HKSAR v. Lau Shiu Kong and Another

CAAR000006/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

Application for Review No.6 in 1998

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Coram : Hon Nazareth, Ag. CJHC, Mayo & Stuart-Moore, JJ.A.

Date of Hearing : 22 January 1999

Date of Judgment : 22 January 1999

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J U D G M E N T

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Stuart-Moore, J.A. (giving the judgment of the Court):

1. The Respondents, D1 and D2 respectively at trial, jointly faced four charges of being agents using a false document to deceive their principal. These charges were laid under s.9(3) of the Prevention of Bribery Ordinance, Cap.201 ("the Ordinance"). They also faced 12 charges of accepting an advantage as an agent, contrary to s.9(1)(b) of the Ordinance. They were convicted on 25th May 1998 after trial before Judge Wilson in the District Court and, in each case, sentenced, overall, to imprisonment for one year. The judge found himself unable to distinguish between the Respondents and imposed concurrent sentences on all counts of one year's imprisonment. In addition, pursuant to the mandatory requirement under s.12 of the Ordinance, he ordered them to pay HK$520,141.68 to Sansegal Incorporated within one year, less the sum of US$15,000 already paid, being the amount of the advantages received by them.

2. The Secretary for Justice now asks this Court, under the provisions of s.81A of the Criminal Procedure Ordinance, to review these sentences on the ground that the total of 12 months' imprisonment in each case was wrong in principle and/or manifestly inadequate.

3. The facts of this case have already been set out in very considerable detail in CACC274/98 in the judgment of Power V.-P. delivered on 17th December 1998 when the Respondents' appeals against conviction were dismissed. Nevertheless, in these separate proceedings, it is perhaps both convenient and necessary to set out again the summary already given by this Court of the charges and the trial judge's findings which were outlined with commendable brevity by the judge in his Reasons for Verdict.

4. The first of the charges under s.9(3) reads that the applicants, on or about 21st day of November 1994, in Hong Kong, being agents of Sansegal Incorporated ("Sansegal (U.S.)"), with intent to deceive their principal, used a document, namely a Sourcing Form reference No.95/012, in respect of which their principal was interested which contained a statement which was false, in a material particular, namely that the ex factory cost per piece of a baseball cap of a description contained in the said Sourcing Form was US$1.42 which, to their knowledge, was intended to mislead their principal.

5. The second and third charges referred to the same date and to the same type of goods but involved different forms, namely 95/013 and 94/014 and to different prices, namely US$1.91 and US$2.51.

6. The fourth charge also involved baseball caps. It alleged an offence on 12th February 1996, which involved Form 96/019 and the price of US$1.51.

7. The first of the charges laid under s.9(1)(b) alleged that the applicants, being agents of Sansegal (U.S.) on or about 3rd May 1995, in Hong Kong, without lawful authority or reasonable excuse, accepted an advantage from Hong Tat Manufactory Enterprise Company Limited, namely a commission being a payment of $81,479.84 Hong Kong currency, the proceeds of a bank draft in the sum of US$10,582.46, as a reward for showing or having shown favour to the said Hong Tat in relation to their principals' affairs or business, namely, by placing an order for the supply of goods from Hong Tat to Sansegal (U.S.) on behalf of Sansegal (U.S.).

8. The other 11 charges were of identical offences involving different amounts occurring between 3rd June 1995 and 4th September 1996. The facts as set out by the trial judge in his Reasons for Verdict were as follows:

" Sansegal Incorporated ('Sansegal') is a United States corporation based in Utah, USA.

Kevin Smith (PW1) is director of overseas imports for that company. He had come to Hong Kong in 1990 as an English teacher and himself become proficient in Cantonese. Here he met the 1st defendant, whom I shall call D1, who was one of his students and who was involved in a company called Sense of Order Limited ('SOOL')

In 1994 Mr. Smith left Hong Kong and returned to the USA to join Sansegal. Sansegal started to use SOOL of Hong Kong to 'source' Asian products to buy on its behalf. Sansegal paid SOOL commission on each transaction and PW1 said they regarded SOOL as their agent. They were aware that the 2nd defendant (D2) was also involved with SOOL.

In late 1994 the defendants said the commissions were insufficient and there were discussions about making the defendants the Hong Kong office of Sansegal. PW1 approached Macon Rudick, the president of Sansegal in Utah (PW3) for authority to make proposals and they asked the defendants to name their salaries. Both said that 'salaries' was the word used.

Eventually the parties agreed that Sansegal would pay the defendants an 'all-in fee' of US$20,000 per month. This was to include the salaries requested by the defendants and expenses. The defendants in turn were to change their name, SOOL, to Sansegal Hong Kong Ltd. and henceforth devote their energies to the US office, as Smith and Rudick put it, the 'eyes and ears of Sansegal in Asia'. In effect, they would become the Hong Kong branch office.

It emerged later that the defendants had already changed the name SOOL to Sansegal Hong Kong Ltd prior to that discussion without the knowledge of the US company.

No formal written agreement was made but from April 1995 onwards Sansegal paid US$20,000 per month to Sansegal Hong Kong and there was regular correspondence referring to the latter as 'the Hong Kong office'. Stationery was prepared and printed on this basis and Sansegal and Sansegal Hong Kong corresponded with each other and with third parties on this stationery.

Both Smith and Rudick were clear that at all times the defendants were regarded as agents of Sansegal. Prior to April 1995 (when they thought the defendants were SOOL) they had been remunerated with a commission for each transaction and were not sole agents; they were free to do any other business of their own. After that date they became sole agents and, in effect, employees operating the Hong Kong branch office.

One of the companies sourced by the defendants in Hong Kong was a Hong Tat Manufactory Enterprise Company Limited ('Hong Tat'). Hong Tat manufactured baseball caps and exported them to Sansegal through the defendants.

Sansegal had a proforma called a Sourcing Form. This contained various blank spaces for completion such as the proposed vendor or factory, the 'ex-factory cost' and other information.

The practice was that the defendants would complete the blanks on this form and fax it to the US office. The US office would consider the proposal on the Sourcing Form including, of course, the price, and in due course this might mature into a firm order from Sansegal.

In this case some Sourcing Forms did become firm orders. The 'factory/vendor' was Hong Tat, the 'product' was baseball caps and the 'ex-factory cost' was entered by the defendants in US dollars per piece.

So it was that business proceeded along these lines.

Then one day in September 1996 PW1 happened to meet the managing director of Hong Tat in New York. I am not clear whether this was by chance or design, but it does not matter. PW1 heard something which disturbed him. As a result, PW1 flew to Hong Kong in October 1996 to make further enquiries. What he learned caused him to consult solicitors here and subsequently to report to the ICAC. The ICAC made enquiries leading to these charges.

These enquiries revealed that the sales staff of Hong Tat had been approached by the defendants in September 1994, inquiring about baseball caps for their US office. There was talk of the price and D1 had asked them to inflate their price by 10% but not show that inflation on the documents. This 10% extra was to be paid to Hong Tat then returned to Sansegal Hong Kong as commission. This aspect was not to be divulged to the USA.

After some hesitation, the Hong Tat staff were persuaded to do this, believing it to be some internal arrangement of Sansegal. They did satisfy themselves first that the two defendants were the sole directors of Sansegal Hong Kong and that no cash, as distinct from cheque, commissions were being sought.

Enquiries disclosed that four Sourcing Forms with this 10% inflated ex-factory cost had been faxed by the defendants to the United States and these had matured into 12 orders from the US at the inflated price.

Sansegal Hong Kong, of which the defendants were the sole directors and sole operators of the bank account, had received a commission refund from Hong Tat in respect of the excess.

Between May 1995 and September 1996, these 12 commission refunds from Hong Tat totalled US$67,585.68, or HK$520,141.68. The four Sourcing Forms are the subject matter of charges 1-4 and the 12 commissions are the subject of charges 5-16."

9. Having convicted the Respondents, the judge had this to say in his Reasons for Sentence at page 30, line K in the Appeal Bundle prepared for this Review of Sentence :

" The facts which I have found proved, disclose that (D1 and D2) caused to be sent four Sourcing Forms containing a secretly inflated price to their principal. Subsequently 12 orders were received based on these inflated prices and the defendants benefited by commissions concealed from their principal.

This was a course of conduct which went on broadly over a two-year period and resulted in approximately half a million dollars worth of concealed profit.

I have not had any guidelines cited to me and, such as I have been able to find, vary widely, save to say that custodial sentences are normally appropriate as such cases involve a breach of trust striking at the commercial community.

This is a case involving entirely the private commercial sector, there is no suggestion of a public servant being involved.

Both defendants are middle-aged family men with clear records and of hitherto good character.

One slightly unusual feature, which I did not mention in my reasons for verdict because I ruled the resulting documents inadmissible, was this: when PW1 confronted the defendants in Sansegal's solicitor's office, the solicitors extracted a signed agreement from the defendants to repay not only the illegal commissions but the defendants' previous salaries as well. Only when the defendants defaulted on early instalments was a report made to the authorities. This 'repayment agreement', as it was called, signed in the solicitor's office, may yet have to be examined in civil proceedings but I agree with defence counsel that the provision for repayment of the previous salaries, as distinct from commissions, seems extraordinarily onerous.

Having regard to the extent of the offending I have reached the conclusion that a custodial sentence is called for and it would be inappropriate to suspend. Although the offending occurred over a period, it appears to me essentially all one course of conduct and that it would be artificially intricate to attempt to split the 16 charges into consecutive sentences. I therefore approach the matter from the overall totality principle."

10. The justification for this application under s.81A of the Criminal Procedure Ordinance is put forward on five grounds by Mr Schapel on behalf of the Secretary for Justice. He submits that :

(a) The sentences imposed wholly fail to reflect the following considerations, namely, that :

(i) it is the duty of the courts to stop the spread of corruption in public and commercial life and that the means by which they can do this is by the imposition of severe sentences;

(ii) attempts to inhibit the spread of corruption necessarily involve an element of general deterrence, even in the case of a first offender, so that the gravity of offences contrary to the Prevention of Bribery Ordinance may properly be marked; and

(iii) the sentences must properly reflect public condemnation of the defendant's activities and their effect upon the financial community.

(b) Notwithstanding that the trial judge referred to a breach of trust, the sentences he imposed did not adequately reflect the fact that secret rebates are a form of breach of trust that those engaged in commercial enterprises are entitled to expect will not occur amongst those they employ.

(c) The trial judge gave insufficient weight to a feature of aggravation involved in the commission of the offences of accepting an advantage as an agent, namely that the secret rebates which were paid to the Respondents were generated by a deception perpetrated upon their principals, such deception being reflected in the convictions for offences contrary to s.9(3) of the Prevention of Bribery Ordinance. The sentences, therefore, did not adequately reflect the totality of the criminal conduct of the Respondents.

(d) The trial judge gave insufficient weight to the fact that the criminal conduct of the Respondents was a sustained one over a substantial period of time.

(e) In so far as the judge treated the "extraordinarily onerous" repayment obligations which had been imposed upon the Respondents as a mitigating factor, he erred.

11. The maximum penalty for any one of these offences was seven years' imprisonment and a fine of $500,000. As Mr Schapel, for the Applicant rightly points out, the only positive factors in mitigation were that the Respondents had clear records and that US$15,000 had been repaid to Sansegal. However, as the judge merely took a starting point of 12 months for all the offences taken together, it is impossible for this Court to assess what discount, if any, was given for these factors, or to what extent totality had reduced the original starting point that the judge must, or at least should, have had in his mind. Ultimately, having been reminded by trial Counsel of the sum which had been repaid, the judge allowed this sum to be treated as a part-payment of the order he made under s.12 of the Ordinance to which we shall turn later.

12. The way the matter has been presented on behalf of the Secretary for Justice, putting it very shortly is this. These were serious offences of their kind because the commission payments obtained from Hong Tat were, somewhat unusually, themselves generated as the result of fraudulent misrepresentations made to Sansegal, the Respondents' principal. The offences were in clear breach of trust as the Respondents, being "the eyes and ears" of Sansegal in Hong Kong, were relied upon to secure the required goods at the most competitive price. It is pointed out that in A.G. v. Leung Kin Wai AR5 of 1996, which was similar in some respects to the matter presently before us, Power V.-P. said (at page 4) :

"...We do not need to state again the strictures repeatedly made by divisions of this court stressing the seriousness of commercial corruption. Such offences are properly likened to an insidious cancer secretly gnawing at the vitals of commerce...."

13. Mr Grounds for D1 has emphasized such mitigation as there was, and has pointed out that the judge seems to have had not only this in mind but the relevant aggravating features which had been proved in the prosecution's case in mind as well. In addition, he reminds us that the defence at trial saved considerable time by admitting evidence that would otherwise have added to the length of the trial if it had had to be proved strictly. He invites us therefore to conclude that a proper sentence was imposed by a judge who has very considerable experience.

14. Mr Grounds further brought to our attention D1's present state of health which we can indicate will be brought to the attention of the Executive.

15. Mr Watson-Brown for his part, appearing as he does for D2, has lent his support to the general contentions advanced on behalf of D1.

16. However, as Mr Schapel points out, in the Leung case the Court was dealing there with sentences amounting to two years' imprisonment and a fine of $300,000 where there had been two separate courses of corrupt and fraudulent conduct which involved a sum of $450,000. That had also been a contested trial, and the Court observed that three years for each course of conduct was a proper starting point and substituted a total sentence of 3 1/2 years when it found that the trial judge had given too much emphasis to the factors advanced in mitigation.

17. Taking into account all the matters before us, we are satisfied that the trial judge did fall into error by failing to give sufficient weight to the manifest breach of trust involved in the commission of these serious offences. To some extent, Counsel at trial, who were not the Counsel appearing in this application, had responsibility for failing to put before the trial judge authority for the proper level of sentence in a case such as this, and the judge might well have been, in what he called the absence of authority, well advised to have adjourned the sentencing procedure until he found such authority.

18. We take the view that if proper weight had been given to the serious aspects of this case, the correct starting point to have taken would have been four years' imprisonment on each charge, bearing in mind also the extent of the offending. Taking into account the previous good character of both Respondents and other matters raised in mitigation, this could properly have been reduced to sentences of 31/2 years' imprisonment.

19. The Applicant has made no criticism of the judge for having made all these sentences concurrent, but it is submitted that the extent of the offending was not adequately reflected in the totality of the sentence. This is borne out by what, as we have already said, we consider to have been the appropriate level of sentence.

20. One other factor which the judge appears to have taken as mitigation was the onerous repayment agreement. We cannot agree that this was a matter which had any bearing upon sentence. However, the repayment of US$15,000 before the offences were reported to ICAC was valid mitigation, but this was taken into account on the mandatory aspect of the trial judge's order made under s.12 of the Ordinance, requiring the Respondents to pay a sum amounting to the value of the advantages received by them to Sansegal.

21. For the reasons we have given, we take the view that these sentences were manifestly inadequate. We propose to grant the application and to vary the sentences on each charge from concurrent terms of 12 months' imprisonment to concurrent terms of 3 1/2 years' imprisonment on each. The order made under s.12 of the Ordinance for the payment of HK$520,141.68 less the US$15,000 to be paid to Sansegal within one year will stand.

22. Section 12 appears to us to be unsatisfactory as presently drafted because it lacks clarity as to what sanctions in the event of non-payment are envisaged. In these circumstances, it may be that the relevant authorities would wish to consider amending the legislation.

Representation:

Mr Anthony E. Schapel, SADPP, for DPP/Applicant

Mr Christopher Grounds and Mr Cheung Kam Chuen, inst'd by M/s S.K. Wong & Lee, for the 1st Respondent

Mr Anthony Watson-Brown, inst'd by M/s S.H. Leung & Co., for the 2nd Respondent