Introduction

The District Court of Hong Kong recently handed down the judgment in a criminal case (DCCC 479/2023) concerning conspiracy to defraud. The defendant, Zheng Zhong, a senior executive of China Railway International Trading (HK) Limited (“CR Trading”), was charged with conspiring with others to defraud DBS Bank for a letter of credit of more than HK$75 million through the use of falsified trading documents. The central issue in this case was whether the defendant possessed the requisite “knowledge” and participated in the fraudulent scheme. The Court, finding the defendant not guilty, gave a thorough analysis in its judgment regarding the elements and standard of proof required for establishing conspiracy to defraud. This analysis holds significant reference value for similar cases.

Brief facts

The prosecution alleged that three trading agreements entered into between CR Trading and Top Famous Construction Engineering Limited (“Top Famous”), ostensibly for the procurement of construction materials, were in fact loan agreements. The defendant, as the decision-maker of CR Trading, was accused of signing fraudulent documents (such as receipts for goods) to mislead DBS Bank into believing that the transactions were genuine and approving the loans. However, Top Famous and its affiliated company, King Tai Construction Limited, have never delivered any goods, and the proceeds from the loans were eventually misappropriated.

In defence, the defendant asserted that he merely signed the documents in accordance with the company’s usual practice and did not know that no delivery of goods was involved in the transaction. He contended that the scheme was orchestrated by another senior executive, Wang Xiaoshan, and Liu Conghai, director of Top Famous.

Issues

1.    Knowledge of the defendant

The prosecution relied on the testimony of key witness Chen Jian (“PW4”), an employee of CR Trading who was granted immunity from prosecution. PW4 alleged that the defendant was aware that the agreements were, in fact, for loans and no genuine transaction occurred. However, the defence challenged the credibility of PW4’s testimony, arguing that his significant involvement in the matter suggested a potential motive to protect himself by framing the defendant.

2.    Existence of a conspiracy agreement

The prosecution bears the burden of proving that the defendant entered into a “dishonest” agreement with another party. The judge noted that even if the defendant was aware that the agreements pertained to loans, this knowledge alone does not necessarily imply that he was aware of a scheme to defraud the bank (see legal analysis below).

3.    Burden and standard of proof

The judge highlighted that it is for the prosecution to prove the defendant’s guilty intent beyond reasonable doubt. Indirect evidence, such as the act of signing of documents, is not sufficient to infer the defendant’s knowledge.

Precedents

The court referred to the rulings of the Court of Final Appeal in Mo Yuk Ping v HKSAR (2007) 10 HKCFAR 386 and HKSAR v Chen Keen (2019) 22 HKCFAR 248, reiterating the three primary elements of conspiracy to defraud:

1.      “Deception” is not a primary element of the offence; rather, the emphasis is on “dishonesty”. Conspiracy to defraud involves an agreement between the defendant and one or more parties to use dishonest means: (a) to cause financial loss to another person or to jeopardize that person’s financial interests; or (b) knowing that such means may cause financial loss to that person or jeopardize that person’s financial interests.

2.      The element of “dishonesty” pertains to a state of mind which is established by the two-fold test set out in R v Ghosh [1982] 1 QB 1053. Dishonest means are those which are dishonest by the standard of a reasonable and honest person, and those which the defendant knows to be dishonest according to the same standard. In most cases of an agreement to use dishonest means, deception is present. In other cases, the defendant may agree to do something which he knows or believes he has no right to do, or something which he knows or believes to be dishonest.

3.      In addition to dishonesty, conspiracy to defraud also requires another state of mind, namely, the intention to cause financial loss to another or the knowledge that the agreed course of action will or might jeopardize the financial interests of another. While this state of mind may often involve dishonesty, it is prudent to consider it as a separate element.

The Court also referred to HKSAR v Lai Kam Fat (2019) 22 HKCFAR 289 regarding the inference of indirect evidence, and pointed out that the Court may infer the existence of an agreement based on circumstantial evidence, provided that it is “the only reasonable conclusion”. A crucial element of conspiracy is the intention to carry out the underlying crime. In this case, the defendant’s act of signing may only reflect his trust in his subordinates rather than an active participation in fraud.

Decision and reasons

The judge held that the defendant was not guilty based on the following reasons:

1.      Unreliability of PW4’s testimony: His testimony was found to be contradictory and his motives questionable. For example, he had never clearly told the defendant that no goods were delivered, yet he alleged the defendant possessed knowledge of this fact.

2.      Lack of direct evidence: There was no evidence to suggest that the defendant was informed that the transaction was fraudulent or that he had actively participated in the falsification of documents.

3.      Nature of the defendant’s duties: As a senior executive, it is reasonable for the defendant to rely on his subordinates, with whom he had longstanding working relationships, to inspect goods and prepare documents. The mere act of signing documents does not mean possessing the requisite knowledge.

4.      Knowledge of loans does not mean fraud: Even if the defendant knew that the agreements pertained to loans, it does not necessarily mean that he must have known that the relevant transaction did not involve actual delivery of goods.

Takeaway and implications

The crime of conspiracy to defraud requires proof of the defendant’s subjective intent, and the standard of proof is high. Indirect evidence is generally insufficient to meet the standard of proof “beyond reasonable doubt”. Furthermore, the Court will rigorously examine the testimony of exempted witnesses to eliminate any possibility of “tailoring of facts”. While it is common (and even the Judge in this case considered it as a common practice) in the business world for senior management or a boss to “blind” sign documents without reading them for use in business operations, there is a risk that if something wrong happened, the signing would indicate or denote that the signer endorses or approves the document and its contents. It is therefore important for management to consider the process and procedures to reduce such risk when a senior executive is asked to sign in such a way.