THE LAW REFORM COMMISSION
OF HONG KONG
REPORT ON
CREATION OF A SUBSTANTIVE OFFENCE OF FRAUD
(TOPIC 24)
JULY 1996
The Law Reform Commission was established by His Excellency the Governor in Council in January 1980. The Commission considers such reforms of the laws of Hong Kong as may be referred to it by the Attorney General or the Chief Justice.
The members of the Commission at present are:
The Hon Mr J F Mathews, CMG, JP (Attorney General) (Chairman)
The Hon Sir Ti Liang Yang (Chief Justice)
Mr Tony Yen (Law Draftsman)
The Hon Mr Justice J Chan
Mr Eric Cheung
Professor Yash Ghai, CBE
Professor Kuan Hsin-chi
The Hon Mrs Miriam Lau, OBE, JP
Mr Andrew Liao, QC
Mr Gage McAfee
Mr Alasdair G Morrison
Mr Robert Ribeiro, QC
Professor Derek Roebuck
Professor Peter Wesley-Smith
Mr Justein Wong Chun, JP
The
Secretary of the Commission is Mr Stuart M I Stoker and its offices
are at:
20/F Harcourt House,
39 Gloucester Road,
Wanchai,
Hong Kong.
Telephone: 2528 0472
Fax: 2865 2902
Mr Stuart M I Stoker, Principal Crown Counsel, was principally responsible
for the writing of this report.
THE LAW REFORM COMMISSION OF HONG KONG
REPORT ON
CREATION OF A SUBSTANTIVE OFFENCE OF FRAUD
CONTENTS PAGE
Introduction
The impact of fraud
The new fraudsters
The problems
Terms of reference
The LRC sub-committee
Acknowledgements
Chapter 1 - Background to Fraud in Hong Kong
Types of fraudulent behaviour
Danger signs
Environment for large scale frauds
Chapter 2 - The Law of Fraud in Hong Kong
The concept of fraud
The Theft Ordinance offences
The conspiracy to defraud charge
Chapter 3 - Defects of the Existing Law
Introduction
Not applicable to one person acting alone
Artificiality of the common law conspiracy to defraud charge
Breadth of the charge
Practical difficulties in charging conspiracy to defraud
Practical difficulties concerning fraud with a foreign element
Lack of availability of extradition for conspiracy to defraud
Chapter 4 - The law of fraud in other jurisdictions
Introduction
Australia
Canada
England and Wales
Jersey
Malaysia and Singapore
New Zealand
Scotland
South Africa
Zimbabwe
Chapter 5 A new offence of fraud
Introduction
Objections to creating an offence of fraud
Advantages of a fraud offence
Possible formulations of a substantive offence of fraud
Fraud revisited: the elements of the offence
The proposed offence applied
Conclusions
Annexures
Annexure 1 Individuals and organisations in Hong Kong who commented on
the Consultation Paper
Annexure 2 Theft Ordinance (Cap 210) - (ss 17 to 19 & s 22 fraud related
offences)
Annexure 3 Specimen schedule indictment
Annexure 4 Draft Fraud Bill
INTRODUCTION
The impact of fraud
1. It has been said that the different types of fraudulent activity "are as diverse as man's infinite capacity to invent them."1 One international law enforcement agency has estimated that it handles more than 50 separate categories of fraud offence, ranging from insider-dealing and share manipulation to the use of bogus qualifications.2
2. Although this type of crime is one of the most under-reported forms of criminal offence,3 it has enormous impact, both socially and economically, with figures for fraud losses vastly exceeding those from violent crime.4 A survey carried out in 1995 by KPMG Peat Marwick of the top 1,000 companies in Hong Kong, based on the number of employees, found that 32% of respondents were aware of frauds within their organisations during the previous year. Of those who had experienced fraud, 65% had detected losses of more than $100,000, while 34% reported frauds aggregating $1,000,000 or more.5 It is estimated that losses from commercial crime world-wide in the years from 1980 to 1990 involved over HK$120 billion, 20 times the figure lost from bank robberies.6 Hong Kong in particular suffered during this period when economic turmoil was caused by a spate of company collapses, many of which allegedly involved fraud.7 The legal repercussions of this period are still being felt today.
The new fraudsters
3. In addition to the dramatic scale of some offences, fraudulent activity in general has taken a"quantum leap" in sophistication in recent years.8 Developments in technology have opened up enormous opportunities for the clever but unscrupulous,9 with a disturbing increase in involvement by both those in management and the professions.10 As one writer has commented, however:11
"Do not be misled by the exotic names commonly attributed to these crimes. They are perpetrated by ruthless and pitiless criminals. Although the tools of their trade are computers rather than coshes, these criminals are morally and culpably no more than glorified muggers."
The problems
4. The fact that modern commercial crime now takes a great variety of forms12 and knows no territorial boundaries13 poses major challenges for the investigators, lawyers, judges and administrators tasked with fighting the rising tide of crime in this area.
5. An exacerbating factor is said to be the "cacophony" of different approaches which countries take in tackling fraud.14 It has been observed that:
"Fraud flourishes in confused and complex situations in which rules, regulations, practices and procedures are badly understood ... There is a pressing need to harmonise sanctions and laws relating to fraud in the whole industrialised world."15
6. In particular, jurisdictions do not share a common definition for the fraud offence. Indeed some, England and Hong Kong included, have no definition of fraud at all:
“Contrary to popular belief, English law knows no crime of fraud. Instead it boasts a bewildering variety of offences which might be committed in the course of what a layman (or for that matter a lawyer) would describe as a fraud.”16
Another writer comments:
"In almost every other area of the law, the definition of a crime is quite specific: how did the development of the criminal law leave this one common law offence stranded on a plateau of its own, with virtually no visible horizon around it?"17
It is in this context, of seeking to define the offence of fraud, which our present study lies.
Terms of reference
7. On the 31st of March 1988 the Chief Justice and the Attorney General referred the following matter to the Law Reform Commission:
"To consider whether a substantive offence of fraud should be created and, if so, to recommend the constituent elements of the offence and the maximum penalty."
The LRC sub-committee
8. The Commission appointed a sub committee in May 1988 to research, consider and advise on the present state of the law in this area and to make proposals for reform. The sub committee members were (with their designations at that time):
Dr Henrietta Ip OBE JP (Chairman) Commission Member (1983 1989).
Mr Henry Litton OBE JP (Vice Chairman) Queen’s Counsel.
Mr Malcolm Barnett Legal Adviser,
The Hongkong and Shanghai
Banking Corporation Limited.
Mr Ross Dalgleish Senior Crown Counsel,
(up to January 1989) Attorney General's Chambers.
Mr Michael Grimsdick Accountant,
Ernst & Young.
Mr Michael Jackson Lecturer in law,
University of Hong Kong.
Mr R J Mason Chief Staff Officer (Adm.),
Royal Hong Kong Police.
Mr Michael McMahon Senior Assistant Crown Prosecutor,
(from January 1989) Attorney General's Chambers.
Mr E W D Radcliffe Solicitor,
Wilkinson & Grist.
9. The sub committee considered its reference over the course of twenty-five meetings. The majority concluded that there was a need for a new substantive offence of fraud but that this should be restricted to circumstances where there had been a "scheme of fraud". The sub-committee proposed that a "scheme" should be defined as "a plan, design or programme of action, whether of a repetitive or non-repetitive nature." They argued that this approach would allow the prosecution to adequately reflect the scope of an accused's criminality where he had embarked on a course of fraudulent conduct on his own. A minority of the sub-committee, however, did not favour this option for a number of reasons, not least because they regarded it as vague and uncertain. The sub-committee's deliberations are discussed further in Chapter 5.
10. The Commission considered the sub-committee's report in detail and were conscious that the sub-committee's final recommendations were the result of much anxious debate. The Commission reached the view, however, that the approach favoured by the majority of the sub-committee was not without difficulty. After careful consideration, the Commission concluded that the problem should be looked at afresh, laying particular emphasis on an examination of the law in those jurisdictions which already possess a substantive offence of fraud. As a result of its initial deliberations, the Commission reached the conclusion that a substantive offence of fraud should be introduced and incorporated its reasoning and a formulation of the proposed offence in a consultation paper which was issued for public comment in May 1995.
11. The report which follows is the result of careful consideration of the responses which we received to our consultation paper, and to further detailed discussion of our original proposal within the Commission. We should make clear at the outset that the views contained in this paper are the Commission's alone, and should not be taken as in any way attempting to reflect those of the sub-committee. The responsibility for this report and the recommendations contained in Chapter 5 rests with the Commission.
Acknowledgements
12. In completing this report we have been greatly assisted by the advice and comments generously given by lawyers and experts both in Hong Kong and in a number of other jurisdictions. In Hong Kong, we are particularly grateful to all those who responded to our consultation paper and whose comments helped to shape this final report. The individuals and organisations who responded are listed at Annexure 1. Overseas, we wish to express our thanks in particular to the following, without whose help this paper could not have been completed:
Ms Phyllis Atkinson, Senior Advocate, Office for Serious Economic Offences, Cape Town, South Africa
Mr Richard Buxton, QC, Law Commission, England.
Mr A R Chigovera, Deputy Attorney General, Zimbabwe.
Mr C Dickson, Senior Assistant Director, Serious Fraud Office, London, England.
Ms Helen Garlick, Serious Fraud Office, London, England.
Zainal Adzam B. Abd. Ghani, Attorney General’s Chambers, Kuala Lumpur, Malaysia.
Mr Brian Gill, QC(now Lord Gill, Senator of the College of Justice), Edinburgh, Scotland.
Mr W Henegan, Secretary, South African Law Commission.
Dato’ Stanley Isaacs, Attorney General’s Chambers, Kuala Lumpur, Malaysia.
Mr F W Kahn, SC, Attorney General, Cape Province, South Africa.
Mr J E Lowe, Chief Legal Adviser, Department of Justice, Wellington, New Zealand.
Mr Norman McFadyen, Deputy Crown Agent, Edinburgh, Scotland
Mr R G Neighbour, Deputy Director, Commercial Affairs Department, Ministry of Finance, Singapore.
Noraini Bt. Abdul Rahman, Commissioner of Law Revision, Malaysia
Mr Roger Rose, Director, the Commonwealth Legal Advisory Service, London, England.
Mr D J Rossouw, Vice-chairman, the Goldstone Commission, Cape Town, South Africa.
Sheriff J E Young, Dundee, Scotland.
Finally, we extend our thanks to the members of the Fraud sub-committee who laboured long and hard on this reference and whose considerable efforts we greatly appreciate.
Chapter 1
BACKGROUND TO FRAUD IN HONG KONG
Types of fraudulent behaviour
1.1 Fraudulent behaviour can take a great variety of forms. Interpol has indicated that it handles more than 50 separate categories of fraud offence,18 some of which include: theft and counterfeiting of cheques, travellers-cheques and credit cards; insurance frauds (such as self-provoked accidents or exaggerated value of damages incurred); tax frauds (such as falsely reporting the origin of goods to avoid taxation); use of bogus qualifications; forged or stolen bonds or letters of credit; the issuing of false prospectuses; insider-dealing and share manipulation. 80% of those responding to a 1995 survey on fraud in Hong Kong conducted by KPMG Peat Marwick believed fraud would become more of a problem in the future, and cited “the weakening of social values, economic pressures and the impending change of sovereignty in 1997..”19 The problem is not unique to Hong Kong. A recent discussion paper issued by the Institute of Chartered Accountants in England and Wales pointed out that in England in 1992 “losses from reported fraud totalled œ8,500 million. In contrast, figures for reported burglary totalled just under œ500 million, retail crime œ560 million and vehicle crime œ700 million.”20
1.2 Types of fraudulent activity which commonly occur in Hong Kong include “long firm frauds” and “Ponzi scams”.21
1.3 Long firm fraud In this type of fraud, the perpetrator sets up in business (ostensibly as an ordinary trading concern), orders goods from suppliers (which he pays for promptly at first to establish good credit standing), then places very large orders with the suppliers on credit. As soon as the goods are delivered, they are sold off, large sums are withdrawn from the business (leaving little to satisfy creditors) and the fraudster "folds his tents and steals off into the night."22
1.4 The Ponzi scam In a Ponzi scam, "early investors are paid artificially high returns with money raised from later investors. Such schemes ultimately collapse when the supply of new investors dries up."23 Apparently this type of fraud is common here because of high levels of disposable income "seeking the best possible return."24
Danger signs
1.5 Although one would usually identify fraudsters as being those in high financial positions, such as company directors:
"The growth in commercial crime is not confined to `big fish'. The most common example is the accountant, clerk or bookkeeper who has been trusted too much."25
Examples would be the employee who:
misuses signed cheques left with him by the authorised signatory
secretly adds his relatives to the payroll
without permission uses his employer's money to meet his personal expenses.26
1.6 In relation to company accounts, the danger signs for an auditor that fraud may be afoot have been noted as follows:27
failure on the part of the company to correct serious weaknesses in internal control
unauthorised transactions
unusual recording of transactions
unusual transactions near year end
transactions not supported by normal documentation
discrepancies between related accounts
loosely controlled suspense or expense accounts
high volume of correcting entries near year end
problems regularly given to the same employee to correct
difficulties in obtaining information
lack of co-operation
glib or guarded replies to audit questions.
1.7 The 1995 KPMG Peat Marwick survey on fraud found that “poor internal controls were identified as the cause of frauds ... in more than half of the cases.” Most of the frauds uncovered were discovered through internal controls. Next most common means of detection were notification by customer, internal audit review and discovery by accident.28
Environment for large scale frauds
1.8 As to Hong Kong's economic situation generally, one writer has commented:
"In a developing economy such as Hong Kong, fairly sharp financial cycles are to be expected. Creating an economy which, starting from post-war chaos, has given the presently enjoyed living standards to our [six] million people has been a remarkable achievement."29
1.9 In the wake of such economic development, however, large-scale business collapses have occurred in which fraud (via "massive exercises in false accounting"30) has been alleged to have played a part. The particular factors in the economic environment which led to these occurrences are outlined below.
1.10 1980s economic factors In the early 1980's there was a dramatic growth in the number of banks and deposit-taking companies registered in Hong Kong. This elevated the level of competition amongst lending institutions, some of which made loans to customers whose financial standing was less than secure and whose activities related largely to property development.
1.11 Spiralling interest rates meant that by 1982 many of these institutions' customers were unable to service their loans. The collapse in the property market around that time meant that the asset value of their security also fell. Insolvencies followed (for example, the Carrian and Eda groups).
1.12 Some local banks and deposit-taking companies found themselves in sudden liquidity difficulties and a number of them collapsed. The Government stepped in to provide financial support for some of these and a public outcry ensued over the cost (particularly as fraud was suspected in some cases, which was subsequently borne out).
1.13 The legal consequences It was in this context that a number of problems came to light concerning the prosecution of fraud offences. Modern technology, and in particular the instantaneous transfer of funds across national borders, created difficulties for law enforcement agencies due to the insular nature of rules regarding jurisdiction.31 Many of the suspects were now living overseas in countries where extradition was not possible. Even in cases where they could be extradited, the terms of the relevant extradition treaty might mean that the appropriate charge (of conspiracy to defraud) could not be laid. There were possibly even difficulties in charging conspiracy to defraud where the suspects were apprehended in Hong Kong.
1.14 The scope of the law in this area and the particular problems which may arise are the subject of the next two chapters.
Chapter 2
THE LAW OF FRAUD IN HONG KONG
The concept of fraud
"dishonestly to prejudice or to take the risk of prejudicing another's right, knowing that you have no right to do so."34
"The factor which lends this protean concept some semblance of unity is not so much what is actually done as the character of what is done, the element of disregard for the rights of others and for ordinary standards of conduct. This feature is commonly and conveniently referred to as `dishonesty'."37
2.4 It follows from the breadth of the fraud concept that the different types of behaviour constituting fraud may be "many and various."41 In Hong Kong, cases involving aspects of fraudulent behaviour are dealt with either as specific offences under the Theft Ordinance (Cap 210), or, where a criminal agreement between two or more persons can be proven, by means of a charge of "conspiracy to defraud." These different types of fraud offence are discussed below.
The Theft Ordinance offences
section 17: Obtaining property by deception
section 18: Obtaining pecuniary advantage by deception
section 18A: Obtaining services by deception
section 18B: Evading liability by deception
section 18C: Making off without payment
section 18D: Procuring false entries in records of banks and deposit taking companies
section 19: False accounting
section 22: Suppression of documents.
"Any person who by any deception (whether or not such deception was the sole or main inducement) dishonestly obtains property belonging to another, with the intention of permanently depriving the other of it, shall be guilty of an offence and shall be liable on conviction upon indictment to imprisonment for 10 years."
"... if P knows that the statement is false, or if he would have acted in the same way even if he had known it, or if he does not rely on the false statement but arrives at the same erroneous conclusion from his own observation or some other source, or, of course, if he does not read or hear the false statement ... D is not guilty of obtaining."46
"... any deception (whether deliberate or reckless) by words or conduct as to fact or as to law, including a deception relating to the past, the present or the future and a deception as to the intentions or opinions of the person using the deception or any other person."47
"establishing the outward appearance of a genuine business or enterprise and thereby inducing people to supply goods that will not be paid for;"50
a person who sells property to another knowing it is not his to sell (and where the buyer would be unlikely to buy if he knew the "seller" had no title) and who thereby obtains the money from the "sale" by deception;51
a taxi driver who (dishonestly) tells a passenger that the usual route to his destination is blocked and uses a longer route to obtain a larger fare.52
2.13 It should be noted that the section will only apply where there is an intention on the part of the accused to permanently deprive the other of the property. Thus, a mere borrowing by an individual of another’s property, even if it is unauthorised or the result of deception, will not suffice to found a charge under section 17, nor will it fall within the ambit of a conspiracy. Such conduct could, however, be covered by the new substantive offence of fraud we recommend in chapter 5.
2.14 Similarly, there may be difficulties under section 17 where the accused has dealt with property in his possession “dishonestly” but there is no offence because the property did not “belong to another”. The case of Lewis v Lethbridge 54 provides an example. In that case, the accused obtained sponsorship from a colleague to run in the London Marathon and then failed to pass on the sums collected to the charity concerned. The court held that the accused could not be said to have appropriated a debt which he himself owed simply by not paying it. Again, it would seem that this conduct would be met by our proposed substantive offence.
Any person who by any deception ... dishonestly obtains for himself or another any pecuniary advantage shall be guilty of an offence and shall be liable on conviction upon indictment to imprisonment for 10 years."
2.16 "Pecuniary advantage" is defined in section 18(2) to include the provision of (or an improvement to or extension of) credit facilities granted by banks or deposit-taking companies, as well as overdrafts, insurance policies or annuity contracts.56 It also includes cases where the defendant "is given the opportunity to earn remuneration or greater remuneration in an office or employment, or to win money by betting."57
an impecunious bank customer deceiving a bank manager into granting him an overdraft facility;60
a bank customer, with a fully overdrawn account, using his cheque card to guarantee a cheque drawn on the account - thereby obtaining a pecuniary advantage because the bank is obliged to honour the cheque;61
a person obtaining employment and collecting wages by falsely claiming to hold certain qualifications;62
a person deceiving a bookmaker into accepting a bet and then collecting the winnings once the horse wins.63
"A person who by any deception ... dishonestly obtains services from another shall be guilty of an offence and shall be liable on conviction upon indictment to imprisonment for 10 years."
the defendant "commissioning" the victim to do repair work for him;
the victim allowing the defendant to take goods on hire-purchase;65
the defendant obtaining the services of a prostitute without intending to pay her.66
2.21 Difficulties arise if this section is used to attack a deception aimed at securing loan facilities. In Halai 67 O’Connor LJ said:
“In our judgment, a mortgage advance cannot be described as a service. A mortgage advance is the lending of money for property and can properly be charged under [section 17], if the facts support it.”
There has been considerable criticism of this judgment. The difficulty would, we suggest, be avoided by the introduction of a substantive offence of fraud such as we propose later.
"... a person who, knowing that payment on the spot for any goods supplied or service done is required or expected from him, dishonestly makes off without having paid as required or expected and with intent to avoid payment of the amount due shall be guilty of an offence and shall be liable on conviction upon indictment to imprisonment for 3 years."
"... a person dishonestly, with a view to gain for himself or another or with intent to cause loss to another -
(a) destroys, defaces, conceals or falsifies any account or any record or document made or required for any accounting purpose; or
(b) in furnishing information for any purpose produces or makes use of any account ... record or document ... which to his knowledge is or may be misleading, false or deceptive in a material particular ... ."
If convicted, the defendant "is liable on conviction upon indictment to imprisonment for 10 years."
2.29 It is said that the purpose of this section is to supplement the law of theft and deception and the law of forgery and using false instruments.80
"If D fraudulently doctors a cash-book or destroys copy invoices and other sales records, he may not obtain or intend to obtain any property thereby. His conduct may rather be designed to cover up offences already committed. But the particular crime concealed by the false accounting may be hard or impossible to identify; or, though it may be clear, for instance, that D has systematically `milked' an enterprise of which he is a member or an employee, it may not be possible to frame an indictment for theft. For such reasons the criminal law is provided with a weapon which strikes at the falsification of the accounts rather than at the dishonest gain that those accounts assist or conceal."81
2.30 A Hong Kong case on point, which went on appeal to the Privy Council, was Lee Cheung-wing and Another.82 The defendants in this case were both employed by a securities company. They sought to circumvent a company rule prohibiting them from operating futures contracts on margin accounts by persuading a friend to allow them to open an account in his name. Once established, they used the account to trade extensively in futures contracts. They withdrew profits from the account by signing withdrawal slips in the friend's name. Both defendants were convicted of seven counts of false accounting contrary to section 19(1)(a). Their convictions were upheld on appeal.
2.31 In another example, an offence under section 19(1)(b) was alleged in the case of Sze Sing-ming, above. There the defendants had furnished false information in the form of the "fictitious" bill of lading for the purpose of negotiating a bank draft drawn under a letter of credit.
2.32 Suppression, etc, of documents (section 22)83 This section, like section 19, incorporates two offences. Section 22(1), which to some extent resembles section 19(1)(a), provides that an offence is committed by a person who dishonestly, and for gain to himself or loss to another, destroys, defaces or conceals any of the following documents:
"any valuable security, any will or other testamentary document or any original document of or belonging to, or filed or deposited in, any court or any government department ... ."
If convicted, the defendant "is liable on conviction upon indictment to imprisonment for 10 years."
2.33 The second offence under this head relates to the procuring of valuable securities. Section 22(2) states:
"Any person who dishonestly, with a view to gain for himself or another or with intent to cause loss to another, by any deception ... procures the execution of a valuable security shall be guilty of an offence and shall be liable on conviction upon indictment to imprisonment for 10 years."
2.34 "Valuable security" is defined in subsection (4) to mean:
" ... any document creating, transferring, surrendering, or releasing any right to, in or over property, or authorizing the payment of money or delivery of any property, or evidencing the creation, transfer, surrender or release of any such right, or the payment of money or delivery of any property, or the satisfaction of any obligation."
2.35 This has been held to apply to:
cheques84
forged travellers cheques;85
an irrevocable letter of credit;86
stolen US Treasury social security orders.87
In Manjdadria 88, however, the court held that a telegraphic transfer was not a “valuable security” for the purposes of the equivalent section of the Theft Act 1978 in England. This has considerable significance as increasing ways are developed of transferring funds from one account to another electronically.
The conspiracy to defraud charge
2.36 In cases where two or more persons are involved in committing fraud, the Theft Ordinance offences are supplemented by the common law offence of conspiracy to defraud. This offence:
"is wide enough to embrace, not only agreements to commit many offences under the Theft [Ordinance] ... but also any other agreement to act dishonestly to the prejudice of the proprietary rights or economic interests of another or others."89
2.37 The Scott case The leading authority in this area is the 1974 decision of the House of Lords in Scott v Metropolitan Police Commissioner,90 a case involving film piracy. The defendant in this case admitted bribing cinema employees to lend him films for the purpose of making illegal copies. He was charged, along with others, with conspiracy to defraud the owners of the copyright and distribution rights. The defendant's argument was that the element of deceit was essential to establish the offence of conspiracy to defraud (ie, a victim could not be said to have been defrauded unless he had been deceived). In this case, the copyright owners had no knowledge that the cinema operators were being bribed to allow the film piracy to take place.
2.38 The House of Lords rejected the defendant's argument and held that deception was not an essential element of conspiracy to defraud.91 Instead, the court held that the dishonest means by which the conspirator's purpose was to be achieved (ie, the bribery involved) was sufficient. Viscount Dilhorne stated:
"[I]n my opinion it is clearly the law that an agreement by two or more by dishonesty to deprive a person of something which is his or to which he is or would be or might be entitled and an agreement by two or more by dishonesty to injure some proprietary right of his, suffices to constitute the offence of conspiracy to defraud."92
2.39 Lord Diplock elaborated further on this definition:
"Where the intended victim of a `conspiracy to defraud' is a private individual93 the purpose of the conspirators must be to cause the victim economic loss by depriving him of some property or right corporeal or incorporeal, to which he is or would or might become entitled. The intended means by which the purpose is to be achieved must be dishonest. They need not involve fraudulent misrepresentation such as is needed to constitute the civil tort of deceit. Dishonesty of any kind is enough."94
2.40 Results of the decision The Scott case implied the following:
the offence of conspiracy to defraud is extremely broad;
it is broader than the corresponding tort of deceit which requires fraudulent misrepresentation and consequential damage;
the offence extends to conduct which would not amount to an offence if committed by a single individual; and
being a common law offence, its exact parameters are unclear and emerge over time on the basis of the particular fact situations which come before the court.
2.41 Dishonesty as an ingredient of conspiracy The case also confirmed that "dishonesty" is an essential ingredient of conspiracy to defraud at common law.95 After some conflicting case law, the test for dishonesty in conspiracy to defraud was firmly established to be the same as that for theft, obtaining by deception, etc.96 In the context of conspiracy to defraud, this means: (a) that the objectives of the parties must be dishonest according to ordinary standards of reasonable and honest people, and (b) that the parties to the agreement must themselves have realized that their objectives were by those standards dishonest.97
2.42 The case of Wai Yu-tsang made it clear that the motive of the parties is irrelevant in deciding whether or not a conspiracy to defraud has been committed. In Wai Yu-tsang the accused believed that his actions would prevent a run on the bank. Lord Goff of Chieveley said:
“... it is enough ... that ... the conspirators have dishonestly agreed to bring about a state of affairs which they realise will or may deceive the victim into so acting, or failing to act, that he will suffer economic loss or his economic interests will be put at risk. It is however important ... to distinguish a conspirator’s intention (or immediate purpose) dishonestly to bring about such a state of affairs from his motive (or underlying purpose). The latter may be benign to the extent that he does not wish the victim or potential victim to suffer harm; but the mere fact that it is benign will not of itself prevent the agreement from constituting a conspiracy to defraud.”98
2.43 Developments in England subsequent to Scott It was long recognised that there were problems in principle with the common law offence of conspiracy; in particular, the issue of whether an action should become criminal merely because two or more persons agreed to perform it. In 1977, following recommendations from the English Law Commission,99 Parliament enacted a statutory offence of conspiracy to replace the offence at common law. Henceforth, conspiracy was only to be an offence if the object of the agreement would necessarily amount to a criminal offence.
2.44 The particular usefulness of the common law offence of conspiracy to defraud was recognised, however, and this was retained as an exception to the principle100 until such time as a replacement could be found.101 The 1977 legislation went on to provide that a person charged with conspiracy to defraud at common law could not be charged also with the statutory offence.102 This rider was to cause much difficulty103 and was eventually repealed.104
2.45 Uses of the conspiracy charge As noted earlier, the definition of common law conspiracy to defraud under the Scott formula might be described as "wide and amorphous."105 Being judge made law, it continues to be refined and developed in the process of being applied from case to case. The following examples illustrate some of the situations where the charge of conspiracy to defraud might be brought and some of the complexity of the law in this area.
2.46 Banking fraud In one case,106 C, a businessman, was charged with six counts of conspiring with the chief manager of a bank (who was deceased at trial) to defraud the bank by dishonestly causing it to grant loan facilities without adequate security, guarantee or provision for the payment of interest.
2.47 C and the chief bank manager were close personal friends. C had for many years held accounts at the bank and so too did companies controlled by him. In 1984, the bank (and the chief bank manager personally) were in financial difficulties. C alleged at trial that in order to assist both his friend and the bank he agreed to borrow money from the bank (totalling $25 million) which his friend would have the use of; provided he, and not C, paid the interest due under the loans.
2.48 The loans were made either by way of extensions to overdrafts on C's personal accounts or to the companies he controlled. As regards security for the loans, his personal overdrafts were secured (though the extension of the overdrafts came close to the limit of the security) and C signed guarantees in respect of the other loan facilities. The proceeds from the loans were in turn paid over to the chief bank manager's personal accounts or to the accounts of two companies which he controlled.
2.49 The issue at trial was whether the facts showed beyond doubt that C's actions had been dishonest. Although C himself had made no financial gain out of the transactions, the true nature of the facilities was concealed from the bank, ie, that the real recipient of the money was to be the chief manager. The jury found C guilty of conspiracy to defraud.
2.50 On appeal, it was held that the trial judge had misdirected the jury as to what the Crown was required to prove: ie, that C knew that the chief manager intended to defraud the bank (by obtaining the bank's funds under the pretext that they were being borrowed by C and secured by him, while in fact they were to be used by the chief manager for his own purposes).
2.51 In its decision, the Court of Appeal noted that a properly directed jury might or might not have come to the conclusion that C's actions were dishonest. Clearly his conduct required an explanation and he had given a satisfactory one in evidence.107
2.52 Company fraud In another case involving conspiracy to defraud,108 the three accused were charged with conspiracy to defraud shareholders and creditors of a company. The first count alleged that two of the accused conspired together to defraud shareholders and creditors of the company involved, by dishonestly causing and permitting false entries to be made in the company's books. The second count related to the records of the company. The accused were convicted at trial.
2.53 On appeal, it was held that the convictions on the first count were unsafe and unsatisfactory as there had been both misdirection and an absence of direction on the element of economic risk. The court observed during the course of its judgment that the relevant law was "a minefield."
2.54 Further, in relation to one of the accused, the court held that what she was shown to have done was at least as consistent with an agreement to further the economic interests of the company, as with the charge of putting those interests at risk.109
2.55 Long firm fraud As noted earlier, another typical scenario where conspiracy to defraud might be charged is in the "long firm fraud" case. In these instances the conspirators, ostensibly acting as an ordinary trading concern, gain the confidence of creditors to obtain large quantities of goods on credit. With no prospect or intention of paying for the goods, they are sold off, usually at a reduced price; the conspirators then extract large sums of money from the business and disappear, leaving no assets from which the creditors can be paid.
2.56 In these cases there is almost always a deception within the meaning of section 18 of the Theft Ordinance. Accordingly, it may be possible at least to say that there was a conspiracy (assuming at least two persons were involved) to commit the offence of dishonestly obtaining property or services by deception. However, it is sometimes difficult for the prosecution to establish exactly what act of deception induced, or was intended to induce, the victim to part with property and even in some cases the precise facts which constituted the deception.
2.57 Letter of credit fraud Yet another example where the common law conspiracy to defraud charge is useful is in a typical letter of credit fraud. In Hong Kong this often involves false bills of lading and other shipping documents being presented to banks for negotiation of bills under letters of credit, when in fact no goods have ever been shipped.
2.58 This type of offence is usually charged as a conspiracy to defraud. It is facilitated by the fact that banks deal typically in documents and not in the goods themselves.
2.59 It can be seen from the above cases that the conspiracy to defraud charge can prove a useful prosecutorial tool in the area of complex frauds. In particular, in a complex case it is often difficult to pin-point particular transactions and to establish specific deceptions, even when the fraudulent character of the scheme as a whole, taking into account all of the evidence, is perfectly obvious.
2.60 There are also, however, a number of shortcomings which can be identified in relation to the conspiracy to defraud charge. These, and other areas of concern in the law of fraud, are considered in the next chapter.
Chapter 3
DEFECTS OF THE EXISTING LAW
Introduction
3.1 In the course of the discussion of the law in the previous chapter, reference was made to some of the criticisms which have been made of the law of fraud. A number of defects and anomalies have been identified, particularly in relation to the conspiracy to defraud charge.110 This chapter examines these in detail.
3.2 The particular defects of the law in this area may be summarised as follows:
the fact that the offence does not apply to one person acting alone;
the artificiality of the charge;
the breadth of the charge (and its possibly expanding nature);
the practical difficulties in charging conspiracy to defraud;
the difficulties concerning fraud with a foreign element; and
the fact that extradition from certain countries may be unavailable in conspiracy to defraud cases.
Not applicable to one person acting alone
3.3 The first objection to the offence of conspiracy to defraud is that it conflicts with the principle111 that an act which is lawful if done by one person should not become unlawful simply because more than one person has agreed to commit it.112
3.4 As we have seen, conspiracy to defraud allows two or more persons who are party to a fraudulent scheme to be prosecuted on the basis of the whole scheme, though under a single charge. The significance of this is that the full extent of the defendants' criminality can be exposed to the court at trial.
3.5 One person acting alone, however, may not be dealt with in this way. Such a person's conduct must fall within an existing (specific) fraud offence, as a fraudulent scheme may only be established through the use of multiple counts.
3.6 The English Law Commission has commented that if the conduct constituting conspiracy to defraud is to continue to be penalised by the criminal law, "a more principled approach would seem to require that conspiracy to defraud should be abolished and replaced by an offence or offences of fraud capable of being committed by an individual acting alone." This would necessarily imply extending the present criminal law, however, which may or may not be justified,113 and would require careful consideration of the form of words chosen for the new substantive offence.114
Artificiality of the common law conspiracy to defraud charge
3.7 The conspiracy to defraud charge is, in essence, an inchoate offence.115 Criticism has been levelled at the artificiality of the charge where the fraud has actually been committed and the fraudster has achieved his ends. As the charge is conspiracy, the indictment must necessarily refer to an agreement by two or more persons to carry out the criminal purpose. However, more often than not the fact of an agreement is inferred from the fact that the object of the agreement has already been achieved. If a crime has been committed, why charge the parties with an agreement to commit the crime? If no crime has been committed, how could an agreement to perform such acts be criminal?
Breadth of the charge
3.8 The breadth of the charge is inherent in its definition: that it can consist of an agreement to do an unlawful (though not necessarily criminal) act or an agreement to do a lawful act by unlawful means.
3.9 Conspiracy to defraud "embraces almost every offence in the Theft [Ordinance] provided the defendant has conspired with another to carry out the conduct in question."116 On this point, the English Law Commission has commented:
"In principle overlapping offences should be avoided unless there is some reason which makes the overlap acceptable. The objection is stronger, however, where it is not merely a question of overlap but a total subsumption of other offences."117
3.10 Another aspect of the breadth of the offence of conspiracy to defraud is that it covers certain conduct which arguably ought not to be criminal at all. The English Law Commission has observed that the continued existence of the common law offence "may in some circumstances make nonsense of the limitations attaching to a number of existing offences."118
"Where [the legislature] has given careful consideration to the limits to be placed on conduct which is to be made criminal [as it has done in the Theft Ordinance in relation to specific fraud offences], it is difficult to justify the retention alongside of an offence whose boundaries ... go beyond those limitations."119
3.11 The Commission also noted that the definitions of conspiracy to defraud put forward by the House of Lords in Scott were not intended to be exhaustive.120
"Another objection to conspiracy to defraud which may therefore be raised is that because of the uncertain boundaries of the offence it offers insufficient guidance as to what can or cannot lawfully be done and consequently infringes the principle that the criminal law should be knowable in advance regarding the conduct to be penalised."121
The Commission commented that, arguably, the criminal law should "have no place" for an offence which is so imprecise that one cannot say with reasonable certainty whether a particular combination of facts constitutes the offence.122
Practical difficulties in charging conspiracy to defraud
3.12 There are practical difficulties in the prosecution of conspiracy to defraud charges. These range from the selection of charges to the length of tria