significant amounts of expenditure. PW1 told D4 what I accepted to be the truth as to why these payments were made when he provided D4 with P122, the flow chart. He said it was to facilitate payments to travel agents without the knowledge of their employers. He told the compilers of the KPMG Forensic Report the same thing and added that the scheme had tax advantages for the recipients. The directors would be alive to the fact that a large amount of accounting documentation had been generated to conceal such payments. The directors would also be alive to the fact that TSL could claim tax relief on payments made in this way.

672.  D5 over the years distributed millions of dollars in cash to employees of travel agencies. He gave no receipts for the money he received and obtained no receipts for the monies he handed over. There were two sets of documents created, one for commission A and the other for B. He would have seen the daily commission worksheets for Commission A and monthly commission sheets marked “Testing” for commission B payments, forms AG201 and AG404. There were separate code rate forms to be completed depending on whether the commission payments were to be paid under commission A or B. He would have direct dealings with the travel agency employees.

673.  For the first year of the commission B scheme, D5 was involved in project B whereby he and 16 of his junior colleagues in the showroom division, on a monthly basis, signed false documents purporting to be payments of staff promotional commission. The tax implications of such payments were taken into account. The recipients were given 7.5% of the purported payment to cover their increased tax liability. He was interviewed by the ICAC in 1996 about illegal commission payments to employees of travel agencies. He was the third most senior employee of the showroom division. PW1 and PW2 were friends of his and would discuss company affairs over the years. I accepted the evidence of PW1 and PW2 that they spoke to D5 about the commission B scheme and the overseas companies. I had no doubt whatsoever he was aware of the illegal scheme and participated in it.

674.  The commercial advantages of the Commission B scheme were obvious. The false accounting documentation created enabled TSL to distribute on a monthly basis large amounts of cash to travel agency employees for which there were no records. Whether the payments to the employees were without the consent of their principals or the employees did not want to acknowledge receipt of the monies, they would be more disposed to patronize the showrooms of TSL than the showrooms of other companies who were not prepared to offer this advantage.

675.  The false accounting documentation would also enable TSL to claim that the payments were genuine and deductible as an expense for tax purposes.

PW1 in Perspective

676.  Counsel for D2 made submissions to the effect that PW’1’s evidence was so far-fetched, inconsistent ,tainted, mendacious  and generally lacking in credibility, that the court should treat his evidence as having been given by someone who had lost his grip on reality.

677.  I propose at this stage of my judgment to examine the extraordinary events of late 2002 and early 2003 from the perspective of PW1.

678.  The ICAC carried out an investigation in February 1996 into an allegation that monies had been paid to employees of travel agencies without the consent of the employers. PW1 and D5 were interviewed.

679.  Following that ICAC investigation, the senior management of TLS decided to put in place commission B. Under this scheme millions of dollars of commission each month was paid by TSL to an overseas company which then channelled back to Hong Kong and paid to travel agents in cash without receipt. PW1 was centrally involved in the commission B scheme and from early 2000 controlled the BVI companies involved. Members of his family were involved in the setting up of the companies and handling the monies transferred.

680.  It was resolved at the Board Meeting of the 18^th December 2002, KPMG were to be commissioned to conduct their forensic investigation into, inter alia, the commission payments made by TSL to overseas companies. An independent sub-committee of the Board was appointed comprising of four independent non-executive directors of the Board to carry out investigations and prepare appropriate reports on the company’s affairs. KPMG were to be authorized to inform HSBC, as the coordinating bank for the Bank Creditors of the company about the Company’s affairs.

681.  It would clearly be an understatement to say that PW1 must have been very alarmed at these developments.

682.   The following day D4, a person vastly experienced in corporate affairs and with impeccable corporate credentials, was appointed Chief Executive Officer of TSL.

683.  PW1 was obviously in a great dilemma.  As the person in charge of the showroom operation it must have been obvious to him that he would be the person called upon to speak to the KPMG investigators. In 1996 he had been interviewed by the ICAC in connection with alleged illicit payments to travel agents so he could have entertained no illusions as to the gravity of his situation.

684.  It is disputed that he went to D2 to discuss the problem and D2 suggested he speak to D4. What is not disputed is that PW1 did speak to D4, an expatriate and a complete stranger to PW1.

685.  At this time there was an ongoing investigation by the IRD into payments made by TSL showrooms to travel agents. PW1 had told DTT who were representing TSL in that matter when they visited TSL showrooms that the overseas companies were carrying out promotion work for TSL overseas for which they were paid on a head count basis.

686.  When PW1 saw D4 he did not tell him what he told DTT, that the payments were made for services actually provided by the overseas promoters. PW1 did not say that the arrangement with the overseas company was simply for tax planning purposes.

687.  What PW1 tells D4 put not only himself but also members of his family at very great risk of prosecution.

688.  What PW1 told this complete stranger was that for years, he has been involved in a sham arrangement to facilitate payments to employees of travel agents without the knowledge of their employers. He must have said words to that effect as he subsequently provided him with the flow chart, P122.

689.  The flow chart makes it abundantly clear that the BVI’s do not perform the functions stated in their business promotion  agreements with TSL. The document states that the arrangement with the BVI’s was to facilitate monies being paid to agents which are not evidenced in writing or normally known to the management of the travel agent. The document reiterates that such payments are not known to the management of the travel agent.

690.  On having this explained to him orally and in writing D4 does not immediately resign, ring the police or the ICAC, dismiss PW1 or suspend PW1. What he does is to tell  PW1 to provide the flowchart to the KPMG investigators. At this stage PW1 must have thought he needed a reality check. Nothing happened to PW1 and he continued to operate the commission B system.

691.  He then told the KPMG investigators what is set out in their report. He repeated what is set out in P122 and he added that the scheme also benefited the recipients of the commission from a tax perspective. Again nothing untoward happened to PW1 and he carried on with the commission B arrangement.

692.  The KPMG forensic report was finalized at the end of February and was sent to the TSL board, including the independent non-executive directors. The report concluded that the BVI companies were money transfer vehicles and quotes what PW1 told the KPMG investigators as to its purpose. Again, nothing happened to PW1 and he carried on with the commission B arrangement.

693.  The KPMG forensic report was shown to the KPMG auditors who produced the qualified report in July 2003 concerning the accounts for the financial year 2002/3.This report states that concerning $22 million paid to business promoters, the management of TSL were “ unable to provide sufficient audit evidence as to the nature of the amounts payable to the business promoters”. Of course there was insufficient audit evidence. The whole arrangement between TSl and  the overseas companies was to their knowledge a complete sham.

694.  The Auditor’s comments, P1313, on the KPMG Forensic report states that the report was inconclusive but “ certain internal control weaknesses were identified”. The auditor stated that “ the Board of Directors have reviewed and discussed this transaction arrangement and they were not aware of any fraud involved in these transactions and these promotion fees were genuine payments and it was ( sic) arisen in the ordinary course of business to generate tourist sales business to the Groups’s showrooms.”

695.  PW1 could scarcely have believed his eyes when reading these words. To describe the commission B system as an “internal control weakness” is not simply misleading, it is false.

696.  The matter did not conclude there. There was still the public announcement to be prepared. The Public Announcement, D2-35, dated the 2^nd October 2003, was made by order of the Board and in consultation with KPMG and Herbert Smith. It referred to the KPMG forensic report as having identified certain “internal control weaknesses” in relation to TSL showroom commission payment system and concludes that there has not been any wrongdoing. Again, PW1 could hardly have believed his eyes when reading this document.

697.  As I mentioned above, at this time, there was the ongoing IRD investigation into the commission payment system. PW1 had already told DTT about the overseas companies being used for legitimate commercial reasons. He later repeated this to the IRD. PW1 is present when D2 and D4 repeat the same lies to the IRD.

698.  PW1 must indeed have felt that he was inhabiting a different world. He had moved into the world of corporate fiction.

699.  I had no doubt whatsoever that what PW1 set out in P122 is true and was the main purpose for TSL using the overseas companies.

Brief Summary of the Evidence of other key TSL Employees

PW2

700.  PW2 is an accomplice and an immunized witness. He stole money from the company and worked closely with PW1. His evidence had to be approached with considerable caution.

701.  PW2 came to know D1 in about 1980. He initially assisted D1 in the setting up of a finance company. In around 1983, he was engaged by TSL as an Administration Controller. In around 1984 he became the business controller of TSL, responsible for the showroom branches. He reported directly to D1 and was senior to PW1. In around 1986 he left TSL and was employed by another jewelry company with the sponsorship of D1. PW2 rejoined TSL in 1990 and worked as the General manager of the showrooms. He was promoted to the position of Business Controller in about 1992, reporting directly to PW1. PW2 remained in this position until he purportedly left TSL when Worldwide was set up. He and his assistant, Chris Chan, then moved to a different office on the 12/F of the building occupied by TSL. The rent for the office was paid by TSL.

702.  PW2 was responsible for the operation of the showrooms. His day to day work focused on contacting travel agencies. He was assisted by Chris Chan until March 1999 when the HK and DY showrooms were sold by TSL to Dynamic King. Chris Chan was mainly responsible for calculating commission B. He would prepare the summaries and invoices for PW2.

703.  In his evidence in chief, PW2 said at the time of the ICAC investigation in February 1996 payments were being paid to travel agents without the consent of their employers. He said the purpose of the meetings that followed the ICAC investigation was to find a way to have supporting documents for those commission receipts.

704.  PW2 explained that the codes 7,8 and 9 which appear in P16 and other formative documents referred to a special commission arrangement called “Fei tan”. He said that when tourists came to make purchases, for part of the commission instead of paying the agencies it was paid to the tour guides without the consent of the agencies.

705.  In his evidence in chief PW2 said with regard to the consent letters, P11, sent out by TSL in April 1996 that if a travel agency did not return the letter signed to indicate that they consented to payments to their employees TSL would consider the scale of the business with the particular agent. If small TSL would end the relationship but if large TSL would have no alternative but to accept the position. He said with regard to C4 payments, if the consent letters were not received back from the travel agencies, the payments would be made via the overseas companies.

706.  When cross-examined by counsel for D1 he agreed the emphasis of the commission scheme was to enable TSL to claim tax benefits on the payments. He said the real aim was to cover the real expenses incurred by TSL. He said even at the time of giving evidence he was not 100% sure if the arrangement was legal or not. I did not believe this evidence from PW2.

707.  In re-examination PW2 was referred back to P18, a confidential memorandum dated the 7^th September 1996 from PW2 to PW1 and PW4 containing a list of agencies showing the new arrangement under the James Bond project. He was also referred to P12, the unsigned minutes of a meeting concerning commission payments to travel agencies. At that meeting PW2 reported 26 companies had not signed back consent letters. In respect of one company which refused to sign back the consent letter it was agreed the account be rescinded. PW2 reported that the companies referred to , Jalpak and P and O, did not agree to the contents of the consent letter and as they contributed considerable profit to TSL the situation would be accepted temporarily

708.  There is no reference to P and O in P18. PW2 said they were paid commission by way of File B. PW2 said that for C3 and C4 payments, they would be put under file A if TSL had received clear instruction from the travel agency and had received the confirmation letter. He said such payments were sometimes made together with the C1 and C2 deliveries. He said that on the other hand, if TSL did not have clear instruction from the travel agency or receive the confirmation letter, such payments would be made under File B. He repeated that the payments under codes 7,8 and 9 ( Fei tan ) were all under File B.

PW3

709.   PW3 was the Chief Executive Officer of TSL at the time of the commission B discussions and participated in some of them. He holds an MBA qualification.

710.   He joined TSL in 1995 and left in 1998. He gave evidence under a full immunity from prosecution. Notwithstanding his immunity PW3 was clearly uncomfortable about giving evidence about the commission B system. He purported to have a poor recollection of the details and constantly said the he could not recall many of the events because they occurred so long ago. He said he could not clearly recall the discussions which took place about the commission payment system and said that the major part was taken by PW1 and PW2. I found PW3 to be an evasive witness who was anxious to distance himself from the commission B scheme.

711.  With regard to the showroom commission payment system he said he had not much awareness of the details. He said that following the February 1996 ICAC investigation meetings were held in order that TSL could avoid the risk of doing anything illegal. He said that tax issues were discussed but illegal commission payments were the major topic, commissions paid without the authority of the employer. He said that he was told by PW1 and PW2 that there were a lot of evil people in the trade, there were quite a lot of traps, just like a minefield.

712.  He said that one of the reasons for setting up the overseas company was to shift the risk of paying illegal commission from TSL to the overseas company. He said that D1 attended at least one of the meetings. He said he could not recall if D1 attended the meeting before or after the consent letter was sent out in April 1996. He said his impression was that D1 wanted to continue the business but not to break the law. He said the more intensive discussions took place after the sending out of the consent letter.

713.  PW3 said that the whole scheme was to ensure that on the one hand TSL was not making unauthorized payments and if it did, it was protected from liability.

714.  PW3 said the issue of tax came up only in the context of travel agents not being liable to pay tax on the commission payments.

PW4

715.  PW4 started working for TSL in 1984 as the financial controller. She remained with the company until February 2000. She is a certified public accountant. She gave evidence under immunity.

716.  She said throughout her time at TSL she reported to D1. She said she took part in the numerous discussions that took place in connection with the setting up of the commission B system. She said the system was set up to facilitate payments to travel agents without the knowledge of their employers and in circumstances where the payees did not want to declare their income to the revenue.

717.  PW4 said that D1 was occasionally present at the meetings and was aware of the proposals to set up an overseas company and the reasons for setting it up. She said he agreed to it. She said he indicated his consent at a meeting at which she was present. She said she reported to D1 several times about the discussions. She said D1 agreed to the proposal before P19 was signed. Under cross-examination by counsel for D4 she agreed that the major roles for the setting up of the commission B system were played by PW1, PW2, PW3 and D1 for discussing the overall plan. She said that all payment requisitions would be prepared properly and there would be supporting data.

718.  PW4 said that project B was set up because if an unduly large amount was sent to the overseas company, it might attract audit attention to commission B payments. She said the problem of the commission B payments being unreasonably large was a constant danger. PW4 agreed that she did not want the auditors to know about commission B. She agreed that the audit committee reports for 1999 made no reference to the use of overseas companies and commission payments.

719.  PW4 said she informed D1 of the HC entertainment fee plan to pay commission B and D1 agreed to the plan. PW1 said she discussed with PW1 and D5 about the commission payments for the HC showroom. She said that D5 said that the showroom dealt in pure gold for which the profit was relatively low so commission to travel agencies would be smaller. She said it was agreed that instead of using commission B they would use entertainment expenses payable to D5. The payments would initially be made to D5 who would pay the tour guides. She said the rate of 2.% of sale was agreed upon.

720.  PW4 was shown documents by counsel for D5 which indicated that the entertainment expenses put in by D5 for the HC showroom did not exceed 1% when it started. PW5 said she had read a document produced to her by the ICAC which stated that 2% was the limit. It was submitted that there is no document from the prosecution stating that D5 was entitled to a limit of 2% and that her evidence is simply untrue. However, the KPMG forensic report at paragraph 6.4.1 states as follows:

“Mr S. Wong told us that Commission B arrangements do not exist for the HC showroom. Instead, commission of 2% of the total sales are paid to Travel Agents in the form of cash or other benefits, such as entertainment.”

721.  I reminded myself that this evidence is not admissible against D5. The prosecution did not seek to rely on it. It is however relevant to the point made by counsel for D5 that no document for the prosecution stated that D5 was entitled to a limit of 2%.

722.  PW4 disagreed with the case put by D1 that there was no reporting to D1 of the existence of the commission B scheme. She said whatever she did at TSL she did with the approval of D1. She disagreed that she did not consult D1 about the HC showroom matters. She said that the major roles in the designing the commission B scheme were PW1, PW2 and herself, sometimes with the participation of D1 for working out the plan. She disagreed that commission B was only concerned with whether or not the recipient was willing to sign a receipt for the commission payment.

723.  PW4 said that she was responsible for the preparation of TSL tax returns. She said TSL claimed commission B payments as an expense in the tax returns. She said that the auditors at the time were DTT. They had access to the commission A payment receipts and the invoices submitted by the overseas company, Worldwide. She said they were never informed of the true reasons for the payments. She said that DTT would not have access to the AG405 commission summaries  for commission B payments as they were not regarded as accounting documents.

PW5  Yim Yuen Ching, Wendy

724.  PW5 joined TSL in 1984 as a senior auditor. She left the company in 1985 and rejoined in 1987 in the accounting department as an accounting financial officer. She reported to PW4. In 1992 she became the controller of the accounting and finance department. She stopped doing accounting work for TSL in 1998.

725.  She participated in some of the James Bond project meetings. She said she attended because the project concerned the work of her department.

726.  She said a separate computer system had to be arranged in respect of commission B which had a separate menu and password. She said it was not designed for the accounting record of TSL.

PW39 Paul Wong

727.  I have set out much of the evidence of PW39 above in relation to charges 13 and 15 to 18. These charges relate to the alleged theft by D2 and D3 of a bonus due to Paul Wong.

728.  Paul Wong gave evidence in the United States under the provisions of the Mutual Assistance in Criminal Cases Ordinance, Cap 525.

729.  PW39 is a former President of TSL China, otherwise known as Infinite Assets Corporation ( IAC). He worked with TSL from the mid-1980’s until his retirement in 2001 and was a 7.5% shareholder in IAC. By a contract effective at the date of his retirement, P 891, he earned a monthly salary of $113,000 and a bonus calculated at a rate of 3.5% of the annual profit of the audited accounts of IAC.

730.  PW 39 resigned by letter dated the 3^rd July 2001, P892, and gave 3 months notice. By letter dated the 10^th October 2001 from Rachel Chow of TSL, P1228, PW39 was paid his outstanding salary and informed his bonus would be calculated in due course. The letter incorrectly refers to his contractual bonus as a discretionary bonus. The defendant said he had not expected a bonus as he did not complete his services for the entire year. That letter and a cheque were handed to him by D3 at a meal attended by D1, D2, D3 and Mr Qi. PW 39 signed a receipt for payment and on a copy of P1228 he endorsed a request dated the 6^th March 2002 inviting Rachel Chow to advise him of the status of his bonus and gave his contact telephone number and e-mail address.

731.  On a date he could not recall, PW39 said he received P886, a document headed Bonus for IAC from D3. He said D3 told him that originally he was going to receive $140,000 but that after deductions the sum should be zero. He said that despite this D3 told him the company had decided to award him a discretionary bonus of $100,000 in appreciation of his services.

732.  PW39 said that on or about the 27^th March 2002, PW39 said he had a telephone conversation with D3 in which she informed him that he could collect the cheque for $100,000. He said because of parking difficulties in the area around the office he arranged to wait in his car outside the office for D3 to hand the cheque over to him. This took place at around twilight. PW39 said D3 said nothing to him when she handed over the cheque and he did not expect to receive anything further.

733.  PW39 disagreed the cheque had been handed over at a luncheon held on the 27^th March 2002 at the Shangri La Hotel. He agreed he did attend a luncheon with D3, D2 and Mr Qi that day but denied D3 handed over the cheque then and implied there was more to come.

734.  PW39 agreed that he had been paid substantial bonuses in previous years. He was shown figures relating to the profits for the year in question and was cross-examined to the effect that he must have been expecting far more than the $100,000 paid to him. PW39 agreed that he could have found out what the profits were for the year in question but was adamant he did not expect any further bonus.

735.  It was not disputed that PW39 had not made any further enquiries of TSL after being paid the $100,000 and the next discussions about bonus were on the 19^th December 2002 when PW39 agreed to meet D2 and his father.

736.  It was suggested in cross-examination that PW 39 was difficult to contact and documents were produced dated 1992 and 1995 suggesting PW39 was difficult to contact.

737.  However, the day after the 18^th December Board meeting D2 is able to contact him by telephone and an e-mail is sent to PW39. The telephone number and e-mail address were those supplied by PW39 to the company on the 6^th March 2002. It was never suggested to PW39 that e-mails had been sent to him or efforts to contact him by telephone had been made between the end of March and the 19^th December 2002.

738.  The comprehensive letter from Andrew Ng and Company, Solicitors to Herbert Smith, P880, dated 8 January 2003 deals comprehensively with this matter. The letter does not state that TSL had any difficulty contacting PW39 or suggest that any efforts were made to do so. The letter states that the reason for not contacting PW39 was because of the number of urgent and important matters which kept D2 very busy and delayed the handing over of the bonus monies.

739.  It was suggested to PW39 that he invented part of what he told KPMG forensic and the ICAC to settle old scores with D2. This was an area that was gone in to in some detail in cross-examination. The letter from D2’s solicitor to Herbert Smith, P880, states that D2 intended to hold a meeting with PW39 to hand the bonus to him “as well as to maintain a continuous good relationship with him since the company might need [PW39’s] cooperation in handling the Chinese partner relationship in the future.”

740.  A number of other matters were canvassed at length in cross-examination. It was suggested he had engaged in underhand dealings on the mainland, worked for competitors, evaded his tax liabilities and profited from a $6m dollar commission payment which was paid to a company owned by PW39 and Mr Qi. He was also cross-examined in detail about the slow rate of remittance of monies from TSL China to TSL Hong Kong and it was suggested he had abused his position to manipulate the system.

741.  It was suggested in cross-examination that the add-back items referred to in P882 related to interest on shareholder loan, heavy tax payments and some rebates. It was suggested that as these were matters which had not been charged to AIC in previous years and they expected PW39 would object if his bonus were affected by these items. PW 39 said he could not understand the add back items.

742.  Documents were produced showing that was a credit limit of $3million on goods supplied to TSL China. When shown the documents, PW 39 agreed that there was such a limit but it was clear from the document supplied that the limit was never adhered to.

743.  PW39 was shown the transfer documents dealing with the sale of his TSL China shares to Mr Qi at a price of $30,000. He said he sold the shares for over $5million. PW 39 said the documents were drawn up by D3 and he never paid much attention to the detail.

744.  PW39 was called as a prosecution witness to give evidence concerning charges 13 and 15 to 18. He was extensively cross-examined about numerous transactions and persons going right back to his first involvement with TSL in the mid 1980’s. He left TSL in 2001 and his evidence was heard in 2008. Concerning the events covered by the charge period, PW 39’s attention was drawn to the monies the subject of this charge on the 19^th December 2002 when he met D2 and D1 to discuss this matter. There was subsequently some correspondence and PW39 was interviewed by the KPMG Forensic investigators early in 2003. PW39 heard no more of the matter until he was interviewed about this charge two years later.

745.  PW39 has suffered from heart problems and his medical condition was such that he was unable to return to Hong Kong to give evidence. When giving evidence in the United States there were times when the case had to be stood down to enable PW39 to rest.

746.  It was suggested by defence counsel that PW 39 was an evasive and dishonest witness and no reliance should be placed on his evidence.

747.  There were matters about which PW 39 was evasive, particularly in connection with the details of the China operation and his tax affairs.

748.  It was suggested in particular that PW39 was lying when he told the court that he must have expected a much greater bonus than the $100,000 paid to him at the end of March 2002. However, what is clear is that there is no dispute that after that payment PW39 never raised the issue of his bonus payment again. He had been given a schedule in March 2002 signed by D3 and dated the 27^th March 2002, P886, which showed he was entitled to no bonus. The first half of the bonus calculation, P887, dated the 27^th March 2002 and signed by D2 and D3 is identical to P886 but contains some “add backs” which result in the calculation of the bonus at $1,921,955. This document was never sent or given to PW39 until the 19^th December 2002.

749.  The question of the bonus was next raised by D2 on the 19^th December 2002. Whatever was said to PW39 by D2 on that occasion, PW39 declined to accept the monies offered. He said he felt it “ inappropriate” and declined the offer after taking legal advice. He said he felt it inappropriate as he had left the company for such a long period of time.

750.  I considered the evidence of PW 39 very carefully and the relevant documentary evidence. I considered his evidence in the context of  D2’s disclosures to PW32 and the TSL Board, what D2 and D3 said to the KPMG Forensic investigators, the letter from D2’ solicitors to Herbert Smith and what was said to the ICAC. I considered all the matters covered in cross-examination. I was sure that PW39 was telling the truth about what occurred in his meetings with D2 and D3 concerning this purported bonus payment.

The Disclosures of D2

The BVI’s

751.  I have set out above in some detail the evidence of the various witnesses as regard disclosures made by D2 to PW32 and others with regard to certain financial dealings.

752.  PW32 told the court that when D2 visited him on the night of the 14^th December 2002 he mentioned inter alia a system that had been set up to facilitate payments of commission to travel agencies that passed through BVI’ companies.

753.  PW32 said the D2 appeared quite confused about that. He said his impression was that D2 really didn’t understand the system in TSL that had been set up in order to facilitate the payment of commissions to travel agents but passed through the BVI companies alongside something else which PW32 thought D2 referred to as a bonus pool.

754.  I noted that there had been discussions held between D2, D3, PW32 and PW33, on the tax liability regarding commission paid to overseas BVI companies on the 22^nd November 2002 at the offices of Anglo Chinese.

Charge 11 – Monies allegedly diverted via D5

755.  PW32 said that when D2 came to see him on the 14^th  December 2002 he wanted to talk to him about monies he and his father had received. PW32 said D2 told him he had received cash in a box. Later,   in cross-examination, PW32 agreed it could have been in a brown envelope rather than in a box. He said D2 told him that he and his father had received money for some while on that basis. He said he could not recall how much D2 and his father had received but believed it was a larger sum than D2 said he received himself. I reminded myself this evidence was inadmissible against D1.

756.  PW32 said that the following day he met D2 again at the office of Anglo Chinese together with PW 33 and D2 repeated what he said the previous day. Another meeting was held on the 17^th December at which D2 was again present. As a result a decision was made to hold a Board Meeting on the 18^th December.

757.  In re-exanimation PW32 was referred to P1297, the draft notes of the meeting held on the 17th December, typed on Anglo Chinese letter heading. The second bullet point under “A” reads “ the father of Tommy Tse had received approximately $80,000 per month from this arrangement” and confirmed what D2 had said. I again reminded myself this evidence was not admissible against D1.

758.  Frederick Leung, PW33, said he made a note of the meeting held on the 16^th December. He recalled PW32 repeating what D2 had earlier told him which included inter alia, “Tommy’s father got $85,000 since March 2002 every month.” Again I reminded myself this was not admissible against D1.

759.  PW33 also testified that at the 17^th December meeting it was said that Tse senior received $80,000 through the BVI companies.

760.  I bore in mind that the prosecution case in respect of this charge was that the money was not stolen through the BVI commission system but under the pretence of a sham bonus offered to D5 for the HE showroom.

761.  PW33 also said in relation to the alleged disclosure relating to this charge that he heard PW 32 saying that D1 was receiving money and D2 was aware of it since October 2001. PW32 said in his evidence in chief that D1 had been receiving this money for years. The alleged conspiratorial meeting between D3 and PW1 did not occur until February 2002.

762.  I bore in mind that D2 told the KMPG forensic investigators that out of each cash payment he received from Kenny Cheung by way of loan, if he received more than $100,000 he gave the excess to D1. Again, I reminded myself this was not admissible against D1.

763.  When he is interviewed by the ICAC D2 does not tell the ICAC he gave part of the monies to D1.

Charge 12 – Monies allegedly received by D2 from commission payment to Best Joint

764.  The prosecution alleged that the payment made to D2 from Kenny Cheung in the period July to December 2002 were made using an agreement with Best Joint which is controlled by Kenny Cheung. The defence case is that these payments were made but they were a loan.

765.  PW32 said at the 14^th December meeting with D2 at his home, D2 told him that he had received money which ran counter to the advice he had been given as to how to assist the company. PW32 said for the last four or five months the amount had been $80,000 to $100,000 per month.

766.  PW32 said he met D2 again with PW33 at the office of Anglo Chinese on the 16^th December where as far as he could recall, D2 repeated what he said at his home. PW32 said he told D2 that his receiving $85,000 to $100,000 per month was a matter of grave concern for them and they had decided to call a board meeting.

767.  PW33 said at this meeting both D2 and PW32 spoke about what D2 had told PW32 earlier including that D2 had received $85,000 to $100,000 per month for a few months.

768.  PW 32 said that on the 17^th December he arranged a meeting of the advisory team and independent non-executive directors of TSL as well as D2. He said that he requested D2 to run through again what he had told him and D2 did.

769.  PW 32 attended the meeting on the 17^th December. He recalled both D2 and PW 32 speaking and he recorded in his notes that D2 had received $100,000 per month

770.  PW36, Anny Leung, a trainee solicitor with Herbert Smith attended the meeting of the 18^th December to take a note. She prepared the minutes together with her supervisors at Herbert Smith. On the first page there is an entry:

“ Mr Tse took the chair and informed the board meeting of the following

(1) Between July and November 2002 he had apparently procured for himself from showroom staff sums of money between $60,000 to $100,000 per month”

771.  PW35, Gerald Dobby, a non-executive director, told the court he attended the Board meeting on the 18^th December. He said he later signed the minutes which he believed to accurately reflect what was said at the meeting. He said he had also been present at the 17^th December meeting when PW32, in the presence of D2, provided the same information as in the minutes. He said at the Board meeting D2 was not emotional.

772.  With regard to the 18^th December Board meeting, he recalled D2 sitting at the top of the table talking about the four matters. PW35 said “it was quite an impact. He said what he said with note-takers present”.

773.  PW34, Robert Chui, a non-executive director, testified that he attended the board meeting on the 18^th December and he recalled that at the start of the meeting D2 said between July and December 2002 he had got a share of money from a showroom staff member and the amount ranged from $60,000 to $180,000. He said he later initialled the Board minutes and was satisfied they accurately reflected what D2 had said.

774.  PW 32 said he also initialled the minutes to approve them. He said he noticed the sums of $60,000 to $180,000 differed from what D2 had mentioned in his home on the 14^th December which was $100,000 per month.

775.  PW33’s recollection of the 18^th December Board meeting was that D2 mentioned receiving $100,000 per month since July 2002.

776.  I bore in mind that at the time of these disclosures in 2002 KPMG, the TSL auditors were concerned about a very large amount of receivables due from a BVI company called Sino Sources International ( Sino Sources) and from the China operation. The large amount of money due, ($60 million) was a great concern to the TSL Board and Anglo Chinese. There was a suspicion that Sino Sources was a company used by the Tse family to milk money from TSL.

777.  At a meeting in November 2002 at the offices of Herbert Smith and a second meeting at Anglo Chinese, PW32 recalled D2 telling him he did not know who was behind Sino Sources but it had nothing to do with the Tse family. He said other board members thought TSL was not properly run and wished to get as many Tse family members out of the company as possible. PW32 recalled telling D2 that if the management of TSL did not improve Anglo Chinese would resign which would almost certainly have led to the collapse of TSL.

778.  PW32 said at the meeting at his home on the 14^th December 2002, D2 was hysterical. He said he came with some Sino Sources documents to show that the perceptions that the Tse family was behind the company and milking TSL money were wrong.

779.  PW32 said he could not discount the possibility that D2 said he he had some personal dealings with an associate of the company and borrowed money from him. PW32 agreed he would have recalled if D2 had told him that he had stolen TSL money and that he did not say that. He agreed he told D2 something along the lines, “ Tommy, I’m sure you have done nothing criminally wrong, we’ll sort it out.

780.  What I find irreconcilable with this concession by PW32 that D2 might have mentioned that the monies to which he was referring might have been a loan, is how PW32 could have got matters so very wrong when he and D2 met PW33 on the 16^th December and at the subsequent meetings. He reported the matter the next day to PW33 in the presence of D2 and does not use the word loan. D2 does not correct him.

781.  The draft meeting notes of the meeting at Anglo Chinese on the 17^th December 2002 signed by PW32, P1297, refer to the possibility of false accounting, conspiracy to default or theft. The notes state that:

“ Mr Tommy Tse had received an aggregate of approximately HK$100,000 in the past three to four months from this arrangement”

The arrangement referred to is the arrangements whereby commissions are paid to overseas travel agents. The notes state that the whole incident might lead to investigation by the ICAC. They are inconsistent with the concession made by PW32 as to what D2 might have said.

782.  PW32 had at that time a close working relationship with D2. PW35 observed that PW32 and D2 had a close and cordial working relationship.

783.  I noted that in connection with the minutes of the 18^th December Board meeting D2 did dispute them and asked to see the notes of the meeting taken by Herbert Smith. The manuscript note taken by Joanna Claydon of Herbert Smith at that board meeting do not reflect the words in the minutes. Her record refers to D2 mentioning a personal transaction with showroom staff through which he obtained between $60,000 to $180,000 between July and November 2002. PW 34 did not rule out the possibility that the terms personal transaction or personal dealings might have been used.

784.  PW36, who prepared the initial draft of the minutes told the court that her note as regards this matter contains the phrase “personal transaction”. The word transaction does not appear in the minutes. No one’s notes of the meeting contained the word “procured for himself”. PW36 said amendments were made to her original draft of the minutes by her bosses Mark Johnson and Joanna Claydon. PW32 said he agreed that the wording of the minutes were unfair to D2.

785.  Whatever words were used by the defendant in this regard, I have no doubt whatsoever that he at no time used the term loan to describe the monies he had received. Nowhere is the word loan used to describe the transaction in any of the records kept up to and including the meeting of the 18^th December. If the transaction had been a loan, I was sure D2 would certainly have corrected PW32 when he spoke at meetings about this matter.

786.  If this had been a loan which D2 was in a position to repay, I am sure D2 would have told PW32 in clear terms that this was the situation.

Charge 13 – Conspiracy to steal from TSL – The “Paul Wong Bonus”

787.  PW32 told the court that when D2 came to see him at his home on the 14^th December 2002, D2 told him that he had paid the bonus of Paul Wong to himself. He said he thought the bonus was around $1.2 million.

788.  PW32 said he met D2 again at the office of Anglo Chinese with PW33 on the 16^th December where D2 repeated what he said.

789.  PW33 said he attended the 16^th December meeting. He said D2 gave a brief summary of events which included that a bonus of  $1.5 million which was to be paid to Paul Wong, had been given to D2. In cross-examination by counsel for D2, PW33 said he understood the bonus was supposed to be for Paul Wong but somehow it had come into Tommy’s hands and he took it.

790.  PW32 said at the 17^th December meeting with the non-executive directors and others D2 repeated what he said. This was confirmed by PW33.

791.  The minutes of the 18^th December in connection with this matter record the D2 said “ he had apparently given himself a bonus of RMB 2 millions in April 2002 out of the company’s China business”. The words “given himself a bonus” do not appear in the manuscript notes of PW36 or Joanna Claydon.

792.  PW34 said he recalled at the 18^th December meeting, D2 said at the start of April 2002, D2 had taken RMB 2 million from the company and that he had taken it from the operation in mainland China and it was for a bonus. He said he initialled the minutes as he was satisfied they accurately represented what happened at the meeting. PW34 said D2 was emotional at the meeting.

793.  PW35 said he believed the minutes were accurate. He said D2 said he had given himself a loan of RMB 2 million out of the company’s China business. He said he recalled D2 saying the same the night before.

794.  PW32 said there was no resolution made in respect of the “Paul Wong bonus” at the 19^th December Board meeting. He said that he  was not sure but they thought they concluded that D2 did not intend to take the money improperly after various discussions which they had and as D2 clarified the matter. PW32 said they might have been unduly concerned with the motivation for the bonus payment.

795.  I was sure that if this money had been sitting in D2’s office safe  as alleged in the letter from his solicitors, P880, I am sure this is something D2 would have mentioned to PW32 when he first saw him or at the subsequent meetings. Moreover, if the money had been sitting in his safe, I am sure before contacting PW32, D2 would have tried to make contact with PW39 to arrange for the bonus to be given to him. Had it been dealt with in that way, that would have been the end of the matter.

FINDINGS

Charges 1 and 2

796.  These charges allege that all the defendants and others conspired together to offer advantages to agents and commit false accounting between the 2^nd August 1996 and the 30^th April 2003

797.  The period covered starts just before the use of the first overseas company, Worldwide, and ends when the companies Brighouse and Cinedell ceased to be use for money transfer purposes.

Summary of the Evidence Relating to the Alleged Conspiracies

Witnesses

PW1

798.  He gave detailed evidence of the events leading up to the setting up of the commission B system and the overseas companies.

799.  He said that following the investigation by the ICAC in February 1996 meetings were held by the management of TSL to design a new system for commission payments to travel agents bringing tourist to the TSL showrooms. He said the commission B system was introduced to handle commission payments which would not be properly recorded and included commission payments to managers and tour guides without the consent of their principals. He said that such payments could be concealed from the IRD.

800.  Within a short time of D4 joining TSL at the end of 2002, PW1 produced to D4, a document headed “ Flow- Chart of the Overseas Promotion Fee ( Table B)”  setting out the main objectives of the commission B system, i.e., to facilitate commission payments which are not known to the management of the Travel Agent, P122. PW1 also provided this document to the KPMG Forensic investigators. By making this disclosure to D4, a complete stranger, and to KPMG, PW1 was exposing himself and some of his family members to risk of prosecution. He also explained to KPMG Forensic the tax advantages of the scheme to the recipients of commission B.

801.  PW2 also participated in the management meetings held in 1996. He proposed payments of commission to be paid without anyone’s confirmation should be paid through an offshore company. He said this included commission paid without the consent of the owner. In his evidence-in-chief, he said that where travel agencies had not responded to the consent letter, P11, payments would be made to employees of agents who had not given their consent if they did sufficient business with TSL. In cross-examination when shown documents by counsel for D1 he agreed with defence counsel that the use of the overseas company was not related to the issue of consent and was a tax planning scheme. However, PW2, in re-examination, confirmed that payments were made to employees where there was no consent from their principals.

802.  PW3, the Chief Executive of TSL in 1996 gave evidence about the discussions held by management in 1996 relating to commission payments. I found PW3 to be an evasive witness. He frequently claimed to be unable to recall events and was eager to distance himself from what took place. He said that after the consent letter was sent to the travel agents he was told by PW’s1 and 2 that some agencies did not sign and return the consent letter for various reasons which were complicated. He said that PW1 and 2 told him there were quite a lot of evil persons in the trade and there were quite a lot of traps just like a minefield. He said they told him it was necessary to work out a long term solution to remove the risk. He said that the tax issue was discussed but the main topic was illegal commission. They wanted to shift the risk from TSL to the overseas company.

803.  PW4, the Financial Director of TSL in 1996, was involved in the 1996 discussions. She said it was decided to set up an overseas company and to implement Project B for payments made without the employers knowledge and in circumstances where the employees did not wish to declare income to the IRD. She was shown a number of documents by counsel for the first defendant in particular with a view to establishing that the purpose of the Commission B system was not to facilitate illegal payments to employees of agencies. She agreed this was so on the face of the documents with which she was presented but was adamant that the scheme was for making payments of illegal commission without consent. She said Project B was put in place for the same purpose.

804.  PW5, Wendy Yim, the assistant deputy manager of the Accounts Department also attended management meetings in 1996. She said it was decided to set up an overseas company and to implement Project B to handle problematic payments when travel agencies had refused to sign and return the consent letter, P11, and where travel agencies did not wish to pay tax. She said that by using the overseas company there would be no record of TSL making payments to the travel agencies or their staff. She said that the symbols M and G were changed to C3 and C4 on company documents since the group did not want people to know what C3 and C4 represented. She said that the codes 7,8 and 9 were included  as C3 and C4 payments.

805.  PW5 said she informed PW41 of the Human Resources Department of the purported promotional commission received by the staff so she could prepare the tax returns.

Documentary Evidence

806.  I considered the formative documents to which I have already referred, P12 to P19

807.  I considered the various agent code and other documents which contained the word “Testing” to denote they related to the commission B scheme.

808.  I considered the sham agreements entered into by Bonaventure and the three overseas companies

809.  I considered the Board resolutions in relation to the agreements

810.  I considered the multiplicity of false invoices issued by the three overseas companies and the false payment requisitions which were generated as a result of these false invoices. They authorized the payment of over $115.7 million to the overseas. For most of this period TSL was in desperate financial straits and all expenditure was being closely scrutinised. I took into account the differences in the payment requisition system. For commission A there would be a daily AG report ( AG 202). For commission B there would only be a monthly ( testing) report, AG 405. There were two sets of code rate maintenance forms, one for each system.

811.  I considered the false staff promotional commission receipts produced to put into effect project B and the accounting arrangements necessary to deal with the extra tax liability incurred by participating staff.

812.  I considered the false payment requisitions generated in relation to Project B.

813.  I considered P122, the flowchart produced by PW1 and produced to D4 at a time he had recently taken over as Chief Executive of TSL and the circumstances which led to his assumption of that position.

814.  I considered P122 in the context of its production to the KPMG Forensic investigators.

815.  I had no doubt whatsoever that the three overseas companies were money transfer vehicles with no legitimate commercial purposes.

816.  I had no doubt whatsoever that the main purpose of the arrangement was to enable TSL to make payments to employees of travel agencies without the consent of their principals. I had no doubt that such payments were intended as an inducement or reward for the employees showing favour to TSL in relation to their principals’ affairs or business. I was satisfied beyond reasonable doubt that such payments were made without lawful authority or reasonable excuse.

817.  In order to facilitate this arrangement,  the senior management of  TSL dishonestly, and with a view to gain for themselves or another or with intent to cause loss to another, created a plethora of false accounting documentation. These documents purported to show that commission payments were made to the overseas companies to promote the business of TSL. No such services were provided. This was a blatant lie. The purpose of such documentation was to conceal payments being made to employees of travel agencies.

818.  The documents purporting to show actual amounts paid to travel agencies and their employees were false. None of the payments made under the commission B system were disclosed in these documents. The false documentation allowed unrecorded cash payments to be made to travel agencies and their employees.

819.  I was satisfied so that I was sure, that the false documentation created to facilitate the commission B system was used to enable TSL to claim tax deductions on such payments. I was sure that the lack of documentation would assist the evasion of tax by the recipients. I bore in mind that these matters were not specifically charged but in my view such considerations were material to the false accounting charges. The false accounting documents created would show payments to overseas companies which were bogus. Such documents were relied upon by TSL to claim such payments against tax. There would also be no documentation evidencing the payments to the commission B recipients.

820.  I was satisfied so that I was sure that these were single conspiracies using different money transfer vehicles with the same dishonest and illegal objectives. The conspiracies were conceived in 1996 and continued until April 2003. During that period, senior personnel changed but the commission B system continued throughout.

821.  In view of these findings I do not propose to deal with the alternative charges 3 to 8.

Evidence Relating to Each Accused

D1

822.  PW’s 1 and 4 both told the court that they kept D1 informed of the progress of the management meetings held in 1996 to find a better way of handling the payment of commission to employees of travel agencies.  They said that D1 agreed to the proposal to use overseas companies and they had outlined to him the commission B system. PW 4 said D1 agreed to the resolutions to implement projects A and B set out in the confidential memorandum, P19. PW4 was the Financial Director under D1 for many years. I could see no reason for her to keep matters from D1. I accepted her evidence that she kept D1 informed as to what was happening.

823.  I took into account that no business promotion agreement with any of the overseas companies was entered into without a Board resolution signed by the Chairman of TSL and initialed by at least 2 directors (P20,21,22, and 40). D1 signed P20, 21, 22 and 40.

824.  As regards the evidence in relation to D1, I took into account that he was surrounded by professional, highly educated staff on whom he relied. He had left school when 13 years of age. The fact that he had not had the advantage of higher education, however, does not mean he is unintelligent. I also took into account that the documents produced which he had either signed or initialed were in English. D1 can neither read nor speak English. D1 was the chairman of a publicly listed company. Most of the official documents or documents relating to company business would have been in English. He had access to a number of English speakers.

825.  I took into account that in the late 1990’s the financial position of D1 deteriorated and much of his time would have been spent attending to the complex and protracted litigation that led to his bankruptcy in September 2000.

826.  I was satisfied so that I was sure that D1 was made aware of Project B which lasted for a year and involved 17 members of his showroom staff signing false receipts. This project was used because of the huge sums of money being transferred to the overseas company.

827.  D1 has a clear record which is relevant to the issue of propensity.

828.  There was dispute between the witnesses as to how much D1 was told about the James Bond project and the extent of his attendance at meetings concerning the project.

829.   There was no doubt D1 signed the minutes of the paper meetings concerning the business promotion agreement between Worldwide and Bonaventure, P20 to P22. This was the culmination of months of discussion which followed the ICAC visit to TSL in connection with alleged illegal commission payments to the staff of a travel agency. PW1 had built up this business over a number of years. The showroom business started in 1984 and by 1996 had become an important and significant source of revenue for TSL. D1 clearly has business acumen. He was aware how important to the group was the income from the showroom division. I had no doubt he was very keen for the business to continue and realized that for this to happen ways had to found of continuing the payment commission system without directly implicating TSL. The management team was to find a solution that was legal on the face of it. One of the management team involved was his Financial Director, PW4, who had worked for D1 since 1984. I accepted her evidence that she kept him informed of developments.

830.  It is inconceivable that the payment of promotion fees to overseas companies was a legal solution to the problem of paying commission to agents. The very basis of the arrangement was a sham and I had no doubt whatsoever that D1 was aware of the purported arrangement with the overseas company and that it was a sham.

831.  He was the chairman of the company. I was satisfied so that I was sure the D1 was aware of the arrangement entered into between TSL and Worldwide. It this were to have been a legitimate arrangement D1 would have wanted to have clarified a number of matters. How was Worldwide going to attract 100’s of 1000’s of tourists annually to TSL generating huge profits for the company? What arrangements were put in place to physically get the overseas tourists to the showrooms? What role if any would local travel agents play in this arrangement.  How did this arrangement solve the problem with local travel agents brought to light by the ICAC investigation?  D1 would have wanted to meet up with these overseas benefactors of his company. On paper, Worldwide were responsible for arranging visits to TSL showrooms of 100’s of 1000’s of visitors from various locations around the world, yet no one from TSL ever met up with any of their representatives.

832.  As the economic recession in Hong Kong started to impact on the tourist industry from late 1997, TSL’s  income from the showroom business would come under greater scrutiny. D1’s own economic situation deteriorated to such an extent he was declared bankrupt in 2000. D1 and the TSL management would have been keen to keep expenses to a minimum. During this period significant sums were being sent to remunerate Worldwide under its business promotion agreement with Bonaventure. I was sure this was a matter to which D1 as chairman of the group would have paid the closest attention. These payments were made monthly over a period of three and a half years.

833.  Looking at the totality of the evidence I had no doubt whatsoever that D1 was fully aware that the agreement was bogus and was being used as a smokescreen to conceal secret payments to employees of travel agencies, payments made without the consent of their principals. I was satisfied beyond reasonable doubt on all the evidence that D1 would be aware such payments were made without lawful authority or excuse. I was sure that the senior management kept D1 aware of developments and that when he signed the minutes of the paper meetings authorising the bogus agreements with Worldwide and Brighouse he was fully aware of the true purposes of the agreements.

834.  In 1996 the Financial Director of TSL, PW4, and her staff were closely involved in the months of planning the commission B scheme. The scheme involved the extensive use of false accounting documentation and separate computer records. I accepted the evidence of PW 4 that she kept D1 appraised of developments. I was sure D1 was most anxious that the payments of secret commissions to agency staff continue.

835.  I was also sure he was aware of the false accounting documentation being used to facilitate these cash payments to employees of travel agencies would not only conceal the payments but have tax advantages for TSL.

836.  I considered both limbs of the Ghosh test. I was satisfied so that I was sure that the scheme put into place by TSL was dishonest by the standards of reasonable and honest people and that D1 must have realized that it was dishonest by those standards. I was satisfied so that I was sure D1 was aware of the commission B system involved the creation of a multiplicity of false accounting documentation. The agreements with Worldwide and Brighouse as well as the invoices generated by them were all bogus. I had no doubt D1 was aware of these matters.

D2

837.  D2 joined TSL in 1994. In 1996, when the commission B scheme was introduced, D2 was a director of TSL. He had received tertiary education abroad. In 1996 he was involved in the retail side of TSL. D2 was working for TSL when the ICAC searched the offices of TSL in February 1996 and interviewed PW1 and D5 about the system of paying commissions to travel agencies.

838.  He initialled, as a director of TSL, all three sets of  minutes of the paper meetings held on the 25^th September 1996, P 20 to 22. Resolutions carried at those meetings appointed Bonaventure as the agent of TSL with power to enter into the business promotion agreement with Worldwide. Bonaventure was authorized to sign all documents in relation to the agreement. The third meeting approved and accepted the agreement between Worldwide and Bonaventure. All three sets of minutes were signed by D2’s father.

839.  D2 initialled the minutes of a Board of Directors paper meeting held on the 29^th September 1999 extending the agreement with Worldwide for a period of three years. This was signed at a time when TSL was experiencing enormous financial problems.

840.  D2 initialled the minutes of the paper meeting, P40, dated the 24^th February 2000 which resolved that Bonaventure should act as the agent for TSL with full power to enter into the Business promotion agreement with Brighouse which is described as a company incorporated in the British Virgin Islands. The resolution gave PW1 full power to “do all things and to sign all documents in connection with or incidental to the Agreement”. This was signed at a time when TSL was still in a grave financial situation. The company was in negotiation with its creditor banks as regards a debt restructuring arrangement.

841.  D2 signed as Chairman, the minutes of the paper meeting dated the 31^st May 2002. The resolution of this meeting was that Bonaventure be given full power to execute the agreement with Cinedell, a company incorporated in the British Virgin Islands. The financial problems of the company had not eased and the cash flow generated by the showroom business was of major importance to the financial survival of TSL.

842.  Some of the payment requisitions for the overseas companies were initialled by D2 in the authorization for payment column.

843.  D2 had read the KPMG Forensic Report and the KMPG auditors report for 2001/2.

844.  When D2 was interviewed by the ICAC in 2005  he was asked about the commission B system ( counter 463). It was suggested to him that TSL via Bonaventure entered into agreements with several BVI companies whereby commission payments to the companies were indirectly given to D5 and then to the tour guides of the travel agencies.

845.  D2’s reply was “Not clear, not clear really.” I was sure D2 was lying. The KPMG forensic report came out when he was chairman of TSL  and it clearly stated the overseas companies were money transfer vehicles enabling commission payments to be made indirectly to travel agents. The commission system was minutely scrutinized at that time by the TSL Board and the new system of making payments to local promoters was put in place. The fact that he lied does not make him guilty of the offence.

846.  D2 agreed (counter 475) that the agreements with the overseas companies needed the approval of the Board of Directors. When asked if he knew the contents of the agreements he said he “might have taken a glance” ( counter 479). He said if he was too busy he would just sign it. He said he did not know who signed these agreements on behalf of Bonaventure.

847.  PW1 said that D2 was present when PW1 explained the commission B system to D3 in great detail shortly after she joined TSL at the end of August 2000. PW1 said D2 was walking past D3’s office when PW1 started to give his explanation to D3 and D2 expressed interest in knowing about the arrangement.

848.  Counsel for both D2 and D3 submitted that it was wholly implausible that PW1 would without inhibition give a lecture explaining the whole of the commission B scheme to D3, a complete stranger and that it “beggared belief” that D2 just happened to be walking past and expressed his interest.

849.  What is not in doubt is that PW1 gave P122, the flow chart explaining Table B to D4 shortly after he joined the company. D4 had joined the company at a time of crisis following the revelations at the Board of Directors meetings in December 2002. Resolutions had been passed at those meetings appointing D4 as Chief Executive replacing D2 in that position and KPMG were to be instructed to carry out a forensic investigation into, inter alia, the use of overseas companies by the showroom division of TSL. PW1 also gave P122 to the KPMG Forensic investigators.

850.  The commission B system had been introduced by TSL following discussions at the highest level with resolutions signed by the Board of Directors in respect of the business promotion agreements. On a monthly basis, significant sums of money were sent to the overseas companies and payment requisitions were authorized by D2 and D3. D3 was appointed shortly after the signing of the debt restructuring agreement with a group of prominent banks. D3 had been head-hunted by KPMG and her appointment approved by the co-ordinating bank HSBC. One of D3’s major responsibilities was to monitor cash flow. Revenue from the showroom division of TSL was a vital source of cash for the TSL group. It is inconceivable that the significant payments by TSL to the overseas companies would not attract D3’ s attention. They cried out for explanation. PW1 said in cross-examination by counsel for D2 that when D2 took over the running of the company in early 2000 he controlled all the payments of the company.

851.  PW1 agreed that D2 had taken over the running of the company some 9 months before the alleged disclosures by him to D2 and D3 in D3’s office. When asked why he waited so long he said he should not be the only one to explain the system to D2 and D2 was very busy. D2 had initialled the minutes of the board meetings approving the business promotion agreements. The minutes had been signed by his father D1. PW1 was therefore not the only one who should explain the system to D2. The senior management were well aware of the system.

852.  I was satisfied so that I was sure D1 knew about the commission B system and use of the overseas companies to facilitate the commission payments to agents without the consent of their employers.

853.  D2 signed and D3 initialled the Board minutes dated the 31^st May 2002, approving further business promotion agreement to be entered in to by Bonaventure and Cinedell. The minutes state Cinedell is incorporated as a BVI. By this time both D2 and D3 had initialled many payment requisitions authorizing significant payments by TSL to Brighouse. There were ongoing IRD enquiries into commission payments by TSL.

854.  PW1 told the court that he met with D2 and D4 only 2 or 3 days after D4 joined TSL as the new CEO. PW1 said he told them the whole system. This was disputed. What was not disputed is that PW1 subsequently gave D4 P122, the flow chart explaining the commission B system and that PW1 gave the chart to KPMG Forensic. It was submitted on behalf of D2 that there was no evidence D2 ever received P122. But the important parts were quoted in the KPMG Forensic report which D2 read and P122 was an attachment to the report ( Attachment 6). The use of overseas companies to facilitate payment of commission B continued for a few months after the receipt of the KPMG Forensic report in February 2003.

855.  During the IRD enquiries D2 lied to and allowed lies to be told to DTT and IRD as to the purpose of the overseas companies. The fact that D2 lied did not mean he was guilty of this offence.

856.  I bore in mind the defendant’s clear record. I bore in mind that in his case this was relevant to propensity and credibility with regard to what he told the ICAC, KPMG Forensic and the representations of his solicitors. I also bore in mind the positive good character of D2 given by DW1 Pastor So.

857.  Taking into account the totality of the evidence, I had not the slightest doubt that D2 was aware of the commission B system. I was satisfied so that I was sure he was aware that the overseas companies were being used as money transfer vehicles to facilitate payments to travel agents without the consent of their employees. I was satisfied that he knowingly took part with PW1 and others to continue this conspiracy and took an active role in it. I was sure that he was aware such payments were made without lawful authority or excuse.

858.  I was sure D2 was aware that false accounting documents were being used by TSL to conceal the true reason for the payments to the overseas companies. I was sure he was aware that the false documentation created enabled unrecorded payments to be made in cash to employees of agencies and that such payments would be to the commercial advantage of TSL. I was satisfied beyond reasonable doubt he acted dishonestly. There is no doubt D2 was aware of  the IRD enquiries and I had no doubt he was aware the false documentation had tax advantages for TSL. I was sure he acted dishonestly as laid down in R. v Ghosh.

D3

859.  D3 joined TSL on the 28^th August 2000. At that time the company was in considerable financial difficulties and had signed a debt re-structuring agreement with a group of prominent banks on the 20^th August 2000. Under that agreement two new independent non-executive directors had been appointed and D3 was head-hunted by KPMG to take over as Finance Director. Her appointment had been approved by HSBC, the co-ordinating bank under the debt re-structuring agreement. PW 32 said she came to the position with impeccable credentials.

860.  In addition to her internal responsibilities with TSL, D3 had a major responsibility to ensure compliance with the undertaking given by the company under the restructuring agreement. Her responsibilities concerned reporting on cash-flow on a monthly basis, reporting all new investment proposals, disposal of non-core assets and monitoring unusual capital expenditure. She was responsible for the finance and accounting department in TSL, the legal and company secretarial department and the IT department. She was obliged to handle major financial projects in a large public company.

861.  In September 2000, PW 32 confirmed that D3’s duties and workload increased. She was invited to take up directorship of the company following D1’s bankruptcy. In October 2000 she took over the post of company secretary and in December she became an Associate Director of TSL ‘s China Division and became very much involved in the critical and complex share conversion agreement with the AIG group.

862.  In January 2001 Lawrence Lai took over as Financial Controller looking after the day to day operations of the Finance and Accounts Department.

863.  PW32 told the court that D3 had brought to his attention a number of areas of concern. She was concerned about the purchase of raw materials by D2 from a single supplier in Thailand. She reported that she was concerned about the lack of receipts for payments of commission which could have significant impact on the company’s tax burden.

864.  PW32 said later in 2002 she reported her concern about the use of BVI’s for commission payments. She was concerned about D2’s shareholding which represented security against a loan and the employment of TSE family members within the corporate structure of TSL.

865.  PW32 said he and D3 were concerned about the role of Sino Sources in TSL. Sino Sources was a BVI. In May or June 2002, D3 wanted to contact Sino Sources with regard to trade receivables in the sum of $60 million. At one stage it was alleged that Sino Sources was in fact owned by TSL and there was concern that TSL, a publicly listed company, was selling goods to another company owned by itself or the TSE family. Enquiries about this company were made through D3.

866.  PW32 confirmed that in early 2002 Board meetings of TSL started to discuss the IRD investigation into the lack of supporting receipts for commission payments made by the showroom division. D3 promoted the appointment of an independent tax consultant to investigate the problem and deal with the IRD.

867.  PW32 confirmed that in September 2002, D3 was under great stress and her health was suffering from the strain of work. She was considering resigning. She was hospitalized between October and early November 2002.

868.  PW32 said that at a meeting in November 2002 he stated his concern about the use of BVI companies which had not been transparently reported to the company’s bank creditors. He said he was disappointed  that D3 was unable to provide satisfactory information about these companies and he expected her to be able to do so. He said he did not suspect her of dishonesty.

869.  PW32 said that at the 18^th December Board meeting D3 said that a difficulty had arisen as a result of IRD investigations into TSL’s tax liability in respect of commission payments over the production of official receipts. She told the Board that some $1.5 million to $2 million per month was being sent as commission to overseas travel agents. The practice started in 1995 –6 and was a transfer by way of telegraphic transfer to overseas accounts. She said the agreements were properly recorded. She said the ultimate beneficiary was unknown. She said the commission was calculated on a head count basis and it was her suspicion they amounted to under-table commission payments.

870.  PW1 told the court that after D3 began to work at TSL at the end of August 2000 she asked PW1 to go to her office so she could know more about the commission being sent overseas. He said that at that time D2 walked past the office and entered D3’s office. PW1 said he told them both in detail about the commission B system. He said he told them about the ICAC investigation in 1996 and about the setting up of the off shore companies to assist TSL to send the illegal commission overseas and to channel it back to Hong Kong for distribution. He said he told them about the purposes of the scheme and about the HC entertainment scheme. He said neither showed any dissatisfaction.

871.  PW1 said that at a later stage D3 told PW1 to go to her office and said that as Brighouse was handling quite a huge sum of money, she wanted to have one more BVI company to handle this kind of money. PW1 said she asked PW1 to talk to D5 about the matter.

872.  D3 initialled P102, the Minutes of the Board of Directors of Bonaventure dated 31 May 2002, resolving that PW1 execute the agreement  with Cinedell and any other documents for and on behalf of the company relating to the business promotion agreement.

873.  A number of payment requisitions were signed by D3 relating to payments to both Brighouse and Cinedell. PW8 gave evidence that there were differences in the payment requisition system. For commission A there would be a daily AG report. For commission B there would only be the monthly “Testing” report.

874.  As CFO D3 was the main custodian of the Company’s finances. She had been specifically tasked to monitor cash-flow when she was appointed.

875.  PW40, Christina Leung formerly with DTT, said the first meeting with DTT and TSL took place in March 2002. She said that her manuscript note of a meeting on the 20^th August 2002 attended by D3, confirmed there was a reference to Promotion Fee paid to unrelated overseas companies. She said she understood this to refer to fees paid to travel agents outside Hong Kong. She said the issue of promotion fees only became an issue after the qualified KPMG audit report in July 2003 and was not the focus of enquiry in August 2002. The note also refers to “ separate account for AG commission but figure shown in management account is one figure”. PW 40 could not recall who raised these matters at the meeting and they were not recorded in the type-written version sent to TSL.

876.  D3 was an authorized recipient of the KPMG Forensic report.

877.  In her record of interview with the ICAC, D3 said she was aware that the business promotion commission was known as “B chai”. D3 said she had no idea how commission was actually paid out. She said she was not sure if TSL had any BVI companies. D3 said she had heard of Brighouse and Cinedell and that they handled “business promotion”. D3 said she recalled Brighouse might have been a BVI company because the remittance was by way of Telegraphic transfer, but she was not sure about Cinedell. She said the IRD would definitely question the commission payments because the amounts were so large ( counter 724).

878.  D3 had participated in the KPMG forensic investigation and had been specifically asked questions about the commission system. She said the report was submitted to the board ( counter 1160) who set up a sub-committee to deal with this matter “ in a special way……….. because these things were quite shocking” ( counter 1162). The report quite clearly stated that the overseas companies were money transfer vehicles and quoted from P122, PW1’s explanation as to the commission B payments. I found D3’s responses to questions from the ICAC about the commission B system to be deliberately vague and evasive. I was sure this was not because of the passage of time.

879.  I took into account the clear record of  D3 which is relevant to this issues of propensity and credibility. There was also positive evidence of good character given by many of the professional prosecution witnesses. I took this into account when considering her responses to the ICAC and to KPMG Forensic.

880.  Taking into account the totality of the evidence I had no doubt whatsoever that D3 was aware of the commission B scheme and its objectives. I accepted the evidence of PW1 that he told here about the scheme shortly after she joined the company. I was sure she was aware the system was used to facilitate the payments of commission to agents without the knowledge of their employers as a reward  to them for showing favour to TSL when acting on their principals’ business. I was sure she played an active role in the conspiracy. She was the financial director, it could not have continued without her compliance. She signed payment requisitions. She signed the minutes of the paper Board meeting of Bonaventure in relation to the business promotion agreement with Cinedell. I was sure she was aware that such payments were made without lawful authority or excuse.

881.  I had no doubt whatsoever that D3 was aware that the huge volume of false accounting documentation created by TSL to facilitate the commission B scheme was being used to conceal the cash payments being made to the employees of travel agencies. I had no doubt she was aware that the false documentation would have commercial and tax advantages for TSL. I was also in no doubt she would be aware that there would be tax advantages for the recipients of these unrecorded cash payments. I was sure she acted dishonestly.

D4

882.  D4 has a clear record and there was positive evidence of good character from many of the professional prosecution witnesses. PW32 spoke of his impeccable credentials and outstanding reputation. PW34 and 35 spoke as to his honesty and integrity.

883.  D4 joined TSL at a time of great crisis. Not only was the company experiencing very serious financial problems certain disclosures had been made at Board meetings on the 18^th and 19^th December which led to the board inviting KPMG to conduct an urgent forensic investigation into a number of areas.

884.  On the 19^th December 2002 D4 was appointed temporary CEO to replace D2 who stayed on as Chairman of the group. He signed a six- month temporary contract on the 7^th January 2003.

885.  PW1 said two or three days after D4 took up his position a meeting was held between himself, D2 and D4. He said at that meeting he explained the commission B system. He said he explained that it covered illegal commissions and assisted agencies with their tax matters. He said that D4 asked him to write down the whole workflow of the commission so that PW1 could present it in a fluent way when meeting officers of KPMG. PW1 prepared a draft of P122 for D4 to read. This evidence is not in issue. This referred to payments being made to employees of travel agents without the consent of their employers. It set out the details of the Table B commission scheme using overseas companies. P122 was later supplied to KPMG Forensic by PW1 on the instructions of D4.

886.  PW1 identified the initials of D4 authorising payment on TSL payment requisitions to Brighouse on P1134, 1136, P 1138, P1140 and P 1142 and to Cinedell on P1154, P1156, P1158, P1169 and P1162 which cover the period from January to May 2003. The final payment requisitions were dated the 6^th May 2003.

887.  In late February 2003, D4 was a recipient of the draft and final KPMG report P1239, which described the overseas companies used by TSL as money transfer vehicles and quoted from the flow chart supplied to it by PW1. The flow-chart is also an attachment to the report. He received the report on behalf of D2 and D3.

888.  D4 of course already knew within a short time of joining TSL that the overseas companies were simply money transfer vehicles as he had been given P122 by PW1 and knew PW1 was going to supply that chart to KMPG. The KPMG Forensic report merely confirmed the situation. I find as a matter of irresistable inference that D4, as CEO of TSL, appointed at a time of crisis, would have read the report. He certainly actively participated in meetings to discuss its ramifications and approved the public announcement which referred to the report.

889.  I was satisfied beyond reasonable doubt that, having been informed of the ongoing conspiracy by TSL to pay commissions to employees of travel agents without the consent of their princpals, D4 acquiesced in the agreement and actively participated in it. I was sure D4 was aware such payments were made without lawful authority or excuse.

890.  I was also sure that he was aware that the commission B scheme generated false accounting documentation which was being used to conceal the payments being made to travel agency employees. I was also sure he was aware of the commercial and tax advantages of the use of false documentation. I was sure he acted dishonestly.

D5

891.  D5 joined TSL in 1986 and worked in the Jewelry Showroom Division of the company. In 1996 he became the General Manager of the Business Promotion Department of the Showroom Division. In March 2000 he was appointed General Manager of the Showroom Division. He was never a director of TSL.

892.  In February 1996 when the ICAC carried out its investigation into commission payments to travel agencies by TSL D5 was interviewed by the ICAC.

893.  According to PW1 and PW2, D5 was responsible for the HE and HO showrooms. The HO showroom catered to the Japanese and Korean tourist market. It was in respect of this market according to PW2 and P16 that the majority of “Fei Tan” was paid.

894.  As the Business Promotion Manager D5 would sign the Agent Commission Codes/ Rate maintenance forms for the HE and HO showrooms. PW8 identified his signatures on P2. P2 contains 2 forms dated the 25^th March 2001. One form is marked “Testing” to denote it comes within commission B and shows payments being made under the C3 code. Both forms relate to the same agency. By this time the commission B scheme had been in place for over 4 years. The showrooms on a daily and monthly basis received forms AG201 and AG404 relating to commission. There were two sets, one marked testing to denote commission B. This system continued throughout the 7 years the overseas companies were used.

895.  PW2 said on receipt of sums transferred to Worldwide, he would hand the portion for the HE and HO showrooms to D5 for distribution. He would hand the sum to D5 in cash in his office on the 12/F of the Hunghom Headquarters. He had moved to this office when commission B started so as to distance himself from the company. PW2 said D5 would not sign any documents to acknowledge receipt of the cash.

896.  It is evident commission B payments ( C3 and C4) were being made for the HE and HO showrooms from the agent commission summary reports ( AG 405) P23, P475, P 476, P 479, P480 and P481. There are also references to 8 and 9 on these exhibits.

897.  PW2 said that overall D5 had an idea that “ we had a special arrangement for this commission and D5 had an idea I was responsible for that. So it would be alright for him to receive the part of commission from me. He did not want to know the details of the commission arrangement.” He said he told D5 about the discussions to arrange commission. He disagreed in cross-examination that he never told D5 the money would go through an overseas company and come back to Hong Kong. He said although the matters were confidential they did not mind D5 knowing about it.

898.  PW2 gave evidence about Project B. He said the staff signed receipts for promotional commission at his request but only received 7.5% of the sum. He said before carrying out the plan he had discussions with D5 and other colleagues.

899.  PW1 also gave evidence about Project B. He said the staff of the company signed receipts for promotional commission but only received 7.5% of that sum to cover their own tax. He said this sum was used to pay commission B less the 7.5%. The scheme lasted one year. During that year D5 falsely acknowledged the receipt of monies each month. The amount purported to be paid to D5 and for which he acknowledged receipt totaled $1,297,399.

900.  PW1 said he consulted D5 about commission payments for the HC showroom. PW1 said D5 did not wish to continue the commission B system as he was not confident in it. PW1 said D5 suggested the use of entertainment expenses to cover such payments. PW1 said the rate agreed was 2% of sales.

901.  PW4 said she discussed the arrangements for the HC showroom with PW1 and D5 and the use of entertainment expenses to pay commission to the agents. She said D5 knew about File B and had no difficulty understanding it. She said the reason behind the decision to use entertainment expenses was because the commission payable in respect of this showroom was small. She said the commission was to be paid through D5. I have dealt with the evidence concerning this matter in greater detail above.

902.  PW1 said that after the Brighouse company was used for commission B payments he would give the sum for distribution to the agents to D5. He said D5 had the full picture. He said he handed the sum to D5 in his office in cash. He said it was given to D5 as he was the person in charge of business promotion and he would be responsible for distribution of commission B as PW2 had been during the Worldwide period.

903.  PW1 said that after D3 had proposed setting up another  BVI company to handle the huge sum of money paid by way of commission B she suggested he spoke with D5 about the matter and he did so.

904.  PW1 said he gave the commission B monies paid through Cinedell to D5 for distribution.

905.  PW8 said that following the replacement of Worldwide by Brighouse, D5 took over from PW2 the collection of the Agent Commission Summaries marked “Testing”. This happened once a month and remained in practice til she left in November 2001. She also confirmed in cross-examination that she handed over the AG405 forms to D5 after PW2 left and thereafter the accounts department would receive the Brighouse invoices.

906.  D5 had been working in the showroom division of TSL when the commission B system was introduced. At that time he was the third most senior member of the showroom division staff. When the system commenced PW 2 moved to an office on twelfth floor of the head office building and thereafter D5 received large amounts of money from him for distribution. In 2000, when Brighouse was implemented, the vast majority of the illegal commission was paid via D5. If one were to present the cash flow movement in diagrammatic form, D5 would be occupy a central position in the flow chart. This is a situation that went on for six and a half years. He would have face to face dealings with the agents and have sight of the various testing forms used throughout this period.

907.  I took into account the clear record of the defendant which is relevant to the issue of propensity. I directed myself that the references to and alleged assertions by D5 in the KPMG forensic report were not admissible against him as were any references to him by his co-accused or any other witness in those documents or statements.

908.  Looking at the totality of the evidence I had no doubt whatsoever that not only must D5 have been aware of the commission B system and its illegal objectives, but he played a central role in it. I had not doubt whatsoever that D5 was aware that TSL were using overseas companies as money transfer vehicles to facilitate the movement of funds and was aware that large amounts of money were transferred to the banks of these overseas companies and brought back into Hong Kong for distribution in cash to agents of travel agencies without the consent of their principals. I was sure he was aware such payments were made without lawful authority or excuse.

909.  D5 had been interviewed by the ICAC in 1996. Over a number of years D5 worked very closely with PW1 and PW2.  Over the years they handed to him huge amounts of cash for distribution to travel agency employees. There were no receipts for the cash he received from PW1 and PW2. There were no receipts for payments made to travel agency employees. I accepted the evidence of PW1 and PW2 that they told him of the arrangement.

910.  I was sure that D5 was aware the scheme involved the use of false accounting documents. He fully participated in the Project B scheme. Over the twelve month period he signed 12  false receipts whereby he purported to receive promotional commission which was then distributed in cash by way of commission B. These were documents required for accounting purposes. I had no doubt that D5 submitted false invoices purporting to be entertainment expenses in respect of the HC showroom. Again these were documents required for an accounting purpose. I had no doubt whatsoever that D5 entered into this scheme with PW1 and PW4 to facilitate the payment of commission to employees of travel agencies without the consent of their employers.

911.  I was satisfied so that I was sure that D5 was aware that the false accounting documentation created by the scheme was for the purpose of covering up the cash payments being made to travel agency employees and that such payments had commercial advantages for TSL. He would also benefit from the arrangement. Increased showroom income would be reflected in higher bonuses. I was sure he acted dishonestly.

Charges 9 & 10 against D2, D4 and D5.

912.  These charges allege a pair of conspiracies in similar terms to charges 1 and 2 but by utilization of the local promoters Golden Speed, Well Zen and Best Joint from April 2003 to April 2005

913.  At the end of February 2003 TSL received the KMPG Forensic report which stated that the overseas companies used for the payment of commission B were money transfer vehicles. The report quoted from P122 the overflow chart provided to the investigators by PW1. It stated that Table B was to facilitate the payment of commission to employees of agencies without their employers knowing about it.

914.  At this time, Hong Kong was in the grip of SARS and showroom business had virtually ground to a halt. TSL were unable to meet its commitments under the debt restructuring agreement.

915.  PW1 said that after the publication of the report it was decided that the use of BVI’s should stop. PW1’ s recollection was that a number of meetings were held between himself D2, D4 and D5 to discuss the problem. PW1’s recollection was that these meetings took place in April and May of 2003 after the discussion of the qualified opinion arose. KPMG Audit did not receive a copy of the KPMG Forensic Report until the end of June 2003 soon after which it brought to the attention of TSL management that there would be a qualified report. Clearly, PW1 was inaccurate as to what triggered the discussion about the replacement of the BVI’s.

916.  The minutes of the paper Board meetings of Bonaventure concerning the business promotion agreements with the overseas companies were dated the 2^nd July 2003 with the agreements to commence on the 1^st May 2003 for 3 years.

917.  To implement the new system there had to be discussions between the parties most involved. D2 and D4 as Chairman and CEO would have to be kept informed. The KPMG forensic report identified PW1 and D5 as being the persons most prominently involved in the commission B system. I reminded myself this is not admissible against D5. I had no doubt  the overhaul of the commission system would have to involve discussions between at least these four persons. At that stage the management were involved in a cover-up of the facts revealed by the KPMG forensic report. PW1 was kept on as a TSL director and the person in charge of the showrooms. D5 was retained as the main cash distributor. D4 and PW1 were given authority to execute the agreements of behalf of Bonaventure.

918.  Kenny Cheung using his company Best Joint was to be used as a local promoter. He had been identified in the KPMG forensic report as a main conduit for Commission B cash to be distributed to the employees of travel agencies for the HO and DY showrooms. D2 provided a statement from him in relation to monies D2 had received in 2002 via Kenny Cheung.

919.  PW2 of Well Zen was the second of the three promoters to be used. He had been one of the main architects of the commission B scheme.

920.  Wong Siu wai of Golden Speed ran a travel agency which had been providing business to TSL for many years. PW1 said he provided tourists but no additional promotional services. He said he did not have direct contact with him. This was done by D5.

921.  PW1 said the arrangement with the promoters was that they would be provided with a fixed fee which would provide for the illegal payments of commission. He said the fees were divided into three parts. There was a handling fee which constituted the commission for the local promoter, secondly the file B payments which were calculated by reference to the monthly commission summaries and thirdly a tax subsidy. He said the promoters were encouraged to reduce the file B payments.

922.  PW2 said that the local companies were to handle the arrangements of the special commission and would replace the overseas companies.

923.  I have set out above the evidence concerning the percentages paid to the various promoters and the complex arrangements for distribution thereafter. I bore in mind the differences in the evidence of PW1 and 2 as to these complex arrangements.

924.  I considered the invoices and payment requisitions in relation the three local promoters

925.  I considered the summary of File B payments and bank reconciliation records produced by PW2.

926.  The total amount paid out to the local promoters by TSL between May 2003 and February 2005 was $44,157,304.

927.  Taking into account the totality of the evidence I had no doubt whatsoever that the local promoters were being used in precisely the same way as the overseas companies, namely as money transfer vehicles to facilitate payments to employees of agencies without the consent of their employers and which were unrecorded. I accepted the evidence of PW1 in relation to this offence.

928.  I was also sure beyond reasonable doubt that the business promotion agreements with these companies were sham agreements and that false accounting documentation was created produced for the same reasons I have set out above in relation to Charge 2.

Evidence Relating to Individual Defendants

D2

929.  I was sure beyond reasonable doubt that the new system of local promoters could not have been introduced without his consent and encouragement and that he actively participated in discussions leading to the scheme being introduced. The company was in a desperate financial state and was badly in need of cash flow.

930.  D2 together with PW1 signed the three sets of Board minutes of Bonaventure concerning the business promotion agreements with the three local companies

931.  One of the agreements was signed with Best Joint which is run by Kenny Cheung. D2 had told KPMG Forensic that he had received monies from Kenny Cheung in 2002 which he intended to repay from a bonus he expected to receive in April 2003.

932.  D2 signed the three sets of Minutes of the Board of Directors of Bonaventure dated the 30^th April 2004 to vary the terms of the original agreements.

933.  Taking into account the totality of the evidence I was sure beyond reasonable doubt D2 was aware that the monies paid to the local promoters were to provide illegal commission payments to employees of travel agents and that the accounting documentation created was a sham designed to cover up the payments being made to employees of travel agencies. I was sure the prosecution had established all the ingredients of each offence against D2 beyond reasonable doubt.

D4

934.  Shortly after D4 joined TSL he was supplied with P122, the commission B flow chart. I am satisfied so that I am sure he would have read the KPMG Forensic report. I was satisfied that at that stage he was aware that for many years TSL had been making illegal payments to agents as set out by PW1 in the flow chart and in the KPMG ReportThe new system of using local promoters involved most of the personnel engaged in the previous illegal distribution of commission. PW1 was still in charge of the showroom division. D5 and Kenny Cheung of Best Joint were prominently involved in the distribution of cash to agents under the commission B system.

935.  According to the KPMG forensic report, D2 had said that Kenny Cheung had supplied cash to him in 2002 as a loan and if the amount exceeded $100,000 he would pay the balance to D1. He told KPMG he intended to repay the loan in April 2003. At around the time of the payments, on the 2^nd August 2002 a business promotion agreement between Bonaventure and Best Joint, P 106,was signed. Under this agreement the commission on sales in the DY showroom were increased from 5 to 10% and  switched from Well Zen to Best Joint. PW2 who worked at DY showroom said he never saw Kenny Cheung at the DY showroom.   The matter of the payment by Kenny Cheung to D2 had been referred to the KPMG investigators and reported upon. On any view of the matter the appointment of Kenny Cheung as a local promoter on generous terms so shortly after the disclosures relating his dealings with D2 and his position in the commission B cash distribution system were matters which would cause any honest CEO very grave concerns.

936.  D4 and PW1 signed P127, the business promotion agreement with Well Zen dated 4^th July 2003. The remuneration was 12% of the net sales of the DY showroom and a fixed monthly fee of $40,000. I noted that this switched the commission for the DY showroom from Kenny Cheung back to PW2 who controlled Well Zen and who had all along been involved in the DY showroom. PW1 said that the $40,000 was the commission B he was to pay to Associated Tours and that he told D4 about that.

937.  D4 and PW1 signed the Business Promotion Agreement P128 dated the 4^th July 2003. This agreement was between Bonaventure and Golden Speed. It provides for commission to be paid at the rate of 8.5% of the nets sales of the HE showroom.

938.  D4 and PW1 signed the Business Promotion Agreement P129 dated the 4^th July 2003 between Bonaventure and  Best Joint. This agreement provides for commission to be paid at the rate of 20% of net sales to visitors from the Philippines and 7.5% in respect of net sales to other visitors. The agreement relates to the HO showroom. This is the showroom to which Kenny Cheung had all along introduced visitors since the beginning of his association with TSL. A letter, P130, signed by PW1 and Kenny Cheung on the 28^th April 2003 terminated the Business Promotion Agreement entered into between Bonaventure and Best Joint dated the 2^nd August 2002 with effect from the 1^st July. This letter was copied to D4.

939.  The variation of those agreements in April  2004 were all signed by D4 and PW1. The variations reduced the commission rates. PW1 said D4 asked him if he could do anything to reduce the operating costs of the showroom. PW1 said he then approached D5 to discuss with the three promoters to reduce the level of payments and they gave way.

940.  PW1 identified the initials of D4 on numerous payment requisitions authorizing payments to the local promoters.

941.  As I have stated above, I had no doubt on the totality of the evidence that the switch from the use of overseas companies to using local promoters was merely a change in the modus operandi of the conspiracy to offer advantages to employees of agencies. It was also accompanied by the creation of further false documentation which could be used in the same ways as under the previous arrangement, namely to conceal the payments being made to travel agency staff.

D4 was well aware of the purposes of the overseas companies and I was sure he was very much involved in the arrangements to have the local promoters take over from the overseas companies with the same ends in mind. I had no doubt the D4 was an active participant in these two conspiracies. I was sure the prosecution had established all the ingredients of each offence against D4 beyond reasonable doubt.

D5

942.  Just as D5 paid a prominent role in the distribution of cash under the commission B system when the overseas companies were utilized, I was satisfied so that I was sure that D5  played an equally prominent role when the system was switched to using local promoters.

943.  I had no doubt whatsoever that because of his crucial role in the commission payment system, he would have been involved in the discussions leading up to the setting up of the local promoter system. I took into account that there were differences in the evidence of PW1 and PW2 as to who conducted the negotiations with the local promoters and as to the precise movement of funds within the new system. I had no doubt that because of his position in the company, his role in the new and old systems, D5 knew that the new system was to facilitate the payment of illegal commissions to employees of travel agencies and that the business promotion agreements were sham agreements designed to conceal such payments.

944.  D5 witnessed the variation of the Business Promotion Agreement, P133, dated the 28^th April 2004 between Bonaventure and Best Joint.

945.  PW1 said that PW2 returned 70% of the balance of the amount not used for File B payments by Well Zen to D5. He said that 40% of this sum was kept by D5 and 30% by himself. PW2 said D5 told him to give back the 70% and he handed the money to him. D5 told PW2 he could keep 30%. It was agreed that PW2 would give D5 the 70% as soon as possible after receipt of the money from TSL. PW2 said he also gave D5 the fixed fee to give to PW1 to pay to Associated Tours less a deduction to cover tax. The return of the 70% is documented in the records retained by PW2.

946.  The monthly summaries of File B reveal that File B payments were made and that of the remainder there were calculations to show the 30% to be retained by PW2 and the 70% which PW2 said he handed to D5. The Well Zen bank reconciliation records from 31^st July 2003 to the 1^st April 2005 show that within a short period of time of the fee received from Bonaventure, there were always large cash withdrawals.

947.  PW 2 said this arrangement continued until May 2005 when PW2 was arrested by ICAC. At that time PW1 no longer worked at TSL and was replaced by a new colleague, Erwin Huang. PW2 said he was told by the company that they would not use this method anymore.

948.  In cross-examination by counsel for D4, PW2 said between July 2003 and March 2005 he paid D5 70% of the amount left over after paying the unconfirmed commission. He accepted that the approximate figure was in the region of $5.2 million. PW2 was taken through some of his file B summaries as examples. P 793 for July 2003 reveals Well Zen received a promotion fee of $62,307 from TSL of which $3,040 went on File B commission and $37,338 was returned to D5. This was towards the end of the SARS period. P804 for June 2004 reveals Well Zen received $403,715 from TSL of which $30,950 went on File B commission and $260,950 was returned to D5. P813 for March 2005 reveals Well Zen received $549,682 of which $41, 823 was for File B commission and $387,001 was returned to D5. He agreed that File B commission paid by him would be less than 10% of the sum received from TSL.

949.  The system whereby local promoters were used, as with the  system whereby overseas companies were used, enabled TSL to release substantial sums of money which were not to be used for the purpose shown in the false documentation created. I was sure beyond reasonable doubt that the monies were not paid to the local promoters and retained by them for services rendered under the promotion agreements. Large sums of money were paid out to the promoters and then distributed by D5 and others with no paper trail as to their final destinations. Looking at the totality of the evidence I had no doubt whatsoever that his was a continuation of the commission B system using local promoters instead of overseas companies. I was also sure that D5 was aware of the nature of the scheme and actively participated in it.

950.  I was sure the  prosecution had established all the ingredients of each offence against D5 beyond reasonable doubt.

Charge 11 Conspiracy to steal – D1,D2, D3 and D5

951.  This charge alleges a conspiracy to steal TSL funds for the benefit of D1 under the guise of an advance “HE” bonus for D5.

952.  To establish this conspiracy the prosecution rely on the evidence of the witnesses PW1, PW41, PW32 and PW33.

953.  The prosecution also rely on the documentation relating to the alleged commission payments and the surrounding circumstantial evidence. I have set out in detail above the evidence relating to his charge.

954.  There is considerable support for the evidence of PW1 from other witnesses and from the documentary and circumstantial evidence. On any view of the evidence, the payment of a bonus to D5 of this magnitude would be extremely generous. In 2002 it was decided to set up the Remuneration Committee comprising a majority of independent directors to determine remuneration of executive directors. D5 was not an executive director.

955.  At the first meeting of the committee on the 27^th March 2002, the minutes of the meeting,P1303, record that D2 told the meeting that the monthly basic salary of the staff was cut by $500,000 per month in total and the 13^th month of salary was also cut. D2 proposed that to allocate $3.5 million for the Hong Kong Division and $2million for the China division for the discretionary bonus pool. The previous years total had been $5.9 million. PW 35 pointed out that all discretionary bonuses should be described in a fair manner. He said in order to ensure no underpay or overpay, the allocation should be prepared by the HR department, the Group Finance Director and the CEO. He said all payments should be approved by the Finance Director and CEO. D2’s proposal was accepted.

956.  The discretionary bonus awarded to D2 was $800,000 and to D3 was $425,000. The total amount of their discretionary bonuses was to be included in the total amount of discretionary bonus approved by the meeting which would reduce the amount available for distribution for the HK division to $2.25 million. PW35 said that D2 told the meeting that the company was strapped for cash and that it was a difficult time for the company.

957.  The first payment to D5 was made pursuant to a payment requisition authorized by D3 and dated the 5^th March 2002, P97 and the second payment pursuant to a payment requisition dated the 26^th March 2002 authorised by D3 approved by D2 with the payment day shown as the 27^th March 2002, the day of the first meeting of the Remuneration Committee. This was also the day D3 had lunch with D2 and PW39 and maintains she paid $100,000 by way of bonus to PW39. PW 39 said the cheque was given to him in the evening whilst he was in his car outside the offices of TSL.

958.  No calculation sheet was produced in respect of this bonus. It was put to PW 41 that  she had been shown supporting documents. PW41, whose evidence I accepted, insisted she had been shown none.

959.  All the relevant payment requisitions, P97 to 101, were initialled by D3 in the authorization for payment columns. Three of the requisitions were approved by D2. The cheque relevant to P97 was signed by PW1 and D3. The cheques relating to P99 to 101 were all signed by D2 and D3.

960.  In the two preceding years, D5’s bonus had been $300,000 and $200,000.

961.  D2 told PW32 that his father had received money from the company and this is recorded in the minutes of the meeting of the 17^th December 2002. I took into account the varying recollections of what was stated according to PW32 and PW33. I will come to the payments made via Best Joint in more detail later, but I had no doubt whatsoever that the monies paid via Best Joint to D2 were not loans as D2 asserted. I was satisfied so that I was sure that the references by D2 to monies being paid to his father had no connection with any alleged loan arrangement. I bore in mind that any statements attributed to D2 were admissible only against him and not D1.

962.  D3 was not questioned by the ICAC about this matter. In her first record of interview, she was questioned about the purported bonus payment to Paul Wong which was purportedly calculated on the 27^th March 2002. In relation to this she said that a Remuneration Committee had been set up by the board to oversee and approve the bonus if key personnel and she was the secretary of the committee. She said D2 was the person who proposed certain bonus payments to the committee. This was not admissible against D2. In relation to the payment of $100,000 to Paul Wong she said she knew it was wrong to issued the cheque to Paul Wong without the approval of the remuneration committee.

963.  D5’ bank account shows the deposit of the four sums of $100,000 into his account, P1335. PW41 said in relation to payment requisition P99 she was instructed by D3 to change the payment method from cash cheque to cash. His counsel made the point that there are no entries in P1335 showing the withdrawals of $85,000. However, there are at this time huge deposits into his account and withdrawals of significant amounts of money in cash.

964.  Around the period covered by the charge D5 makes the following cash withdrawals from his account:

·    8^th March    -  $600,000

·    11^th March  - $200,000

·    27^th March  - $1,000,000

·    28^th March  - $300,000

·    - ditto    - $500,000

·    2^nd April  - $1,800,000

·    3^rd April  - $300,000

·    8^th April  - $500,000

·    15^thApril - $ 207,300

·    18^th April    - $300,000

·    29thApril    - $2,000,000

·    16^th May    - $800,000

·    21^st May - $5,000,000

·    27^th May    - $5,600,000

·    5^th June - $3,000,000

·    13^th June   - $200,000

·    26^th June   - $600,000

·    5^th July  -$700,000

·    8^th July - $330,000

The total amount withdrawn in cash over this period by D5 is $22,237,300.

965.  During that period payment requisitions were approved authorizing payments to Brighouse in the following amounts :(P1114/6/8/20/22):

·    4^th March  - $1,208,640

·    4^th April    - $1,835,709

·    3^rd May     - $1,618,054

·    4^th June    - $2,052,405

·    5^th July - $849,447

966.  According to PW1, whose evidence I accepted on this point, D3 was concerned about the large amounts of money being paid to Brighouse and suggested the use of a second BVI. She initialed the minutes of the paper meeting dated the 31^st May 2002, authorizing the business promotion agreement between Bonaventure and Cinedell. The first Cinedell debit note, P1143, is dated the 2^nd August 2002 and purports to relate to services rendered in July 2002. I was sure that D5 was the main conduit for the distribution of cash under the commission B system at that time.

967.  I bore in mind the good character of the defendants and the positive good character evidence given in relation to D2 and D3.

968.  Taking into account the totality of the evidence I was satisfied so that I was sure that the purported payments of commission to D5 were to disguise payments to D1. I was sure that D1, D2, D3 and D5 all actively and knowingly participated in this conspiracy to steal money from TSL. I was satisfied so that I was sure they all acted dishonestly according to the criteria set out in the case of Ghosh (supra).

Charges 13, 15 to 18:  D2 & D3

969.  I propose to deal with these charges before charge 12 in order to deal with the offences in chronological order.

970.  Charge 13 alleges a conspiracy between D2 and D3 to steal money between the 2^nd April 2002 and the 9^th July 2002 from TSL under the guise of a bonus to Paul Wong, PW39, for the benefit of D2. Charges 13 to 18 are alternative substantive charges of theft against D2 only.

971.  The purported payment of a bonus of in excess of $1.8 million came under scrutiny following the disclosures of D2 to PW32 and then to the TSL Board in December 2002. Paul Wong, the former president of TSL in China,  said he knew nothing of the matter until he was contacted by D2 on the 19^th December. He said that as far as he was concerned, he thought the matter of his bonus payment was finally dealt with when he received a cheque for $100,000 from D3 in late March 2002. It was not disputed that thereafter he made no further enquiries with TSL about any outstanding bonus payment.

972.  Under his contract with TSL, PW39 was entitled to a bonus of 3.5% of the net profit of the audited account of IAC in each financial year. On the 3^rd July 2001 PW39 signed a resignation letter giving 3 months notice. He actually stopped work in August 2001. He said he did not expect any bonus at that time and no one informed him he would be given any.

973.  PW39 said he attended a lunch in October 2001 with D1, D2, D3 and Mr Qi to discuss TSL China matters. He said at that lunch D3 gave him a letter titled Re Final Payment and dated 10^th October 2001, P1228. The letter stated he was entitled to $78,173 and a cheque for that sum was handed to him. The letter referred to a discretionary bonus.

974.  On the 6^th March 2002 he returned the letter to TSL endorsed with a note asking Rachel Chow about the discretionary bonus referred to in the letter. He supplied his mobile phone number and e-mail address.

975.  PW39 said he later received a bonus schedule, P886, showing he was not entitled to any bonus.

976.  He said he attended a lunch at the Island Shangri La on the 27^th March together with D2, D3 and Mr Qi and he was given some documents relating to the transfer of his China business interests which required signing. He was adamant that at that lunch he was not given any cheque.

977.  PW39 said on or about the 27^th March he had a telephone conversation with D3 in which D3 told him that although his bonus should be zero, because he had worked for the company for so long, the company had agreed to pay him a discretionary bonus as an appreciation of his services. He said that on the instructions of D3, at about twilight he drove to the TSL headquarters and D3 came down to meet him at his car and gave him the cheque for $100,000 without saying anything. This cheque was issued following preparation of the payment requisition P879 dated 27^th March 2002 prepared by D3 and approved by D2. This was the date of the first meeting of the Remuneration Committee.

978.  A document purporting to relate to the Paul Wong bonus, P887, was signed by D2 and D3. The top half is in identical terms to P886. The lower half of the document contains a series of add backs  which purport to show the bonus due to Paul Wong is $1,921,953. It was not disputed that PW39 did not see this document until it was later e-mailed to him after his meeting with D2 of the 19^th December. PW39 said he could not understand it.

979.  Endorsed on P887 in manuscript are the figures RMB500,000 (2/4), 500,000 (3/4), 850,000 (11/4) and 154,150. These correspond with the four payment requisitions approved by D2 and prepared by D3, P879.

980.  Many of the remarks that I made in respect of charge 11 are pertinent to the consideration of this charge. These payments were made at a time when TSL was “cash –strapped” and any bonus payments were given the most careful consideration. The first meeting of the remuneration committee was held on the 27^th March. D2 was very short of money. The bonus was more than double the bonus approved by the remuneration committees for D2  and much more than the combined bonus for D2 and D3. It exhausted nearly the whole of the bonus allocation for the China Division. The proposed bonus for the year  for the China Division submitted to the Remuneration Committee tabled by D3 was $2 million  and the number of staff concerned was 20 to 30, P1303. The payment of a bonus to Paul Wong of $1,921,954,18 would leave $79,045.82 for distribution amongst the other staff. Paul Wong had only been employed for 7 months of the financial year.

981.  The first four payments in respect of the alleged bonus were all by way of cash given to D2 and the final payment was by way of  cash cheque given to D2. The cheque was cashed by a relative of D2. D2 was very short of money at this time maintained in via his solicitor that he kept all the cash in his safe at the office, P880.

982.  In the very comprehensive letter, it was maintained that the reason for not paying the money to PW39 was because he was very busy. When he was interviewed under caution by the ICAC he said it was because he had difficulty in contacting PW39. I was satisfied so that I was sure both explanations were lies. PW39 said he was not difficult to contact. D2 had not trouble contacting PW39 the day after the 18^th December Board meeting and a secretary at TSL sent an e-mail to him asking him to contact D2. After the meeting with PW39 D2 e-mailed PW39 information about the bonus, P887. I reminded myself that the fact that D2 lied about this matter does not mean he is guilty of the offence.

983.  I took into account that D2 subsequently repaid this money to TSL via his solicitors by letter dated the 8^th January 2003, P880.

984.  I considered the evidence of PW’s 32 to 36 in relation to the disclosures made by D2. I bore in mind that minutes taken of meetings were not verbatim minutes and that the witnesses could not recall the exact words spoken. I also bore in mind that their recollections as to what he did say varied. It was never suggested to any of the witnesses that D2 said he was holding the money in his safe in cash because either he had been too busy to give it to PW39 or that PW39 was difficult to contact. Had that been the real situation I was sure D2 would have made that very clear to everyone. He did not correct PW32 when he addressed the meeting at Anglo Chinese on the 17^th December as to what PW32 said he had been told by D2.

985.  On the afternoon of the 19^th December 2002 PW39 met D1 and D2 at the Harbour Plaza Hotel. PW39 said he had used his name to obtain a sum of money from the company, approximately $2million. PW 39 said D2 suggested they share the money and PW39 told him he would need to take legal advice. He said he felt it was not normal. PW39 said he asked D2 to fax the information about the bonus which he later received by e-mail. PW39 said after consulting a lawyer friend the same day he decided not to accept D2’s offer. PW 39 said on the 20^th December 2002 D2 sent him an e-mail asking him to confirm the bonus calculation and confirm his bank details. PW39 later telephoned D2 and told him he refused the bonus and confirmed his refusal in writing.

986.  In his record of interview D2 said he had a conversation with PW39 about his bonus in a hotel in Hung Hom in December 2002 when he offered PW39 the bonus and PW39 refused it. He said the first 3 instalments were given to him in cash by D3 and the money was to be given to PW39. D2 said the money was put away in the company because PW39 was difficult to contact. He said the cash cheque P1282 was given to him by D3 and he asked his mother to cash it as he was so busy. D2 said that earlier on PW39 had been given a bonus of $100,000 but as PW39 was in a rush to go to the USA he did not mention there would be a further bonus.

987.  I took into account what was stated in the letter from D2’ s solicitor to Herbert Smith, P880 and what D2 told the KPMG Forensic. These were mixed statements and admissible as to their truth.

988.  D3 in her first record of interview said PW39 called her to press her for his bonus and that he also pressed the Human Resources department. She said she paid $100,000 to Paul Wong at the lunchtime meeting on the 27^th March 2002 before the meeting of the remuneration committee which took place later that afternoon as a sweetener so he would be cooperative in the matter of the transfer of his shares to Mr Qi. D3 said she told PW39 “take this first”. She admitted handing the three sums of cash and the cash cheque to D2 to give to Paul Wong. She knew D2 was in urgent need of money . She was unable to explain why she did not write Paul Wong’s name on the cheque P1282.

989.  D3 said she gave the money to D2 and never thought he would not pay it to PW39. She said all things relating to bonus had to be paid to D2 and all the other bonuses she worked on went through D2. She said there was a cash flow problem and when she received the money she immediately gave the payments to D2 and told him it was PW39’s bonus. She asked him to sign the payment requisition forms to show he had received the cash.

990.  D3 said that after the conclusion of the AIG deal she did not want to have any dealings with PW39, she did not like him and he was not her friend. She said she was reluctant to have any contact with him at all. She said also that telephone calls would to be made repeatedly to get hold of PW39. In connection with trying to contact PW39 about the AIG deal she said he was difficult to reach and that she left a message on his mobile phone or by e-mail (P1584)

991.  She said the payments were made in cash because PW39 requested cash ( second interview 440) .Yet in her third interview she said she could not explain why the cheque was made out to cash and did not have Paul Wong’s name on the cheque.

992.  D3’s counsel in his submissions said the suggestion that the cheque for $100,000 P1336 was handed to PW39 by D3 whilst he sat in his car outside the offices of TSL was ludicrous. However, in her second record of interview (counter 779) she told the ICAC there were occasions PW39 came to collect documents in a car “ we handed over something, er, that is something like documents…..That is, maybe, when paying the bonus, er, probably before the first payment in April, we might have exchanged documents somewhere”.

993.  I considered all the matters raised by defence counsel in their cross-examination of PW39. I accepted that PW39 was evasive when questioned about his previous dealings with TSL particularly as to dealings in China and his tax affairs. I also took into account that there had been friction between PW39 in his dealings with both D2 and D3. At the meeting with D2 on the 19^th December D1 was present. I accepted what PW39 said as to what took place at that meeting. I accepted what PW39 said as to the circumstances in which he was handed the cheque for $100,000 by D3.

I found both D2 and D3 vague and evasive in their replies to ICAC questions. I took into account that they were being questioned about events which occurred 3 years previously. However, this matter had been the subject of detailed enquiry and both had given information to KPMG Forensic about this matter at a time it must have been fresh on their minds. I bore in mind that what they said concerning each others’ words and deeds were inadmissible against the other party.

I reminded myself of the clear records of the defendants and their positive good character.

994.  Looking at the totality of the evidence I had no doubt whatsoever that the purported payment of a bonus to PW39 was a sham.  D2 and D3 dishonestly conspired to steal money from TSL for D2 under the guise of this bonus payment.

Charge 12 – D2 and D5

995.  This alleges a conspiracy to steal funds from TSL between the 1^st June 2002 and the 18^th December 2002 for the benefit of D2 using funds diverted to Best Joint under a Business Promotion agreement between Bonaventure and Best Joint dated the 2^nd August 2002, P106. Best Joint is controlled by Kenny Cheung. It was not disputed that D2 did receive monies from Kenny Cheung. The defence case is that the monies received were a loan by D2 were a loan. In the case of D5 it was submitted that there was no reliable evidence the he was involved with or agreed to such an arrangement and that the arrangement for Best Joint to take over from Well Zen was not a sham as suggested by the prosecution.

996.  Kenny  Cheung’s contractual association with TSL goes back to 1998. By letter dated the 20^th October 1998, P10, Kenny Cheung was appointed a senior business promotion manager of TSL. He was entitled to receive commission at the rate of 5% of the gross sales to customers he introduced to TSL. He introduced customers to the HO Showroom which catered for the Japanese and Korean market and was under the control of D5. Kenny Cheung introduced Philippine tourists to TSL showrooms. In December 1998 Kenny Cheung requested that payments to him be made through his company Best Joint.

997.  Under the business agreement P106, Best Joint was to receive 10% of the net sales of the DY showroom. Prior to this agreement, PW2, through the company controlled by him, Well Zen, was receiving 5% of the net sales of the DY showroom. Both PW1 and PW2 said Kenny Cheung had no connection with the DY showroom which is in Aberdeen. The HO showroom is based at TSL Headquarters in Hung Hom.

998.  PW1 said that in June 2002 D2 came to his office and said he was in financial difficulty. PW1 said D2 told him he had to buy back D1’ shares in a fund institution. PW1 said D2 requested him to discuss the matter with D5 to see if $100,000 could be arranged for D2 monthly. PW1 said he agreed to speak with D5 and he did so.

999.  PW1 said he and D5 thought that money could be raised by raising the commission payable in the DY showroom but both were anxious that PW2 did not know of the matter. PW1 said D5 proposed asking Kenny Chueng to replace PW2 as the DY showroom promoter and increasing the promotion fee from 5% to 10%. Kenny Cheung would give 5% to PW2 and return the other 5% to D5 for him to give to D2. PW1 said it was calculated that his system would raise about $100,000 to $120,000 per month. He said Kenny Cheung was not required to do any work for the DY showroom. PW1 said he told D2 of the arrangement and D2 thanked him.

1000.  PW1 said that after the agreement was signed,P106, PW1 would inform Kenny Cheung of the amount he should bill TSL each month from information contained in the monthly commission summaries. Kenny Cheung would issue a debit note from Best Joint. On receipt of the debit note TSL would prepare a payment requisition and make payment to Best Joint. PW1 said the cheque would be collected from his secretary.

1001.  Under this arrangement, PW1 said 5 sets of debit notes and payment requisitions were produced in 2002:

·    3^rd August   - P107/8 - 10% =   $273,078

·    3^rd September - P110/1 - 10% =  $ 321,313

·    3^rd October - P113/4 - 10% =  $321,947

·    4^th November  - P116/7 - 10% = $481,079

·    3^rd December      - P119/20- 10% = $368,485

1002.  PW1 said that about one or two days after the disclosures about these payments by D2 at the board meeting on the 18^th December 2002, D5 told PW1 that D2 did not want this arrangement to continue. PW1 said he and D5 agreed that a letter should be sent to Best Joint to say the commission was to be reduced to 5% so that Kenny Cheung need only pass on the 5% to PW2. PW1 said he then wrote a letter, P123, to Best Joint about the reduction in commission and backdated it to 29^th November 2002 to avoid suspicion.

1003.  D2 told the ICAC and  the KPMG Forensic report investigators that monies received from Kenny Cheung were a loan. He told KPMG that he had been receiving cash from Kenny Chueng by way of loan and if the amount exceeded $100,000 he gave the excess to his father. This was not admissible against D1. He told the ICAC the total amount was $600,000 and provided a letter from Kenny Cheung to confirm this.

1004.  When questioned by the ICAC about Kenny Cheung being a shareholder and director of Best Joint, D2 said that this was Kenny Cheung’s personal business and he did not quite remember. “ I don’t have much knowledge of it (counter 848). When it was put to him the Best Joint was a promoter retained by TSL he said “ That’s possible, that’s possible”. The letter provided by Kenny Cheung to D2’ solicitor states “ I am a director and shareholder of Best Joint International Limited.. which is an agent/promoter retained by [TSL]. I attend TSL’s offices daily but am not an employee of TSL”

Board and other disclosures by D2 in relation to charge 12

1005.  PW32  said in chief that when D2 came to his home on the 14^th December D2 revealed inter alia that he had been receiving money he thought ran counter to the advice he had been given to assist the company. D2 said for the last four or five months he had received about $80,000 to $100,000 per month. PW32 said D2 repeated this at the meeting with PW33 on the 16^th December. PW32 said this was a matter of grave concern and they decided to call a Board meeting. This matter was again canvassed at a meeting of the advisory team and independent directors held on the 17^th December

1006.  The minutes of the 18^th December Board meeting state that between July and November 2002 D2 had “ apparently procured for himself from showroom staff sums of money between $60,000 and $180,000 per month”

1007.  The minutes were not verbatim notes and the words “procured for himself” do not appear in the contemporaneous notes of the Herbert Smith staff who attended the meeting and assisted in the preparation of the minutes.

1008.  PW32 said he could not rule out the possibility that D2 had said that he had some personal dealings with an associate of the company and borrowed money from him. Nowhere in any of the notes taken or minutes taken about what D2 said is there reference to the monies D2 received from Kenny Cheung being a loan. If this had been the case I had no doubt whatsoever that D2 would have made this very clear. It is not a difficult concept to get across.

1009.  As I have stated in respect of the other two charges of conspiracy to steal charges, the receipt of these monies occurred at a time the company was “strapped for cash” and D2 was short of cash. The agreement reached with Best Joint doubles the commission rate for the DY showroom and authorizes payment to a company which had no dealings with the DY showroom. When the local promotion agreements the subject of charges 9 and 10 are entered into, the agreement in respect of the DY showroom was made with Well Zen, PW2, who had all along been responsible for this showroom. The local business promotion agreement with Best Joint relates to the HO showroom.

1010.  I took into account the various matters covered in cross-examination. I took into account the 3 purported sub-agency agreements entered into by Best Joint in September 2002 with True Ease, Kay’s Company and Well Zen, whereby payments of 5%, .8% and 2% were agreed.

1011.  I took into account the clear records of the defendants and the evidence of good character in relation to D2.

1012.  Taking into account the totality of the evidence I had no doubt whatsoever that the arrangement entered into by TSL with Best Joint with regard to the DY showroom was bogus and designed to facilitate payments of cash to D2. I accepted the evidence of PW1 about this arrangement. It was strongly supported by documentary and circumstantial evidence. I was sure that D5 played a prominent role in making the arrangements for this agreement and made the payments to D2. I was satisfied beyond reasonable doubt the D2 and D5 dishonestly conspired with PW1 to steal monies from TSL as alleged.

Charge 14: D2, D4 and D5

1013.  This charge alleges a conspiracy to defraud officers of the Inland Revenue Department who were conducting an investigation into the true nature of the commissions apparently paid by TSL. As the IRD investigation proceeded it began to focus increasingly  on the use made by TSL of overseas companies as overseas promoters. The IRD first became aware of Brighouse in November 2003, P1237.

1014.  I have set out above in considerable detail the evidence relating to this charge.

1015.  TSL correspondence with the IRD initially concerned payments to Splendid Tours and Travel Limited and PC Tours and Travel Limited for the period 1993 to 1998. In February 2002, DTT were appointed as TSL tax consultants. They had been the TSL auditors up to 2001. The TSL personnel dealing with this matter in 2002 were principally D3 and Lawrence Lai.

1016.  As negotiations with the IRD were proceeding, on the 18^th December 2002, D2 made certain disclosures at a Board of Directors meeting which led to the commissioning of KPMG to carry out a forensic investigation into those disclosures and into the commission B scheme.

1017.  PW1 disclosed orally and in writing to KPMG that the overseas companies were used by TSL to channel money via their bank accounts to enable payments to be made to employees of travel agents without the knowledge of their employers. The confidential report submitted to TSL by KPMG referred to the overseas companies as money transfer vehicles. The report quoted from the flowchart supplied to KPMG by PW1, P122, and annexed it to the report. This report was sent to D2 and D4 received a copy to pass on to other directors. I had no doubt that D4 would have very carefully scrutinized the report.

1018.  A copy of the report was given to the KPMG auditors and in July 2003 the auditors report was qualified. The report stated that as management had been unable to provide sufficient audit evidence as to the nature of the amounts payable to business promoters, they were unable to satisfy themselves as to whether such transactions were properly reflected in the financial statements.

1019.  PW40, the accountant with DTT dealing with this matter, said she became aware of the qualified opinion at a meeting on the 13^th August 200From August 2003 D2 and D4 become more proactive with regard to the IRD enquiries. D2 and D4 both attend a meeting with DTT at which the promotion fee and qualified opinion are discussed. DTT were urged to settle the matter with the IRD.

1020.  A letter was sent  by DTT to IRD dated the 4^th November 2003, P1374, which refers to Brighouse and describes Brighouse as being a promoter outside Hong Kong. This was the first time the IRD had been told about the outside promoters.

1021.  Eventually in March 2004 a report was prepared by DTT and submitted to the IRD, P1247, the Deloitte Report. The report was prepared on instructions from and information supplied by the management of TSL. It was approved by D4.The information contained in the report is completely at odds and inconsistent with the information supplied to and set out in the KPMG Forensic report.

1022.  The Deloitte Report maintains that the overseas companies provided genuine services for which they were rewarded on a per capita basis.

1023.  I had no doubt that the information supplied to KMPG Forensic investigators as to the purpose of using overseas companies was true. It follows that I was also satisfied the information supplied to DTT and set out in the Deloitte Report is false.

1024.  The false scenario told to DTT and adopted in the Deloitte Report was consistently followed by PW1, PW2, D2 and D4 in their dealings with both DTT and the IRD. I had no doubt whatsoever that D2 and D4 knew that what they were telling the IRD and what DTT was telling the IRD on their behalf was false. Both D2 and D4 took an active part in the discussions with DTT and the IRD. DTT represented PW1 and PW2 in their dealings with IRD about these matters. D2 and D4 knew that PW1 had given an entirely different story to KPMG Forensic investigators about the role of the overseas companies. The flowchart, P122, was not supplied by PW1 to IRD.

1025.  I took into account the clear records of D2 and D4 and the positive evidence adduced as to their good character.

1026.  I was sure that they had conspired together and with PW1 and PW2  to defraud the officers of the IRD so as to induce the said officers to act contrary to their public duty.

1027.  I was satisfied beyond reasonable doubt that they falsely represented to such officers that the overseas companies were unrelated to TSL or its management and that payments were made to them to source overseas visitors. The falsely represented that the fees were based on the number of visitors the overseas companies introduced to TSL showrooms. They falsely represented that Worldwide and Brighouse provided services of business promotion to TSL and that PW2 was the contact person for Brighouse. They concealed from the IRD that Worldwide, Brighouse and Cinedell were in fact controlled by or related to the management of TSL. I was sure of these matters beyond reasonable doubt.

D5

1028.  PW1 told the court that in about November of 2003 the IRD were making enquiries as to the contact persons for the overseas companies. PW1 said he met D5 and it was agreed that PW2 should be put forward as the contact person.

1029.  D5 was present at a meeting with DTT on the 24^th November 2003 when the use of the overseas companies was discussed. PW40 said she could not recall what if anything D5 said at that meeting.

1030.  I was sure that D5 was aware of the ongoing IRD investigation into the use TSL made of the overseas companies. I was also sure that D5 was aware that what the management of TSL were  lying to both DTT and the IRD. However, the evidence is in my view insufficient to establish beyond reasonable doubt that he actively participated in the conspiracy to defraud the IRD and I therefore acquit D5 of that charge.

CONCLUSION

1031.  I  therefore convict all defendants on charges 1 and 2

1032.  I convict D2, D4 and D5 on charges 9 and 10

1033.  I convict D1, D2, D3 and D5 on charge 11

1034.  I convict D2 and D5 on charge 12.

1035.  I convict D2 and D3 on charge 13.

1036.  I convict D2 and D4 on charge 14 and acquit D5 of that charge.

1037.  D1 is convicted of charges 1,2 and 11.

1038.  D2 I convicted of charges 1,2 and 9 to 14.

1039.  D3 is convicted of charges 1,2,11 and 13.

1040.  D4 is convicted of charges 1,2,9,10 and 14.

1041.  D5 is convicted of charges 1,2,9,10,11 and 12. I acquit him of charge 14.

25^th April 2008