HKSAR v. Basu, Arnab and Another

DCCC712/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 712 OF 2007 

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Before:   H H Judge Browne

Date:     30 January 2009 at 2.57 pm

Offence:  Fraud,etc. (欺詐等罪項)

Reasons for Sentence

1. The 1st defendant pleaded guilty to three charges.  The charges on the Charge Sheet were Charges 2, 4 and 5.  Charge 5 was a joint charge with the 2nd defendant. 

2. The 1st and 3rd charges were preferred against only the 1st defendant.  They were allegations of fraud and not guilty pleas were entered to those charges.  The prosecution have asked that they remain on the court file and I agree to that application. 

3. Charge 2 to which the 1st defendant has pleaded guilty is a charge contrary to section 56(1) and 56(3) of the Banking Ordinance.  The statement of the offence is that he produced information which was false in a material particular, and the particulars are that on 23 March 2006, in Hong Kong, being the chief executive of the ICICI Bank, the Hong Kong Branch, that being an authorised institution, upon an examination by the Hong Kong Monetary Authority pursuant to sections 55(1) of the same ordinance and upon the bank being called upon to afford information to the HKMA, produced information which was false in a material particular, namely that the private banking team of the bank was in compliance with the applicable laws.

4. The 4th charge to which the 1st defendant has pleaded guilty is under the same sections of the Banking Ordinance.  The particulars of the offence are that on 6 April, in Hong Kong, he, when called upon to afford information to the HKMA, produced information which was false in a material particular, namely that five specific cases observed by the HKMA in an on-site examination were remittance based and conducted at the request of the customers only.

5. The 5th charge is the joint charge and that is a charge of wilfully altering, abstracting, concealing or destroying any documents of business contrary to section 123(C) of the Banking Ordinance.  The particulars of that offence are that between February and March - I assume that means during February and March of 2006 - the 1st defendant as chief executive and the 2nd defendant as the head of private banking of the ICICI Bank, which was an authorised institution, with intent to deceive Hong Kong Monetary Authority, wilfully altered, abstracted, concealed or destroyed entries in the books of record, reports, slips, documents or statements of the business, affairs, transactions, conditions, assets or accounts of the bank, or wilfully caused any such entry to be altered, abstracted, concealed or destroyed.

6. There were in fact separate Summaries of Facts admitted because the 2nd defendant entered his guilty plea to Charge 5 on an earlier occasion on the Summary of Facts admitted on that basis and the 1st defendant pleaded guilty on a subsequent date.

7. The case relates directly to the operations of the ICICI Bank Limited in Hong Kong.  The main bank which has a head office in Mumbai, is a large Indian corporation.  I am told it is the second largest bank in India.  The branch became an authorised institution in Hong Kong and engaged in normal banking activities.  However, the branch has never been licensed by the Securities and Futures Commission in Hong Kong to deal in or to advise upon securities, no matter what their source.

8. Between early 2005 and March 2006, it did so and without authorisation, after advising, dealing in securities and collective investment vehicles, registered outside Hong Kong.  This is regulated by the Securities and Futures Ordinance, cap. 571.  The fact the funds were outside Hong Kong does not matter.  To deal in any funds requires authorisation, the chief executive of the bank was the 1st defendant and D2 was the head of private banking.

9. The branch was investigated by the Hong Kong Monetary Authority who have considerable powers of enquiry and following their examination they wrote to D1 asking for comments upon various matters including five remittance transactions which were prima facie evidence of dealing in securities.

10. In reply to the first letter, and this letter is dated 23 March 2006, and that is the subject of Charge 2, the Hong Kong Monetary Authority were assured by the 1st defendant that the bank was in compliance with the applicable regulations.

11. In the second letter that is dated 6 April 2006, this is the subject of Charge 4, D1 assured the bank, among other matters, that in relation to the five transactions, the bank was only concerned as a remittance bank, and the assurances in both those letters were in fact untrue.

12. Before and during the investigation there were attempts by the 1st and 2nd defendants to conceal documents which tended to prove the unauthorised advising upon and dealing in securities, and this was done by the deletion of relevant emails.  The 2nd defendant also arranged for the sending of physical documents to India, and it is that which is the subject of the 5th charge.

13. ICICI was registered in the form of a branch on 10 October 2005, while its application to be a registered institution in Hong Kong was being processed by the SFC.  Until it did so the branch could not advise upon or conduct securities business.  In the meantime the branch could conduct normal banking activities such as small, medium-sized enterprise lending, corporate banking and treasury activities in Hong Kong.

14. Following an anonymous complaint of unauthorised dealing in securities to the Securities and Futures Commission on 7 November 2005, the matter was referred the following month to the Hong Kong Monetary Authority.  In the course of February 2006, the Monetary Authority, at an on-site examination of the bank and it discovered that there were five suspicious remittances.  These related to the acquisition of investment products with fund transfers between 22 December 2005 and 3 February 2006.  These were notified to the bank in a report from the Monetary Authority on 16 March.

15. On 23 March the 1st defendant, in his capacity as chief executive officer of the bank, wrote that to the best of their knowledge that the private banking team were in compliance with the applicable laws.  On 6 April, the Hong Kong Monetary Authority received a letter from a Mr Raja Subramanian, the head of compliance at the bank, enclosing a reply to the on-site examination.

16. A further reply also dated 6 April was from the 1st defendant, and among other things he stated that, “With respect to the five specific cases observed in the on-site examination, we have conducted an internal investigation and confirm that the transactions are purely remittance based, which are conducted at the request of the customer only.  In all these cases, the role of the branch is restricted to that of a remitting bank.  We would like to submit that the branch has adhered to the applicable restrictions under the Securities and Futures Ordinance.”

17. Mr Akashdeep Grover, a former relationship manager of ICICI, has been convicted of a charge of carrying on a regulated activity without a license contrary to section 114(3)(a) and section 114(9) of the Securities and Futures Ordinance Cap. 571.  On 10 April he was sentenced to pay a fine of $4,000.

18. He joined the ICICI Bank in India in 2003 and in January was deputed to the development of the future Hong Kong branch.  His main purpose was to do business analysis and build networks within the community between January and June 2004.  He reported to his supervisor in India, and in Hong Kong met some of the existing clients of the bank.  In June 2004, he was told that he must also report to the 1st defendant who was then the head of the bank based in Shanghai.  The 1st defendant asked him in addition to his current activities, for any one product.

19. Between September and October 2005, a total of five relationship managers joined the bank in Hong Kong.  The 1st defendant told him that he had checked the legal position with respect to approaching clients and promoting products and that he could approach up to 50 clients.  This was based on information and legal advice given by the compliance division of the bank.

20. The 1st defendant gave Grover instructions to selling those investment-related products to clients of the bank because he was his immediate supervisor.  In about May 2005, the 1st defendant became the chief executive officer of the bank and from that time onwards all the instructions in relation to investment product selling were from the 2nd defendant as he took over the post of D1.  Since then, Grover had little contact or communication with the 1st defendant, instead reporting through his new immediate superior.

21. In October 2005, discussing a possible complaint from a customer, D1 told the 2nd defendant in the presence of Grover that it was not worth the risk of selling investment products.  However, he continued selling investment products under the direct instruction of senior officers from head office and D2 without the knowledge of the 1st defendant.  He submitted monthly reports which related to all activities and sales to D2, who eventually sent them to India.

22. On 14 March 2006, D2 sent a memo through D1 to all RMs asking them not to solicit any business that falls under the Securities and Futures Commission regulated activities, and a copy of that was attached.  On 11 April, the 2nd defendant sent a memo, again through D1 to Grover, warning him about violation of SFC regulations and this warning was acknowledged by Grover.

23. In relation to Charge 5, the evidence of Grover was to the effect that in February 2006, the 2nd defendant asked him to delete emails from his laptop computer in relation to those which were concerned with the promotion and sale of security products to clients.  However, he did not do so and his laptop was not inspected by the HKMA inspectors.  He became aware about that time that all client-related documents had been sent back to India, which was not in accordance with the usual practice as ordinarily such documents were retained for inspection by the Monetary Authorities.  This was a practice both in Hong Kong and in Singapore.

24. Grover said that on the 12thApril he and other managers took part in a conference call.  It had also included the 1st defendant, the 2nd defendant, a Mr Muthya, the head of operations, and a Mr Raja, the head of compliance.  The 2nd defendant told them later to delete all emails from their laptop computers.  He did this but only after making a backup copy on the external hard drive.  At the time of the conference call the 1st defendant made no comment.

25. A number of witnesses, PW’s 4 to 11 on the witness list, were all investor customers of the branch, variously stated that they were advised by and otherwise dealt with the various investment managers of the branch in Hong Kong.

26. On 29 December 2005, the SFC received an application from the bank for registration as an institution under section 119 of the Securities and Futures Ordinance to carry out certain regulated activities.  This form proposed to appoint the 1st and 2nd defendants and Mr Muthya to be its executive officers for both types of regulated activities.  The 1st defendant was a signatory of the application form.  On 10 May, a letter was received from the bank withdrawing that application.

27. In relation to Charge 5, several thousand documents were sent to and returned from India.  They were received by Mr Pramod Rao, general manager and head of the corporate legal group of the ICICI Bank and resident in India.  The documents were sent to India from the branch in Hong Kong sometime in February 2006.  In the main, the documents were files on Hong Kong customers, being individuals and corporations.  Many of the documents were supporting and ancillary to the normal business of the bank, such as deposits and loans.  However, a small proportion consisted of copies of subscriptions of many persons to securities products of the type which were identified by the HKMA in their letter of 16 March.  They are vouched for in the documents by the local managers, including Mr Grover.  The securities documents evidence the advising and dealing in securities in Hong Kong.

28. There was a series of interviews between the 1st defendant and the Hong Kong Monetary Authority on 13 April, 2 May and 23 May.  The first interview was at the request of the Monetary Authority.  The other two interviews were at the request of the 1st defendant.

29. D1, on 13 April, was interviewed, and inter alia he stated that he knew that in some instances the relationship managers might have talked with clients about investment products in terms of their possible availability, and typically the managers would refer these clients to contact some of the colleagues in India directly during their visits to India.  Later he stated that he realised that care had to be exercised in soliciting business in Hong Kong.

30. In the second interview he referred to a meeting in India where he conveyed the Monetary Authority message that the bank should be aware of the Securities and Futures Commission guidelines and should restrain from any securities transactions.  Prior to this there was some confusion regarding the windows of opportunity available in the form of private placement of up to 50 investors and/or the exemption rules regarding professional investors.

31. Paragraph 3 states that he had given private banking a low priority and was concentrating upon institutional and corporate lending.  He also said that he was aware that in spite of the restrictions on the selling of investment securities, Grover was felicitated by the chief executive officer of the bank in India in December 2005 for his good performance in the selling of securities in Hong Kong.

32. The third interview was to highlight points not covered in previous interviews.  There was instruction to cooperate completely with the Monetary Authority.  The reply in relation to the bank’s activity was drafted by the 2nd defendant and Raja.  The reply in relation to private banking was drafted and refined by teams in Mumbai and forwarded to D1 and Raja for sending to the Monetary Authority.  He agreed that in certain places he could have done more investigation.  He was aware of the activities of the managers but there were some grey areas in conducting business in Hong Kong and he took the benefit of the doubt in those areas.

33. He said that he tried to focus the managers on solicitation of deposits and institutional business and admitted that he should have fired any persons who did unregulated activities.  It was endorsed at a meeting in Mumbai in October 2005 that ICICI should stop selling investment products, and on his return the 1st defendant told the 2nd defendant to do so.  There was instruction in the following terms, “We have to be very careful and cautious while approaching clients to solicit business until we get our SFC licence.”

34. The managers could talk face-to-face with clients but on a non-solicitation basis.  This meant no cold-calling but it was all right to ask existing clients if they were interested in securities products.  He said that he knew that one customer subscribed to a private equity fund for a large amount but he thought that there was a legal exemption clause.

35. The interviews with the 1st defendant at the Securities and Futures Commission were conducted on 16 August and 17 August 2006.  The 1st defendant willingly participated and co-operated in those interviews.  In the first of the interviews the ICICI Bank had a big team in Hong Kong, he told them, selling investment products to high net income persons in Hong Kong.  He realised that it would take a lot of effort to stop this activity and understood that some transactions were still going on and verbally attempted to stop D2 and Mr Saha from the sale of securities, especially after the Monetary Authority’s warning.

36. In his reply to the Monetary Authority on 6 April, he concealed this information because the reply was drafted by the Hong Kong branch team and forwarded to head office compliance in India who worked on the draft, discussed with them, and then forwarded the final copy to be forwarded to the Monetary Authority.  He said he went along with the collective view because the bank had applied for an SFC licence by then and his understanding was that maybe the private banking team had conducted about 15 to 20 transactions, mainly in terms of selling to HNIs and professional investors during the period October 2005 to March 2006.  Even though he was aware after the October meeting that there may not be an exemption under this category he went along with the concealment and admitted he was wrong in doing that.

37. In his second interview with the SFC he admitted that he covered up for the managers and for the bank and disregarded the law since he did not get clarification from the head office as for this business and for others who were involved.  He said that the bank had applied to the SFC and were in the process of receiving a license and the managers had stopped selling securities.  He felt the bank could manage this time and start on a clean slate.

38. The 2nd defendant was arrested by the Commercial Crime Bureau on 28 August 2006.  The 2nd defendant requested to have an interview with the investigators of the Monetary Authority in May 2006 and during that interview he admitted that Anil and Raja came up with a suggestion to delete the emails.  “I supported the suggestion and Arnab also endorsed the suggestion.”  He said that he had asked the managers to make a back-up copy of the emails before they deleted them.  He further elaborated that he stated that he asked them to move all the emails to another folder in their laptops.  All the emails would not be shown in the mailbox when the Monetary Authority inspected it, but they would still be stored.

39. As for the concealment of the documents by shipping them back to India, the 2nd defendant said, “Yes, it was in February 2006 when the Monetary Authority conducted the on-site examination.  Arnab instructed me to cover up the transaction documents and I then instructed Akashdeep Grover to arrange sending all the transaction documents to India in order to avoid the Monetary Authority on-site team from locating those transactions.”

40. When the defendant was arrested at his home on the evening of 30 August 2006, he was subsequently interviewed in the early hours of the following morning.  When interviewed he said that he was aware that the bank still had not obtained the licence from the SFC for selling investment products.  He said that before he came to Hong Kong he was aware that relationship managers, who were his subordinates and under his supervision, had already been soliciting and selling investment products.

41. He mentioned the situation to the 1st defendant and the 1st defendant informed him that they could sell investment products to professional investors not more than 50 selling on one product.

42. He said that he later learnt from a conference call that no investment products could be sold without a licence.  He said there were agreements, contracts and subscription forms in the office but that they had been sent back to India for processing; no documents would be kept in Hong Kong.

43. D2 said that he was instructed by the 1st defendant there should not be any record of investment products in the bank and so he instructed Grover to inform other relationship managers of this and collected all relevant documents and sent them to India.

44. The 2nd defendant was further interviewed later again on that same morning of 31 August.  He admitted that Grover, in a conference, suggested a backing up of the information of emails in the hard disk, moving the folder which contained the information away from the computers should be done by the relationship managers.  And in a conference chaired by the 1st defendant, instructed to collect all the reference files from the relationship managers and send them back to India.

45. Those were the facts which have been placed before the court and admitted by both defendants.  I note that the first complaint to the SFC was made on 7 November 2005 and it was referred to the Monetary Authority on 8 December 2005.  In February 2006 there was the on-site examination which discovered the five suspicious transactions relating to the acquisition of investment products.  I mention those dates so as to put the timeframe in context.  It is a considerable time since those events occurred.

46. Both defendants have records, but they are not strictly previous convictions because they were matters to which they pleaded guilty in the Magistrates Court on dates after the charges, the subject of the present proceedings, arise.

47. Those proceedings were brought under the Securities and Futures Ordinance and I note that as regards those charges on summary conviction, the fines under section 114(1), on summary conviction is 2 years and $500,000.  On indictment, I note that the sentence is one of 7 years and $5 million.  Under section 114(3), on indictment the maximum sentence is 2 years and $1 million; and on summary conviction, a level 6 fine, that is $100,000 and 6 months.

48. The proceedings which are before this court under the Banking Ordinance, section 56(1), on indictment the maximum sentence is 2 years and $1 million, and on summary conviction $100,000 and 6 months’ imprisonment.  And under 123(C), on indictment the maximum sentence is 5 years and $1 million, and on summary conviction, 2 years and $100,000.

49. The matters under the Securities and Futures Ordinance were, in terms of maximum sentence, of a more serious nature than the offences to which they have pleaded guilty today.

50. The original offences were prosecuted by the Securities and Futures Commission.  The offences, which we are dealing with today, came about as a result of conduct involving the Monetary Authority and there has been comment made they arise out of the same factual scenario.  I do not accept that.  The original proceedings were for specific breaches of the Securities and Futures Ordinance and current charges are these were matters in addition to that.  So although that was the foundation, they could not have been contained within the original charges that were preferred, they were matters which clearly required investigation, and in my view the prosecution were quite right to investigate.

51. Turning to the pleas in mitigation which have been entered, I propose to deal with the 1st defendant first of all.  It seems to me that not only has this matter been hanging over his head for a considerable period of time, but he has been greatly affected personally by the way in which things have developed.

52. On a personal basis, he is 40 years of age and he is married with two sons.  He is now resident in Calcutta.  He went to a good school, I am told, in India, and then on to university where he studied engineering.  Later, he took the MBA and became a banker.  He had a successful banking career.  He had a successful career in India and they were obviously impressed with him because they sent him abroad and he quickly rose to be a manager, in 2003 he was sent to Shanghai; 2004, came to Hong Kong, and in 2005 he became the chief executive officer of the Hong Kong branch.

53. He was dismissed as a result of his involvement in these matters.  It was urged upon me that really the defendant has been made a scapegoat by the bank.  It seems that his activities were closely monitored by the bank and many of the letters that were sent by him had in fact been drafted by the bank, so I concur with that suggestion that clearly he has been made a scapegoat, and once these matters did come to light, the bank sacked him.

54. I am also told that one of the effects of this was that these proceedings in Hong Kong attracted wide publicity in India to such an extent that he has found it almost impossible to find employment in the banking field and had to take employment elsewhere which has resulted in a considerable drop in his income, plus his movement from Hong Kong obliged him to incur significant expenses.

55. I am told that during the course of these proceedings he has been obliged to come back to Hong Kong on no less than seven occasions and that he has had to pay for those visits, he has had to pay not only for the flights but for his accommodation in Hong Kong, and I accept the mitigating feature there that has been urged upon me that he has shown responsibility to the Hong Kong legal system by voluntarily coming back to face these proceedings.

56. The 2nd defendant I am told is 40 years of age, he is married with two children who are aged nine and 10, and again his family are in India.  As with the 1st defendant he has come back to Hong Kong on seven occasions to answer his bail.  As with the 1st defendant, these are the actions of a responsible person.

57. The defendant pleaded guilty at an early stage to the 5th charge.  It is urged upon me that he was in charge of sales, but when he came to Hong Kong he was unfamiliar with the banking and legal landscape of Hong Kong and really took his lead from others.  A number of letters of reference has been submitted to the court in relation to the 2nd defendant, and it comes out from those letters that he is a man of integrity, discipline and commitment.

58. I am told that he resigned from his last job, from which he had a good reference, in December 2008 in order to return to Hong Kong for this matter to continue.  Reference was made by both counsel to the previous fines that have been imposed by the courts in relation to the Securities and Futures Ordinance charges to which they pleaded and I have taken that into account.

59. The other matter which I have taken into account is this - and I think it is a valid point - that had the only charges before the court at the lower level been the banking charges then this is not a matter that would have caused the prosecution to transfer this matter to the District Court.  I feel sure that the matter would have been dealt with in the Magistracy.

60. The more serious offence of fraud, which no doubt occasioned the prosecuting authority to have this matter transferred to the District Court, have now been dropped and that they will remain on the court file.

61. These matters have been hanging over the head of the defendants for some time and I place no blame on the prosecution authorities for this.  These cases take a long time to investigate; they involve large number of investigators, lots of documents have got to be looked at and it takes a long time for a picture of the overall criminality to emerge, so I certainly place no blame on the prosecution for any delay that has been occasioned.

62. I pointed out at the outset that the charges which were brought under the Securities and Futures Ordinance, in terms of just looking at the seriousness of those charges are no less serious than the charges under the Banking Ordinance which have now been preferred.

63. The main feature of mitigation in relation to the 1st defendant certainly as regards to letters he wrote seems clear that the bank was closely involved in the drafting of those letters and he was heavily involved with the head office when those letters were drafted and when they were sent off.

64. I accept that the charges to which the defendants have now entered guilty pleas, had they been the only charges preferred, this matter would have remained in the Magistracy.

65. I also accept a strong mitigating feature urged upon me that the bank was initially misled upon professional legal advice as to its correct position in the banking industry in Hong Kong, and it was that incorrect legal advice which led to the misconception of the bank as to what they were entitled to do in Hong Kong and as to the instructions to which they subsequently gave to their relationship managers.  It was not until October 2005 that correct legal advice was given and by that time the 1st defendant was the chief executive officer of the bank and the selling of investments was done by the 2nd defendant.

66. I also accept as regards to the 1st defendant that his involvement in Charge 5 was somewhat limited.  There was a conference call involving the bank’s head of operations and head of compliance and there is no suggestion that this conversation was contributed to by the 1st defendant; he made no comment.  He fully cooperated with the subsequent investigation by the Hong Kong Monetary Authority and voluntarily submitted to interviews.

67. The letter referred to in Charge 2, was signed by D1 as the chief executive officer and he added the caveat that this was to the best of his knowledge and belief.  The second letter as I mentioned earlier was drafted in Mumbai by the head of compliance for the whole of the bank.  The other feature of mitigation is that nobody has lost any money by what took place.

68. I have also taken into account the personal background of the 1st defendant and the serious and dramatic personal consequences that have flowed from his involvement in these matters I accept that he has been made a scapegoat by the bank and that his reputation in banking circles, certainly in India, has been ruined.  He has also suffered extraordinary financial consequences in respect of these proceedings because of various expenses incurred and through his loss of earnings.  He has also shown responsibility to the court by complying with all bail requirements and coming back to Hong Kong as and when required.

69. Many of those mitigating features would also apply to the 2nd defendant.  Again, as with the 1st defendant he has frequently returned to Hong Kong and this is a demonstration of his responsibility and remorse; letters of reference have been placed before the court, which I have referred to earlier, and he previously was of good character as was the 1st defendant.

70. In arriving at an appropriate sentence for this case, as I mentioned earlier that had these cases been dealt with at the same time as the earlier offences and I attach no blame to anybody that that has not taken place, I take the view that given the background of the offences, given the uncertainty that existed in the industry, a magistrate might well have dealt with these offences by way of a financial penalty because of the peculiar features of this case.

71. Therefore, in respect of Charges 2 and 4 in respect of the 1st defendant, I impose fines of $10,000 on each charge.  As regards to the 5th charge, that is the joint charge, I fine each of the defendants $15,000.  The total fine, therefore, in respect of the 1st defendant will be one of $35,000, and in respect of the 2nd defendant will be $15,000, and I order that Charges 1 and 3 remain on the court file not to be proceeded with without the leave of the court.