Gaelic Inns case

This case involves a chain of pubs runs by Gaelic Inns Pte Ltd. Their group finance manager, Denise Ang misappropriated over a $1million from the years 2001 to 2004. Her scheme worked as follows - she delayed banking in the pubs' cash receipts and used it for personal purposes. To cover this up, she deposited later receipts equal to the earlier cash takings. In this way, she was able to avoid detection for a lenghty period. This fraud is known as "teeming and lading". The antidote to this type of well-known fraud is to check bank statements and compare them to cash daily takings. Any discrepancy should be thoroughly investigated.

As a result of her crimes, Denise Tan was convicted of criminal breach of trust under section 408 of the Penal Code. The total sum involved was $1.006 million. Less than $10,000 was recovered from her and a $100,000 was recovered from insurers.

As a result of her case, her employer, Gaelic Inns Pte Ltd sued its auditor, Patric Lee PAC. On appeal, the case was reported as the case of PlanAssure PAC v Gaelic Inn Pte Ltd. This was because Patric Lee PAC had in the meantime changed its name to PlanAssure PAC.

Discussion of the liability of auditors and other professionals can be found in this blog -
http://professionalnegligencesg.blogspot.com/

Gemini Chit Fund 2

The chit fund industry was in the early 70s dominated by Gemini Chit Fund with its office at People's Park Complex.

However, the whole industry came tumbling down in 1973 when Abdul Gaffar Mohamed Ibrahim, founder of Gemini Chit Fund Corporation Ltd was found guilty of 3 charges of criminal breach of trust involving $3.2 million. He was sentenced to life imprisonment. (I understand that the prison practice at that time was to treat the sentence as one of 20 years instead of the natural life of the prisoner. In other words, after 20 years jail, he would be released).

The total loss from the chit fund fraud was estimated at $50 million. In today's monetary terms, I would not be surprised if the equivalent sum would be between $250-$500 million.

Gemini Chit Fund 1

This case was an early case in Singapore's history of major fraud.

The idea of a chit fund is simple - a group of persons would contribute a sum of money regularly into a pool eg 10 persons each contribute $100 every month to the pool. The money would then be lent to any of them who was willing to pay the highest interest for the use of the money over a certain period eg 4 weeks. At the end of the period, the succesful borrower would repay the loan together with the interest that he promised. This sum would then be divided among the pool contributors.

I understand that the chit fund company would receive a commission for organising the whole matter.

As you can imagine, without strong regulation, the potential for massive losses is high. Another danger would be that the borrower of the pool will either abscond with the monies or that for other business reasons, he would be unable to repay the loan.

Law - receipients and assistants - constructive trusts

The law of constructive trusts is used to impose liability against the fraudster and his accomplices. This area of law is quite complicated but generally the use of the law of trusts has some major benefits to the victim company. The law of constructive trusts allows property owned by the wrongdoers to be claimed by the victim.

These benefits are

• if the wrongdoers are bankrupt, the properties bought with stolen monies can still be claimed by the victim. The other creditors of the wrongdoes will therefore have no claim to these properties; and
• where the properties bought with stolen monies have increased in value, then the victim can benefit from the increase in value. It is possible for the victim to end off better off as a result of the fraud but this will be rare in real life.

The process of identifying which properties are bought with stolen monies and following the money trail is known as "tracing".

Law - accessories and recipients of stolen money

It is a rare case of large scale corporate fraud where there is only 1 person involved. Often the mastermind finds friends or relatives to participate in his criminal enterprise.

There are basically 2 types of assistants in the criminal enterprise - those who assist in the fraud and those who only receive the stolen monies. Civil law as opposed to criminal law, uses the term "constructive trustees" for these 2 types.

The first type of constructive trustees are those who well aware of the fraud, help in the planning or execution of it. They are known in law as constructive trustees by knowing assistance. The second type of constructive trustees are more passive in that they only receive the ill-gotten gains. Often, the mastermind uses their bank accounts to hide some of the stolen monies in order to avoid arousing suspicions if his own bank account has abnormally large sums of money.

Both types of constructive trustees can be sued by the company victim in order to recover its losses. This area of constructive trust is a branch of equity law.

Law - auditor lawsuits

When corporate fraud occurs, one common target of the victim company is the company's auditors.

The auditors are required by law (the Companies Act) to carry out an annual statutory audit for the benefit of various parties like company shareholders, creditors, lenders, employees and the government.

The auditors' duty is to comment on whether the accounts and financial statements show a true and fair view. If the accounts do not show a true and fair view, then the auditors should qualify their report to either state that a true and fair view is not shown or that the auditors are unable to state whether a true and fair view is shown.

This duty of auditors becomes the source of lawsuits when the accounts are shown to be incorrect. This is even though auditors state that their duties do not include the uncovering of fraud.

For more information about lawsuits against auditors, please see -

http://professionalnegligencesg.blogspot.com/
(professional negligence in Singapore)

SIA case - Teo Cheng Kiat

This trusted Singapore Airlines employee of over 25 years,Teo Cheng Kiat, stole almost $35 million from his employer over a period of 13 years. His method of fraud was to prepare unearned pay allowances for the airline's cabin crew which he then banked into his own bank account. He added extra random names to the names of cabin crew listed for a particular flight. He then changed the bank accounts numbers in the computer system for these crew so that the bank accounts receiving payment were those controlled by him. He used his wife and her sister to set up additional bank accounts for his fraud.

His mistake was revealed when an internal auditor noticed that some recipient accounts received several payments in 1 day when the normal practice was to pay only once a day.

For one of the biggest employee frauds in Singapore history, Teo was sentenced to 24 years in jail. The normal prison practice is that prisoners can get a 1/3 discount from their sentences for good behaviour so he could be out after 16 years when he will be about 65 years old.

Some mistakes of SIA -

• not having strong internal controls of its payment system
• not having random checks of transactions
• not carrying out regular investigations of its staff
  

Pan Electric collapse 1

Pan Electric was a Singapore company which seemed to be a blue chip one. Many investors said that it was one which you could safely lock up and leave to your grandchildren.

The company was a conglomerate involved in activities like marine salvage and hotels and property development. When it collapsed with debts of $480 million, it sent a shock wave through the whole securities industry. The Stock Market closed for 3 days, an event that had never occured before or since. Several stock broking companies went bankrupt including Lin Securities which had been set up by former lawyer Lin Tah Wah.

At the event of the whole saga, several persons were sent to jail including Tan Koon Swan, a leading Malaysian politician.

Fraud and the law

When fraud occurs, there are 2 legal areas to consider -

• Criminal law and
• Civil Law.

Criminal law is essentially within the control of the state which seeks to punish those involved. The fraudsters and their accomplices are investigated by the Commercial Affairs Department. If enough evidence is found against them, they are charged in court. The court will then sentence these culprits if they are found guilty. In cases of serious fraud, the guilty parties can expect long prison terms.

Civil law is more concerned with compensation for loss. The parties who have suffered as a result of the fraud will sue the fraudsters and their accomplices for their loss. In many cases however, these parties will be declared bankrupt as they will have few resources to compensate the victims. The victims will often seeks to sue any other parties with "deep pockets". In some cases, these will turn out to be the auditors. Other parties who may be dragged into the matter are those who have received the proceeds of the fraud innocently. Depending on the facts, they may be recovered to return the monies received.

Future topics

In Singapore's financial history, there are certain memorable cases -

• the Pan Electric scandal
• the Gemini Chit Fund disaster
• the Asia Pacific Breweries case
• the SIA massive misappropriation.
  

These will shortly be the subject of future postings.

Aim and introduction

This blog aims to cover serious fraud cases in Singapore.

We will not use any fixed definition of what is "serious fraud" but generally anything over $500,000 is of interest.

The contents of this blog are

1. past cases of serious fraud
2. recent lawsuits and cases
3. warning signs of serious fraud
4. the law relating to serious fraud.

Disclaimer - This site only provides information and not legal advice. Please consult your lawyer if necessary.