Article

Note: Three family members, father, mother, and son, were Directors of and 20% shareholders in Kwong Wah Steel Pipe Co. (Beneficiary). Guang Xin Enterprises (Applicant) was a 60% shareholder in Beneficiary. Applicant and the family members were charged with conspiring to defraud banks by using false documents, including false invoices, to apply for LCs to provide payment for purchases of steel pipe falsely claimed to have been sold by Beneficiary to Applicant. The fraud took place over a period of four years and involved 138 LCs for a total value of HK$2,590,460,780. Another conspiracy of the same nature by only one of the family members involved Wah Yue Trading Co. resulting in 19 LCs for a total of US$42,869,500, with a loss to the banks of US$11,428,900.

The three family members were found guilty of fraud and sentenced to terms of 6 to 7.5 years. They applied for leave to appeal. The High Court of the Hong Kong SAR Court of Appeal, Stock, JA, Yuen, JA, and Lugar-Mawson, J., denied leave to appeal the sentences, finding that each family member possessed a professional understanding of LC transactions, and that the degree and duration of the fraudulent activities justified the respective sentences.

The mother stated "she was party to a discussion with [one of Beneficiary's directors] in which he suggested that [Beneficiary] should apply for letters of credit to enable the [Applicant] to obtain money from the bank. She was aware that there were no goods for [Beneficiary] to sell but she thought that[,]as [Applicant] was [Beneficiary's] dominant shareholder[,] it was in order for her to do as asked... . She knew ... that no goods were delivered or received[,] and she knew also that it was part of the arrangement ... to transfer monies received under the letters of credit to [Applicant]. She was aware of the fabrication of cargo receipts[,] and she admitted her part in the transfer of monies to [Applicant]. She described ... the agreement reached with [Applicant] in 1995 for the payment of a handling fee. The essence of her case ... was that she ... knew that there were no transactions underlying the letters of credit, ... she knew that the invoices were false, and that she was party to the remittance of funds to[Applicant,] but that she did not act dishonestly because she thought that acting in accordance with the instructions of the major shareholder was in order."

In affirming the sentences, the court stated"[w]hat distinguishes the offences with which we are dealing from many of the others to which our attention has been drawn is, first, the simply staggering amounts of money involved and, secondly, the period over which documentation was deliberately falsified in order to cheat banks. Beyond that, in the case of this applicant, the amount of the loss to the banks as a result of the Wah Yue fraud is very high indeed. It is the fact that [the son] was not the instigator of these offences. Yet, neither was he an employee, and month after month, year after year, he was instrumental in the falsification of invoices and other documents needed to give effect to the fraudulent scheme."

The court also stated "[i]t has been said too often to require any detailed explanation that the gravamen of offences of this kind lies in the substantial risk that they impose upon banks and the damage that is done to the lifeblood of commerce by letters of credit fraud. The fact that there was ... no loss to the banks is a factor to be taken into account[,] and it is a fact that the judge took into account; but, nonetheless, the risk was always there, and the amounts involved were enormous and the period over which the conspiracy was effected, and in which the second applicant played a central role, was substantial."

[JEB/jjdd]

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