Note: The Hong Kong Special Administrative Region brought a criminal action against Cheung King, a director of an LC beneficiary, Long Spark (H.K.) Development Ltd., for conspiracy to defraud.49 2001 LC CASE SUMMARIES the issuing bank, Societe Generale.The defendant was asked by a third party to fabricate paperwork for a fictitious transaction, supposedly involving "gas oil", between it and another company for the purpose of obtaining the proceeds of a commercial LC for US$891,000 for a period of time. The director agreed to assist in the fraud, and subsequently signed a false invoice recording the sale of 6,000 metric tons of "gas oil" to the third party company at a price of US$891,000, which was used, by the applicant, Guangnan (Holdings) Ltd. to obtain an LC. The director then submitted the false documents, and the issuer paid her company. The director transferred that amount to the third party company. Applicant subsequently repaid the full amount of the LC to the issuing bank. The director was later arrested and charged with conspiracy to defraud. She pled guilty in the District Court, Z.E. Li, J., which imposed a sentence of three years imprisonment. The trial court stated that the offense was "the worst kind of documentary credit fraud...comparable to fraud cases involving breach of trust". The trial judge further stated that "this is not the ordinary kind of fraud in the sense that simply there were dishonest alterations to documents by one party. In fact, it is two parties manufacturing a bogus transaction. In the practice of documentary credit, banks only rely on documents. In fact, banks are precluded from looking into the underlying transaction and so the way I see it is that the parties involved do owe a duty to the bank to present genuine transactions rather than bogus transactions for documentary credit. To put it another way, therefore, banks put a high degree of trust on those parties to the extent that the bank expects them to present documents of genuine transaction". On appeal, the Court of Appeal, Stuart Moore Ag, CJHC, and Stock, JA, allowed defendant's appeal and reduced defendant's prison sentence from three years to two years. The appellate court noted that the trial judge in the absence of sentencing guidelines had analogized the offense to a breach of trust case, and the appellate court regarded the analogy inappropriate and indicated that the "starting point" was 4 1/2 years. Noting the director's cooperation and her limited role as a "'small fry' used by other people to make up all the documents in support of this bogus transaction," the court reduced the sentence to 2 years. In considering the appropriate term, the court observed that "all letters of credit frauds are very serious offenses". It cited with approval the headnote of R v. Chan Kam-chuen [1995] 2 HKCLR 257, which stated in part that "the offences [sic] involved the circulation of false documents for the purposes of international trade. The system of documentary credits is the means whereby international trade has been conducted for hundreds of years. The system depends entirely upon trust. If false documents are circulated, some of which are in effect title to the goods themselves, the whole system falls apart. Offences sic of this nature are regarded as being very serious."


The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.