HKSAR v. Martin Joseph Matthews

DCCC 698/2015

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 698 OF 2015

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REASONS FOR VERDICT

1.The defendant faces a charge of "Dealing with property known or believed to represent proceeds of an indictable offence". He pleaded not guilty to the charge.

The Prosecution Case

2.Interush Limited ("Interush HK") is a company incorporated in Hong Kong.  It is one of the companies within the Interush Group[1] ("Interush"), with its headquarters in the United States.

3.Since 22 August 2011, the defendant became the sole director of Interush HK.  He was responsible for running the company.  He was also the authorized signatory of 2 bank accounts, which Interush HK held with Hang Seng Bank.

4.During the offence period, Interush HK packaged a bundle of online applications (known as the IRIS Suite) and sold the package to its affiliates.  To purchase an IRIS Suite, a person had to become an affiliate of Interush HK by paying a one-time registration fee as well as a monthly subscription (for the continuous use of the online applications in the IRIS Suite).  An affiliate could earn monetary bonuses by recruiting others to become affiliates in accordance with a bonus programme.  The prosecution alleges that Interush HK engaged in pyramid selling contrary to the Pyramid Schemes Prohibition Ordinance, Cap.617 ("PSPO").

5.The prosecution also alleges that during the offence period, in order to induce people to become affiliates and existing affiliates to continue to pay their monthly subscription, the defendant and/or staff members of Interush HK (with his consent) made false representations to affiliates and/or prospective affiliates that Interush would become a publicly listed company between 2011 and 2013 and that affiliates would be granted lucrative dividends or shares in the company upon listing.

6.The prosecution case is that the revenue of Interush HK represented the proceeds of 2 indictable offences (namely "Pyramid selling" and "Conspiracy to defraud") and that the defendant, knowing its nature, dealt with such proceeds.  Alternatively, the prosecution says in the event that the court finds no existence of any indictable offence, the defendant still had reasonable grounds to believe that the revenue of Interush HK represented the proceeds of an indictable offence.

7.Prosecuting counsel Mr. CHAU has clarified that for the offence period before 1 January 2012 (the date when the PSPO come into effect), the prosecution relies on "Conspiracy to defraud" as the underlying indictable offence (often referred to as the "predicate offence"); whereas after 1 January 2012, both "Pyramid selling" and "Conspiracy to defraud".

8.The prosecution relies primarily on the evidence of 11 affiliates of Interush HK (4 gave live evidence in court and the rest, by way of witness statements under s.65B of the Criminal Procedure Ordinance, Cap.221).  Out of the 11 affiliates, 9 are mainlanders.  In gist, they all claimed that they decided to join Interush HK and continued paying their monthly subscription because of the money they could earn by recruiting affiliates.

The Defence Case

9.The defendant elected to give evidence and called 2 defence witnesses to give evidence (Madam Mavis TAN, a forensic accountant; and Mr. Michael Johnson, Managing Director of ChinaBridge).

10.The defendant has explained in details the business concept of Interush; the rationale of its bonus programme and how it works; the evolution of listing plans of Interush and what steps he had taken to procure the listing of the company.

11.Ms. TAN analyzed the books of Interush HK and gave her expert opinion that all Team Bonuses were paid for product subscription, and not for introduction of new affiliates.

12.Mr. Johnson runs ChinaBridge, a consulting firm based in Shanghai which gives advice to companies in North America on strategic cross-border transactions.  Prior to founding ChinaBridge in 2010, Mr. Johnson practiced law in New York and California.

13.Mr. Johnson gave evidence that around July/August 2012, Interush was in the process of preparing for an IPO (Initial Public Offering) in the United States.  In August/September 2013, the defendant informed him that they were a bit frustrated with the IPO process in the States and were prepared to move in full speed for listing in Asia instead.  After some discussion, Mr. Johnson was retained by Interush. ChinaBridge was to act as a project manager by putting together a team including counsel, investment advisors, accountants for the purpose of listing. Mr. Johnson stated that but for the execution of the search warrant at Interush's office in November 2013, the plan was to file a listing application by February 2014.

Assessment and Analysis of Evidence

14.The burden of proof is on the prosecution to prove each element of the offence beyond reasonable doubt. The defendant has a clear record. I have directed myself on his good character accordingly.

15.There is no question that the defendant had dealt with the revenue generated from the business of Interush HK. The prosecution alleges that such revenue represented the proceeds of 2 indictable offences in Hong Kong, namely "Pyramid selling" and "Conspiracy to defraud" (for both of which the prosecution says the defendant was responsible). The most peculiar feature of this case is instead of charging the defendant with the 2 alleged substantive offences, the prosecution decided to lay a "money laundering" charge against him.

16.Be that as it may, the prosecution accepts that in order to prove the "money laundering" charge against the defendant, it needs to prove, if not both, either of the 2 alleged substantive offences as well. In other words, it would be a complete defence to the "money laundering" charge if the prosecution fails to prove any of the 2 alleged substantive offences.

17.I say "complete defence" because in the present case, in terms of the mens rea of the "money laundering" offence, the prosecution can rely on the "knowing" limb only. Unlike many typical "money laundering" cases in which the accused played no part in or had no knowledge of the predicate offence from which the proceeds of crime were generated, the defendant in the present case dealt with revenue generated from the business of a company which he ran. I agree with the defence submission that it would be difficult to envisage a situation where an accused, dealing with proceeds of his own business activities which he honestly perceived to be legitimate, can nonetheless possess "reasonable grounds to believe" that the same proceeds represented proceeds of crime. An honestly held belief that the property someone dealt with were proceeds of legitimate business activities is logically inconsistent with that same person having reasonable grounds to believe that those same proceeds represented proceeds of crime. This proposition is true at least in the present case.

18.Whilst some affiliates of Interush HK are mainlanders, the evidence is clear that Interush HK did not operate in the mainland. All transactions were carried out in Hong Kong. In other words, the legality (or illegality) of Interush's business in the mainland is irrelevant and played no part in the present case. In any event, there is no expert evidence on this issue. I need to say no more on this matter except I find some truth in the defendant's evidence that the prohibition of Interush's business in the mainland may well be attributable to a rationale completely different from "Pyramid selling" (for public safety or ideological reasons rather).

Pyramid Selling

19.During the offence period, Interush was a company which engaged in the provision of various online applications. The IRIS Suite was a package deal (which contained a set of online applications) for customers who intended to run their own e-commerce business (not just promoting the IRIS Suite but to actually use the online applications to promote their own business (Interush related or not), for example, health products). For those who did not wish to become an affiliate, they could purchase individual applications from Interush online. As a juror, I accept the defendant's evidence on these matters.

20.Interush HK filed its tax returns and paid significant sums of profits tax for the financial years 2011/12 and 2012/13. The company seemed to be more earnest than some politicians. As a juror, I ask rhetorically "Would a corporation which is set up to scam some quick money from naive and gullible people be ready and willing to pay its taxes in such significant sums?"

21.I share defence counsel's sentiment that if Interush HK was running a pyramid selling scheme in Hong Kong, it is difficult to comprehend why the defendant was charged with a "money laundering" offence instead of a substantive "Pyramid selling" offence[2].

22.I need not repeat the thorough analysis of the legislative purpose and history of the PSPO made by defence in its written Closing Submissions[3], suffice it to say that the motive of the participants in joining a multi-level commission scheme for the purpose of making money from it does not convert a legitimate multi-level marketing ("MLM") scheme into a pyramid selling scheme.

23.It is undeniable that in every MLM scheme there would be some form of payment to entitle a participant to join in its bonus scheme(s), and at least some participants would be induced by the prospect of earning money from the bonus scheme(s). This is not the evil or vice which the pyramid selling legislation was designed to prohibit. The legislative materials reveal it was expressly envisaged by the Administration that there would be some who participate in MLM schemes as a job or occupation, with the sole motive of making money from it.

24.In relation to "participation payment", it is common ground that in order to participate in the Interush bonus scheme, a new affiliate "must" pay a one-time registration fee ($390) as well as the monthly subscription ($800) for 1 set of IRIS Suite. No affiliate was required to pay for 3 sets of IRIS Suite. A new affiliate could "choose" to subscribe 3 sets, but 3 sets were not something which "must" be paid for. I agree with defence counsel that it is incorrect for the prosecution to conduct the "participation payment" analysis on the basis of paying for 3 sets of IRIS Suite. Each affiliate clearly had a choice of his own free will. As a juror, I find that the "participation payment" was for 1 set of IRIS Suite, not 3 sets.

25.The 2^nd question is whether a new participant was induced to join a scheme for benefits which were entirely or substantially derived from the introduction to the scheme of a further new participant. In other words, the court needs to determine whether the benefit which a "topline" member received was derived from continuous post-introduction activities by his "downline" members, as opposed to receiving a benefit entirely or substantially derived from simple introduction of a "downline" member to the scheme. The Administration has acknowledged that "A pyramid scheme can only be sustained by the introduction of new participants by existing participants"[4]. A scheme which pays for benefits of post-introduction spending/selling by existing participants after they have already joined the scheme would not fall into this description.

26.In the case of Interush HK, there is convincing evidence from the defence forensic accountant that all Team Bonuses were paid for product subscription, and not for introduction of new affiliates. The defendant has repeatedly stated in his evidence that whilst affiliates were encouraged to add "downline" members, the Team Bonuses were not paid for addition of "downline" members, but rather dependent on payment of the monthly subscription for the IRIS Suite by existing affiliates (i.e. post-introduction spending). In fact, an existing affiliate would gain very little through the introduction of a new affiliate, if the new affiliate did not continue with his subscription in the following months.

27.There is ample evidence which shows to the contrary that the scheme ran by Interush HK was one which could only be sustained by the introduction of new participants. As a juror, I find that there is no "recruitment payment" paid by Interush HK.

28.Regarding the value of an IRIS Suite, the prosecution did not adduce any evidence on this aspect. The only evidence is from a table supplied by the defendant[5] and there is no evidence from the prosecution to contradict those figures. In the circumstances, I accept the defendant's evidence on this matter.

29.In respect of the option of subscribing 1 set or 3 sets of IRIS Suite, the defendant has explained in great details the features of the binary system. I accept the defendant's evidence that the Interush business model was to encourage the affiliates to use the online applications contained in the IRIS Suite to cultivate and develop their own business rather than simply recruiting more affiliates. According to the defendant, affiliates would also receive "referral bonuses" for other Interush products sold through their hyperlinks or e-banners.

30.Before joining Interush, each affiliate was asked to sign a form to confirm his understanding that (i) he was paying for the right to use the IRIS Suite, and not joining as an "investment"; and (ii) he had the right to attend free product training sessions. Computer illiterate people who joined Interush HK with a view to making some quick money is simply a matter for them. The fact that these people became affiliates does not alter the true nature of Interush's business model by rendering it a pyramid selling scheme. With no disrespect, many mainlanders are masters of speculation (from iPhones to formula powder to cures for Bird Flu and SARS). They have an amazing ability to detect the most unusual money-making opportunities and would capitalize on such ventures to the fullest extent.

31.Based on the reasons stated above, I do not find Interush HK having engaged in pyramid selling in Hong Kong during the offence period.

Conspiracy to defraud

32.As a juror, I accept there is convincing evidence from the defence that during the offence period, Interush had a concrete plan to become a publicly listed company (initially in the United States and subsequently switched to Hong Kong). When I said "concrete plan", I meant there is more than convincing evidence that Interush had engaged or was in the process of engaging the necessary professionals (many reputable firms in the respective fields were retained or approached) to commence the listing process for the company. Global auditing of the Interush Group and pre-listing corporate re-organization were already underway.

33.I agree with defence counsel's submission that affiliates themselves might well have their own views and perception on the prospects of Interush's intended listing. Similarly, they might also have their own interpretation/perception of the information they received in this regard, and their own (and possibly wrong) wishful thinking of the timetable by which that can be done. A statement of hope given by affiliate A could easily be turned into a statement of fact by affiliate B. I have grave doubts about the accuracy and truthfulness of the information related to the listing plan of Interush which were disseminated amongst the affiliates themselves, especially those from mainland.

34.Based on the evidence before me, I do not find the defendant having made or allowed any false representations to be made that Interush would be listed between 2011 and 2013. Even if he did, the prosecution is unable to prove that at the time of making those representations, he knew that such representations were or might be false.

Conclusions

35.Since the prosecution is unable to prove beyond reasonable doubt any of the 2 predicate offences were committed, there is insufficient evidence to prove that the revenue generated by Interush HK represented the proceeds of any indictable offences. Thus, the "knowing" limb fails.

36.Even if I was wrong about the non-existence of any of the 2 predicate offences, I find there is convincing evidence showing that the defendant held a genuine belief or perception that the revenue generated by Interush HK did not represent the proceeds of an indictable offence. His genuine belief or perception can be manifested in the payment of significant sums of profits tax as well as the substantive steps taken towards the listing of Interush.

37.In my view, the defendant's state of mind during the offence period is simply inconsistent with the proposition that he himself (not some abstract reasonable person) had any reasonable grounds for believing that the revenue of Interush HK represented the proceeds of an indictable offence. Such proposition is plainly illogical. Thus, the "reasonable grounds" limb fails as well.

38.Based on the reasons stated above, I find the defendant not guilty of the "money laundering" charge.