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Note: Five Defendants sought leave to appeal convictions for conspiracy to defraud Sin Hua Bank (Issuer), a mainland Chinese bank with offices in Shenzhen and Hong Kong, by arranging for and issuing twenty-five LCs for fictitious transactions.

Defendants claimed that their plan was merely intended to keep a major client of the bank in business by recycling outstanding loans so as to avoid the undue attention of the local bank regulator, the Hong Kong Monetary Authority (HKMA). The HKMA had expressed concern that the bank was over-exposing itself to the beneficiary companies. The holding companies represented approximately 25% of the bank's total capital. The Defendants argued that the scheme did not increase the indebtedness to the bank.

One of the Defendants, who was also an officer of Issuer, controlled both the beneficiary and the applicant companies. Another defendant, a manager of one of the bank's sub-branches, proposed the plan urging that the applicants apply for LCs in favor of other related companies. Accordingly, twenty-five LCs were sought and obtained purportedly to finance the sale of electrolytic copper cathodes or aluminum ingots, transactions that were entirely fictitious.

Defendant owner signed post dated documents related to the transactions including cargo receipts supporting the application. Another Defendant, the accountant for both applicant and beneficiary documents signed other application documents. Other Defendants who were bank employees facilitated issuance of the LCs or advised the group. Instructions ensured that no funds actually left the bank.

The Defendants were charged and the Court of First Instance, Pang, J., convicted them of conspiracy to defraud. The Court of Appeal, Stock and Yeung, JJA., and Lugar-Mawson, J., affirmed in an opinion by Luger-Mawson. Undisputed evidence showed that the funds flowed immediately from the beneficiary companies to the applicant companies. This circuitous flow of funds made no commercial sense. Additionally, the movement of goods was apparently inconsistent with agreements at meetings, and some items listed could not have made voyages that their bill of ladings described. A beneficiary company was found to have no record of income from the purported sale and purchase of goods.

The appellate court observed that the scheme allowed the group to obtain further credit not otherwise available, permitting the group to continue in business when market realities would have forced its closure. Moreover, the court noted that Issuer was deprived of the specific security interest of the twenty-five LCs.

[JEB/tjb]

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