HKSAR v. Mulani Dinesh Kan and Others

DCCC 1176/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 1176 OF 2012

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REASONS FOR VERDICT

1.Mr Mulani (D1) pleads not guilty to six charges of fraud, contrary to section 16A of the Theft Ordinance, Chapter 210 (charges 1-6) and one charge of attempted fraud, contrary to section 16A of the Theft Ordinance and section 159G of the Crimes Ordinance, Chapter 200 (charge 7). Mrs Mathews (D3) pleads not guilty to one separate charge of fraud (charge 21).

2.Miss Chau Kin (D2), referred to in the evidence as Liz Chau, earlier pleaded guilty to all the fraud charges except charge 2 and nine of thirteen related charges of forgery.  In respect of charge 2 and the four charges of forgery to which Miss Chau pleaded not guilty the prosecution initially asked these to lie on the file not to be proceeded with without the leave of the court.  When the defence applied for the evidence of what Miss Chau told the police to be admitted in evidence the prosecution at that stage indicated that they would offer no evidence on these charges.

Introduction

3.The case concerns thirteen applications for Clean Import Loans made to HSBC by Headline Products Limited (“Headline”) between February and July 2009.  The charges each relate to one application with the remaining five applications being admitted as similar fact evidence.

4.Headline was a garment trading company incorporated in 2004.  Mr Mulani was at all times the sole director and shareholder of Headline.  Headline opened a bank account with the HSBC, account number 808-346373-001, of which Mr Mulani and Mrs Mathews were the only authorized signatories.  Miss Chau was employed by Headline as a shipping clerk.

5.HSBC granted loan facilities to Headline including Clean Import Loans.  Application for a Clean Import Loan would be signed by either Mr Mulani or Mrs Mathews and supported by a copy of the supplier’s invoice certified by Mr Mulani or Mrs Mathews and a copy of the bill of lading.  On the application being approved HSBC would pay the supplier direct and Headline would have 90 days to repay the loan.

6.In July 2009 HSBC found irregularities with one application which is the subject of charge 7.  The bank retrieved twelve other applications some of which were also found to have irregularities.  These twelve transactions are the subject of the other fraud charges and the five applications subject of similar fact evidence.  By letter dated 30 October 2009 HSBC cancelled all banking facilities with Headline.  HSBC eventually made a report to the police in March 2010.

7.In summary the prosecution case is that all thirteen applications for Clean Import Loans were fraudulent in that the invoices were not for genuine transactions and the accompanying bills of lading were forged.  Mr Mulani signed the seven applications the subject of charges 1-7 and two of the applications subject of similar fact evidence and certified the supporting invoices.  Mrs Mathews signed the application subject of charge 21 and three of the applications subject of similar fact evidence and certified the supporting invoices.  The prosecution submit both Mr Mulani and Mrs Mathews must have known when signing the documents that they were signing fraudulent applications. 

8.The defence case in summary is that Mr Mulani was only an investor in Headline and that Headline was run by a Mr Sunil Datwani, who was married to Mr Mulani’s cousin Deepa Mulani.  Mr Mulani played no part in the day to day running of Headline and only signed the banking documents at which time he did not know the applications were fraudulent.

9.Mrs Mathews has called no evidence.  No adverse inference is drawn against Mrs Mathews for remaining silent. That is her right.  This proves nothing one way or the other.  The prosecution must prove the charge beyond reasonable doubt. In closing submission Mr Chan says the prosecution have failed to prove Mrs Mathews was a knowing party to the deceit when signing the applications.

Evidence

10.9 of 20 witnesses set out in the list of prosecution witnesses supplied to court at the beginning of the trial were called or tendered for cross-examination.  These were the staff of HSBC (PW1 & PW2) who found the irregularities in the applications; representatives of Fern Leaf Garments Limited (“Fern Leaf”) and Kam Tak (Sexy Feel) Trading Company Limited (“Kam Tak”), two suppliers of Headline (PW10 & PW11) who spoke as to the falsity of the invoices; three police officers (PW15, PW16 & PW20) who were involved in the search of the offices of Headline and arrest and interview of the defendants; one staff of Ultimate Products (HK) Ltd (another company partly owned by Mr Mulani) (PW19) who also worked for Headline and the agent of Million Forward Agents (PW9) who spoke as to the falsity of the bills of lading.  For ease of reference the same witness number was given although all the witnesses were not called and those that were called were called in a different order. 

11.The statements of seven witnesses were read pursuant to section 65B of the Criminal Procedure Ordinance, Chapter 221.  These were PW4-PW8 (exhibits P50-54) relating to the falsity of the bills of lading by showing the vessels did not go on the voyage stated on the bills of lading; PW 12 (exhibit P62) who was the agent of San Yang International Umberella Company (“San Yang”) a supplier of Headline who spoke as to the falsity of the invoice subject of charge 4; and PW18 (exhibit P63) the Government Chemist relating to alterations made to the invoice subject of charge 1.

12.Facts were admitted pursuant to section 65C of the Criminal Procedure Ordinance (exhibits P47-47C) including that Miss Chau (D2) was the one who forged the bills of lading (see paragraph 3, exhibit P47B).  The remainder were largely of a formal nature and I will refer to them when the need arises. 

13.The numbering of exhibits produced follows the lists supplied by the prosecution at the beginning of trial and the defence at the opening of the defence case. These lists were amended and added to as the trial progressed.  Three bundles have been produced one containing the bankers’ affirmations; a trial bundle and a defence bundle (marked A, B & E respectively).

14.Mr Mulani elected to give evidence and called one character witness Mr Steven Shen Yu.  Mrs Mathews elected not to give evidence or call witnesses.  Admitted in evidence are video interviews given by  Mr Mulani (exhibit P22) and Mrs Mathews (exhibit P23).   

15.Admitted in evidence is that both Mr Mulani and Mrs Mathews have no previous criminal convictions in Hong Kong.  I also take into account Mr Mulani has never been arrested before together with the character evidence of Mr Steven Shen Yu.  In particular I take into account that Mr Yu has traded with Mr Mulani for over 10 years during which time he has found Mr Mulani an honest and reliable person with no reason to doubt his integrity.  This is considered in the context that the business between Mr Yu and Mr Mulani has grown over the years to reach US$5 million per year.  In considering good character I direct myself in accordance with the decision in HKSAR v Tang Siu Man[1997-98] 1 HKCFAR 107.

16.I have carefully considered all the evidence and the submissions of Mr Tracy, Mr Duncan SC and Mr Chan.  I have fully familiarized myself with all the documentation.  In reaching my verdict I remind myself of the burden and standard of proof and that the burden is on the prosecution throughout.  The defendants have to prove nothing.  I direct myself that I must be sure of the guilt of each defendant on each charge, each charge being considered separately and the case of each defendant separately.  On the other hand if the court thinks that the defence evidence pointing to innocence is true or may be true, it would follow that the defence has raised sufficient doubt in the prosecution case and the defendant entitled to be acquitted.

17.I remind myself that when drawing inferences from the evidence the inference must be a compelling one and the only one that no reasonable man could fail to draw from the direct facts proved.

The case against Mr Mulani (charges 1-7)

18.There is cogent evidence before court as to the falsity of the invoices and bills of lading including from the suppliers of Headline that the invoices were not issued by them; from the forwarding agent that they did not issue the bills of lading and on most charges evidence from the shipping companies that the vessels were not on the voyages stated in the bills of lading.  Further as noted earlier admitted in evidence is that Miss Chau (D2) forged the bills of lading.  I accept this evidence from which I am satisfied so I am sure the prosecution have proved each of the transactions subject of the charges were fraudulent.  The defence accepting they were fraudulent I therefore do not propose to set out in any more detail the evidence in this regard.

19.The issue to be determined by the court is whether the prosecution have proved Mr Mulani knew of the fraud when he signed each of the applications.  There is no direct evidence from the prosecution that Mr Mulani did know and therefore the prosecution case depends on whether from the documentary evidence the court can draw the inference he did know.

20.Prima facie the case against Mr Mulani can be said to be a very strong one.  One would expect that Mr Mulani being at all times the sole director and 100% shareholder of Headline knew what was going in his company and was therefore party to the fraud.  In particular being the owner of the company Mr Mulani was the one to benefit from the fraud and the one the bank would look to if there was default in repayment of the loans (see for example the security for the loans as set out on page 3 of the facility letter, exhibit P4, HPL129). 

21.Whether this is the only inference to draw depends on all the evidence before the court.  Mr Mulani has testified that he did not know of the fraud at the time he signed the applications for Clean Import Loans subject of the charges and the similar fact transactions.  In summary Mr Mulani’s evidence is that Mr Sunil Datwani who was married to his nephew Deepa Mulani was a 50% partner in Headline and was the one who ran Headline whilst Mr Mulani provided the capital to set up the business.  I will refer to Mr Sunil Datwani as Sunil, the name referred to throughout the evidence.  Mr Mulani took no part in the running of Headline and only signed banking documents when required. 

Incorporation of Headline in 2004

22.Mr Mulani testified that Sunil approached him in early 2004 and asked if he was interested in investing in a garment business.  Prior to this Sunil had worked in his family business Tripasa Industries Limited but had fallen out with his brother and wished to set up his own garment business.  Mr Mulani did not know the reason why Sunil had fallen out with his brother and did not ask Sunil.

23.Sunil proposed that Mr Mulani invest $3 million to set up the company with Sunil managing the company.  After consideration Mr Mulani decided to accept the proposal and Headline was incorporated in August 2004.  The arrangement reached was that profits would be shared 50/50 however as Mr Mulani was the only one who invested capital into the business Mr Mulani became the sole shareholder and director.  The partnership agreement reached by Mr Mulani and Sunil was not reduced into writing because Sunil was family and Mr Mulani trusted Sunil.  Mr Mulani invested a total of $6-8 million in Headline.

The management of Headline

24.Mr Mulani testified he had no knowledge about the garment industry and therefore left the management and running of Headline to Sunil.  Mr Mulani was at the same time running his own electronic company called Asiana Enterprises Limited, which was owned together with his cousins who lived in Australia.  In 2006 the cousins withdrew their investment and so Mr Mulani decided to set up a new company called Active Asia Limited, which changed name in 2008 to Ultimate Products (HK) Limited when Mr Mulani sold 49% of the business to Ultimte Products Holdings in the United Kingdom.  In 2012 Mr Mulani was to buy back the whole company and change the name back to Active Asia.

25.The defence have produced a formidable body of evidence to show that Sunil was running Headline including emails with the suppliers and with the staff of Headline as particularised at paragraph 82(10)-(14) of the defence written closing submission.  

26.That Sunil dealt with the suppliers is partly supported by the evidence of the suppliers Fernleaf and San Yang.  Mr Chan (PW10) the boss of Fernleaf said he liaised with an Indian woman who referred him to an Indian male who he was told was the boss.  Whenshown a photograph of Sunil (exhibit D4) Mr Chan said this was not the person he was referred to.  However when describing this person to the police Mr Chan said he was called Sunil.  Mr Chan however also said he had never met Mr Mulani.  The statement (exhibit P62) of Mr Liang (PW12), who worked in the China office of San Yang, was read.  Mr Liang said he dealt with Sunil.

27.Support can also be gained from the fact that of all the documents seized by the police from Headline, including over 5000 files/documents downloaded from the server no documents bearing Mr Mulani’s name or signature were found save for the banking documents which Mr Mulani had to sign.  There is also the evidence of Gilbert Boquireh (PW19), the computer technician who worked for both Ultimate and Headline, that Mr Mulani did not have an email address for Headline.

28.On the other hand the designation of Mr Mulani as CEO on two of the facility letters with HSBC (exhibit P4 at HPL128 & HPL129) is indicative that at the material time when the fraudulent applications were made Mr Mulani was regarded as the CEO of Headline.  There is however no evidence as to who wrote this but it must have been either the bank or someone from Headline.  In his evidence Mr Mulani said he did not write this and that when he signed the facility letters his title was left blank but said that CEO might have been written by the accounts department, which would therefore have been either Mrs Mathews or her assistant Bella.

29.If the bank one might say this would be only written because someone in Headline told them Mr Mulani was the CEO and if by Headline staff because they regarded Mr Mulani as the CEO.  However looking at the other evidence indicating Sunil was managing Headline together with the evidence of Gilbert Boquireh that Sunil was the CEO at Headline from 2006-2012 together with the name card found by the police showing Sunil claiming himself to be the CEO, I find that without direct evidence as to who and why CEO was written on the facility letters it would be unsafe to rely on this to say Mr Mulani was the CEO and therefore running Headline.

30.I therefore proceed on the basis Sunil was running Headline.  However it does not follow Mr Mulani did not know what was going on in Headline, which was at the material time operating from the same office premises as Active Asia/Ultimate.  After all Mr Mulani had invested substantial sums of money in Headline and as noted earlier liability for default on any loans rested with him and not Sunil.  Therefore one might think it was in Mr Mulani’s interest to know what was going on in Headline. 

Knowledge

31.In my view crucial to the decision whether Mr Mulani had knowledge of the fraud is whether or not Sunil was a 50% partner in Headline.  If he was or may have been then Sunil would stand to benefit by the fraud.  As a mere employee, even if CEO and the highest paid employee, one cannot say he would stand to benefit from such a fraud in the same way as a partner in the business and therefore would conduct such a fraud without the knowledge of the owner of Headline.

32.If Sunil was a 50% partner who ran the business and made all decisions as to payments what is most surprising is that he was not an authorised signatory of Headline’s bank accounts but instead Mrs Mathews was.  Surely if Mr Mulani trusted Sunil as he testified “all the way” then why not at the very least allow Sunil to sign relevant bank documents?  This is particularly so considering Mr Mulani’s evidence that he did nothing other than a cursory glance to check applications were in order and that he did not expect Mrs Mathews to check the documents either stating that she could rely on the shipping department. 

33.The fact Sunil was not made a signatory to the bank accounts gives rise to much suspicion that the arrangements in Headline are not all as the court has been told.  This is suggestive that Mr Mulani did not trust Sunil with Headline’s money and therefore would carefully check the financial position of Headline including applications for loans which only he or Mrs Mathews could sign.

34.Also suspicious is the lack of a written agreement setting out the true position as to the partnership between Mr Mulani and Sunil.  The explanation for this is because Sunil was family and therefore trusted there was no need for a formal agreement to be drawn up.  The number of family disputes one reads in the newspapers on an almost daily basis and as seen in the courts might well lead one to think even more reason to have a formal agreement drawn up to avoid any future dispute.

35.The only document which goes some way to supporting this position is a document titled “DMK STD LOAN DRAWINGS STATEMENT” (exhibit D82), which was signed by Mr Mulani and Sunil on the 8 October 2012.  This was long after the arrest and the allegations made known to Mr Mulani.  Mr Duncan SC however makes the point that the document was not prepared after Mr Mulani was charged.  When Mr Mulani and Sunil signed the statement Mr Mulani had already been released from bail. Although Mr Mulani was charged the next month there is no evidence that at the time this statement of drawings was signed he knew the police were about to re-arrest him.  The evidence of Mr Mulani is that he was telephoned by the police at the end of October when he was asked to report to the police station. As Mr Mulani was leaving for India the next day the police agreed to delay the reporting until after he returned to Hong Kong.  The travel movements of Mr Mulani (exhibit D101) support Mr Mulani did in fact leave Hong Kong at the end of October 2012. 

36.A question mark may be placed over this document by the fact that in a breakdown of the drawings (pages 169-172 of the defence bundle) Sunil is described as a director which clearly he was not. 

37.Mr Tracy also refers to Mr Mulani’s evidence in cross-examination that no monthly or quarterly financial statements were prepared whereby Mr Mulani could check the financial position of Headline.  Later when page 5 of the facility letter, exhibit P4, HPL125 was drawn to Mr Mulani’s attention showing that the bank required half yearly management accounts to be provided Mr Mulani said he assumed these must have been prepared by the accounts department and sent to HSBC but he had not seen them. 

38.Whilst management accounts may well have thrown light on the drawings if any of Mr Mulani and Sunil the fact remains I do not know whether they were prepared and if they were whether the bank kept them.  None have been produced by the prosecution nor have I been told whether the bank received any management accounts from Headline.

39.Also suspicious is that whilst refusing to answer most questions when interviewed by the police Mr Mulani said Miss Chau (D2), was employed by him whereas his evidence was Sunil employed her.  Mr Mulani explained he told the police he employed her because he was the owner of Headline.  At that moment he clearly had the opportunity to reveal the true position of the company to the police but instead chose to hide behind the corporate veil.

40.I have taken into account the irregularities in the bills of lading and the invoices as referred to in Mr Tracy’s written submission at paragraphs 7.2.8-7.2.10 and in the cross-examination of Mr Mulani.  Whilst perhaps Mr Mulani should have checked the documentation more closely when signing the applications having accepted that Sunil was running the company Mr Mulani would be entitled to place reliance on Sunil and the staff of Headline to prepare genuine applications and supporting documents for his signature.  In these circumstances I find it is less likely Mr Mulani would have noticed the irregularities, in particular considering the number of documents Mr Mulani had to sign each day.

41.Further as both Mr Duncan SC and Mr Chan point out the bank staff at HSBC who checked the documents before the loans were granted also did not notice the irregularities in the bills of lading until the application subject of charge 7.  Nor is there any evidence that Mr Mulani had seen the different invoices purportedly from the same supplier by reason of which he may have needed to make some enquiries.

42.Mr Duncan SC submits that Headline had all along been a profitable business (see paragraph 99 of the defence written closing submission) and therefore there was no reason for Mr Mulani to suspect anything about the way Sunil had been running the business for the past five years.  Whilst Headline always paid their profits tax there is a suggestion that Headline may have had a cash flow problem.  They were overdrawn in their current account and suppliers were pressing for payment.  This may well provide the reason why loans were required to meet the cash flow problem.  All the transactions having taken place forged documents needed to be prepared to show they were existing transactions for which loans would be granted to settle those payments.

43.If cash flow was the reason then again one would expect the owner to know.  However if Mr Mulani is not involved in the day to day running of the business he may not be aware.  More significant however is the evidence Mr Mulani would have been in a position to inject more money into Headline to oversee any such cash flow problem. The defence evidence clearly shows that Mr Mulani had substantial assets and access to readily available cash (see the personal bank statements, exhibit D90).   

44.This indicates a lack of motive on the part of Mr Mulani to practise a fraud on the bank.  Whilst the absence of motive is not determinative of a case the failure to show motive on the part of Mr Mulani means the court should be slow in drawing the inference Mr Mulani knew of the fraud.

45.Whilst suspicious that as the owner of Headline Mr Mulani knew more than he has told the court having carefully considered all the evidence and accepting that Mr Mulani was not involved in the day to day running and management of Headline I am satisfied without direct evidence as to his knowledge of the fraud that it would be unsafe to say the only inference to draw is that he knew.  The benefit of the doubt is given to Mr Mulani and he is acquitted of all charges. 

The case against Mrs Mathews (charge 21)

46.Mr Chan submits in respect of the single charge faced by Mrs Mathews that the transaction referred to in the invoice (exhibit P1, HPL51) which was submitted in support of the application for a Clean Import Loan and as particularised in charge 21, is a genuine transaction notwithstanding that this invoice was not issued by Kam Tak.

47.The basis of this submission is that Kam Tak had issued an invoice with the same invoice number (which is part of P18 and found in the trial bundle at page 567) the particulars of which are identical to the one submitted by Headline in support of the application for a Clean Import Loan save and except the date of the invoice is different and the invoice is not signed by Kam Tak.  Further that Mr Lai Wai Keung (PW11) a shipping supervisor with Kam Tak confirmed in court that the goods stated in the invoice were delivered on the date stated in the invoice and that payment of those goods was made by HSBC on the 27 April 2009 in consequence of the granting of the Clean Import Loan (see paragraphs 2.1 & 2.2 of Mr Chan’s written submission).

48.The requirements of a Clean Import Loan as set out in the facility letters stipulate an application is to be supported by a certified true copy of the invoice and the relative transport documents (see for example page 2 of the facility letter, exhibit P4, HPL128).  The related transport document is the bill of lading (exhibit P1, HPL53), which refers to the invoice under marks and numbers. 

49.In making the application and submitting the supporting documentation representation is made, inter alia, that the invoice is a genuine invoice issued by the supplier Kam Tak and that the goods were shipped in accordance with the bill of lading.  The invoice was not issued by Kam Tak and the goods were not shipped in accordance with the bill of lading.  The bill of lading, which is admitted to be a forgery, states the date and place of delivery different to that on the invoice. 

50.Mr Chan submits that regardless of whether the bill of lading submitted together with the application was false the deceit particularized in the charge has not been made out (see paragraphs 2.4-2.6 of Mr Chan’s written submission).  I do not agree that the invoice is to be read in isolation.  The prosecution case has never been limited to the invoice.  That this was so is made clear in the opening (see paragraphs 3, 4 & 11).  Whilst the particulars of the charge may well have been better phrased they do not in my view require amendment.  The defence have in no way been prejudiced by these particulars.  Had amendment been required I would have exercised my powers of amendment. 

51.Whilst the particulars, save the date of the invoice, are the same as that of a genuine invoice issued by Kam Tak the use of such particulars together with a forged bill of lading in the application for a Clean Import Loan cannot in my view be said to be in respect of a genuine transaction.

Knowledge

52.Although Mrs Mathews faces only one charge this charge is not to be viewed in isolation. The evidence is clear both from similar fact transactions which Mrs Mathews signed and the evidence of Mr Mulani that Mrs Mathews was involved in other similar applications made by Headline for Clean Import Loans.

53.As in the case of Mr Mulani there is no direct evidence of knowledge of the fraud by Mrs Mathews.  Whether the only inference to draw is that Mrs Mathews did know depends very much on the responsibilities attached to being the head of the accounts department of Headline and a bank signatory of the Headline bank account.

54.Mr Mulani testified as to the role of Mrs Mathews.  In summary Mrs Mathews was employed to head the accounts department of Asiana and later Active Asia and Ultimate. Mrs Mathews together with her assistant Bella was however required by Mr Mulani to also do the accounts for Headline.  This is inconsistent with the version given by Mrs Mathews in her video interview (exhibit P23) when she says her role at Headline was as bank signatory only (see counters 159-196).  If Mr Mulani is telling the truth Mrs Mathews has been less than frank with the police as to her role in Headline.  Indeed I note Mrs Mathews effectively exercised her right to silence when asked questions about Headline including whether she knew Sunil.

55.Mr Mulani did not expect Mrs Mathews to check the documents presented to her for signature but instead to rely on the shipping department staff to prepare proper documentation.  Whilst one must to a large degree rely on others in a company to provide proper documentation Mrs Mathews as the head of accounts was not simply there just to approve and sign any documentation without making any checks. 

56.Again I have considered whether Mrs Mathews in carrying out her work should have noticed the irregularities in the bills of lading and the invoices.  The position of Mrs Mathews is different to that of Mr Mulani as she had to keep records of all transactions and therefore may be expected to have seen all the relevant documentation. 

57.There is however no evidence before the court of her knowledge of shipping documentation whereby she would have noticed the irregularities in the bills of lading and as noted earlier the bank staff at HSBC responsible for checking the documents also did not notice the irregularities in the bills of lading.  

58.Whether Mrs Mathews would notice the irregularities in the invoices most significant is the evidence of Mr Mulani that after the application was signed this would be returned by the accounts to the shipping department with no copies being kept by the accounts department, including copies of the invoices.  This is consistent with the evidence of the police that the relevant documentation including the applications for Clean Import Loans and suppliers’ invoices were found behind the desk of Miss Chau (D2).   

59.Further Mrs Mathews was, as particularised in paragraphs 3.4-3.8 of Mr Chan’s written submission, extremely busy and handled many such applications every year, estimated at 100-125 for Headline and 600 for Active Asia.  In these circumstances one cannot say for sure that even a diligent accountant, especially a busy one as Mrs Mathews clearly was, would notice such irregularities.

60.There is again no evidence of motive on the part of Mrs Mathews. Mrs Mathews was not employed by Headline and would appear to gain nothing by participating in the fraud.  There is also no evidence Mrs Mathews forged any document. 

61.Whilst suspicion may attach to the failure to notice irregularities in the documentation I find having carefully considered all the evidence that I am left with a doubt Mrs Mathews knew the application subject of charge 21 was fraudulent when she signed and certified the invoice.  The benefit of the doubt is given to Mrs Mathews and she is acquitted of the charge.