A Hong Kong court has been hearing how a former colonel in China's People's Liberation Army (PLA) allegedly became embroiled in the massive set of frauds involving the troubled Guangnan Holdings group and some of its subsidiaries.

Prosecutors have accused Cheng Sui-wa and his clerk Chiu Hoi-yin of channelling more than US$100 million into the bank accounts of a PLA-affiliated company and of Guangnan Holdings by fraudulently obtaining 11 letters of credit from seven banks. The pair has pleaded not guilty to 11 charges of conspiracy to defraud and five charges of dealing with criminal proceeds between October 1997 and July 1998.

Chinese officials have been clamping down on fraud and smuggling operations in which it is said that Communist Party and state organisations are involved. The government has now ordered the army and the armed police to give up their participation in commercial businesses.

Underlying transaction seemed genuine

In the largest of the alleged conspiracies involving Cheng and Chiu, Guangnan applied for a US$24,412,500 letter of credit (L/C) from the Bank of East Asia in favour of Createx International Limited, of which Cheng was a deputy general manager. The bank believed that documents in which Createx contracted to supply a Guangnan subsidiary, Asian Honour International, with steel to make food packaging were genuine and released the funds.

The court however heard prosecutors claim the contract was bogus and that the funds circulated through several accounts held by Cheng and Chui before finishing up with Guangnan or one of its subsidiaries.

Human cost of fraud

Cheng was allegedly encouraged to participate in the scam by Tang Wai-na, a deputy general manager at Asian Honour. She was charged in November last year with four counts of conspiracy to defraud and was released on US$250,000 cash bail and US$250,000 cash surety, but failed to report to the police on 10 January.

Three of the charges alleged that Tang had conspired to perpetrate L/C frauds against 23 banks with several accomplices, including her late husband Yip Hiu-sui. He was found hanging in his cell with a blanket tied around his neck early last year, the day before he was due to appear in Hong Kong's Western Court on charges related to the alleged frauds.

The case continues.

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