Chia Teck Leng, APB and the banks 1

As previously mentioned, Chia Teck Leng, hold the record for the longest prison sentence for commercial crime and for the biggest losses caused by fraud.

The facts show that he approached various foreign banks operating in Singapore, in his capacity as finance manager of major brewer, Asia Pacific Breweries, (APB) for loans totalling $117 million for his employer. He managed to divert the loans into accounts controlled by him.These loans were never approved by the board of directors of APB and the board denied all knowledge of them.

4 of the 5 banks started lawsuits against APB in the Singapore High Court. These were -

Germany's Bayerische Hypo-und Vereinsbank (HVB) and Sweden's Skandinaviska Enskilda Banken (SEB) and Japanese banks Mizuho Corporate Bank and Sumitomo Mitsui Banking Corporation.

SEB is seeking US$25 million, a lawyer for the Scandinavian bank said. Mizuho was seeking US$8 million and Sumitomo Mitsui S$10.3 million. HVB, a unit of Unicredit, is claiming US$32 million. It is believed that their claims were based on arguments relating to estoppel, agency and apparent authority.

The Japanese banks discontinued their claims at the start of the trial. The claims by the other banks have not been decided by the court.

Lawsuits against government and regulators

When massive fraud is committed eg in the Madoff case, the victims look for parties to sue. One set of possible defendants are the governmental and quasi-governmental regulators. In the Madoff case, some investors are looking to sue the Securities and Exchanges Commission (SEC), which as the name suggests, is supposed to regulate the securities industry.

In the United Kingdom, there have been lawsuits against the financial regulator the Bank of England although I am not aware of any successful lawsuits. The financial regulator is England is now the Financial Services Authority.

In Singapore, relevant regulators are the Ministry of Finance and perhaps the Singapore Exchange (SGX). I have not done any research on this matter, but my preliminary feeling is that there is no reason why the regulators cannot be sued if they are negligent in the discharge of their statutory or common law duties of care. In each case, it is important to note the scope of responsibility of the relevant authority as well as the areas in which they are alleged to have been deficient as regards the standard of care expected. It should be noted it is not possible to spot in advance all cases of fraud. However, in some cases, the fraud is supposedly apparent from the start.

In the Madoff case, there are allegations that there were red flags - obvious warning signs - for example, the audit firm supposedly auditing Madoff's multi-billion dollar operations were a small firm with only a handful of staff in total. Many investments funds invested with Madoff without doing due diligence and they are facing lawsuits from their investors.

The Madoff case

The news is out - Bernie Madoff, who probably created the world's biggest Ponzi scheme, has been sentenced to 150 years jail. It is unlikely that he would even serve 1/5 of that sentence, but with advances in medical science, you never know how long human life expectancies will increase.

Madoff's sentence for his fraud involving perhaps only US$13 billion in monies actually invested with his funds (not US$50 billion claimed by him) is the longest ever awarded by a US court.

In Singapore, on the other hand, the records for the longest sentence for commercial crime and the longest non-life sentence was formerly found in the case of SIA ex-employee Teo Cheng Kiat who was sentenced to 24 years jail. These records are now held by Chia Teck Leng who swindled banks of $117 million while he was finance manager of Asia Pacific Breweries. He was sentenced to 42 years jail in 2004.

If he behaves himself, he can get 1/3 time off for good behaviour, meaning that his sentence might only be 28 years, and he could be out in the year 2032.

Motivations for fraud

Fraud is motivated by many reasons. Why should a acounting professional or a fraud investigator be concerned with the motivation? A criminal's motivations may be important for the following reasons -

1. pre-fraud - when hiring staff, it might be possible to sieve out those with the propensity to commit fraud;
2. fraud occurence - looking for red flags such as an employee's gambling habits, might help detect or prevent fraud
3. investigation - understanding fraud motivation might assist in questioning of the suspect or tracing the money flow
4. trial - the motivation may have some effect on the sentencing meted out by the court but this is not common.

The motivations for fraud include -

a) financial - this could either be pure greed, or desperation when a person encounters financial problems; (lawyer David Rasif was probably one of the few lawyer crooks who stole not because of financial pressure but because of sure greed)
b) revenge - a desire to punish the victim for some real or imagined wrong;
c) vindication - there is some evidence that SIA clerk Teo Cheng Kiat was partly motivated to show his employer that he was smarter than it was.

Fraud and funny numbers

I am not a mathematician but a mathematical law is supposed to help spot fraud. Known as Benford's Law, it was referred to in the crime investigation TV series "Numb3rs" in the episode "The Running Man".

Apparently, in many sets of numerical data, the first number is not divided equally among the digits 1-9. The number 1 is expected to be present 11% of the time as the first digit but under Benford's Law, "the first digit is 1 almost one third of the time, and larger digits occur as the leading digit with lower and lower frequency, to the point where 9 as a first digit occurs less than one time in twenty."

This mathematical principle is important in fraud investigations as it may reveal fictitious data eg made-up daily sales figures when in fact no sales have been made. A criminal when creating fictitious sales figures may well try to distribute the first digits evenly about the various numbers but Benford's Law may show suggest that the figures are made up.

For more details about this mathematical law, see http://en.wikipedia.org/wiki/Benford%27s_law

Defamation and auditors 2

Another defence that is sometimes important to investigating auditors of fraud is found in section 8 of the Defamation Act.

Normally, the defence of justification to a defamation lawsuit requires that the defamation is literally true. For example, if the auditor makes the statement that the finance manager of a company stole money ten times from the company, but the manager only stole money 9 times, then the defence of justification would fail.

Under section 8 of the Defamation Act, the defence of justification will still succeed even if certain allegations are untrue provided that considering the rest of the true allegations, the false allegations do not materially injure the other party's reputation. There is probably little difference from the defamatory point of view whether a person stole money 9 times or 10 times, so the defence is likely to succeed.

Defamation and auditors

As mentioned previously, section 208 of the Companies provides auditors with qualified privilege with respect to defamation lawsuits relating to the audit report.

Defamation occurs where a oral or written statement lowers the reputation of a person. The defamation may occur expressly or impliedly. For example, a statement like "the financial manager embezzled the money" is expressly defamatory while the statement "the clerk was in charge of the missing funds" is impliedly defamatory.

At common law, an auditor also has qualified privilege. This privilege is important when fraud investigations are being carried out. Very often, preliminary statements and conclusons implicating certain person or persons will be made by the investigating auditors before all the evidence is available. Such statements could well turn out to be incorrect.

Qualified privilege will protect the auditors for honest mistakes. They must ensure that the statements are made to the correct persons - those who have an interest in receiving the information or have a duty to receive it, for example, statements about the fraud made to the directors of the victim company or to the authorities. However, statements made to the spouse of the suspected criminal will probably not be privileged.

True and fair view - what it means

Financial statements are required to show a true and fair view. But what do the words "true and fair view" mean?

There is no definition in the Singapore Companies Act. Neither are the words defined in the United Kingdom's companies legislation. The relevant accounting standards bodies have also not defined these words.

Queen's Counsels Mary Arden and Leonard Hoffman (as he then was) in England (who are senior well respected lawyers) stated that the words require that the accounts will not be true and fair unless the information in them is sufficient both in quantity and quality to satisfy the reasonable expectations of readers to whom the accounts are addressed. Unfortunately, these words do not assist in any meaningful way.

In the English case of Lloyd Cheyham v Littlejohn, the judge stated that compliance with the rules of the relevant accounting standards authority is strong evidence as to the proper standard to be adopted.

This case was referred to in the local case of JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (a firm) [2007] 4 SLR 460; [2007] SGCA 40

(for a discussion of this case from the viewpoint of the law of negligence, please see http://professionalnegligencesg.blogspot.com/2009/04/gaelic-inns-jsi-shipping-2-contributory.html)

True and fair views in the accounts and financial statement

A company's financial statements are required to show a true and fair view. The company's external auditors are also supposed to express an opinion as to whether the accounts do in fact show such a view. If the accounts appear to be in order, then an unqualified opinion is given.

If the accounts do not show a true and fair view, the auditors are supposed to render an adverse opinion. This is used where the auditors are reasonably sure that the accounts are incorrect. Where the information and documents available are insufficient for the auditors to ascertain whether the accounts are correct or incorrect, then the auditors are required to express an disclaimer opinion.

To protect the auditors from defamation lawsuits in relation to such opinions, section 208 of the Companies Act provides them with qualified privilege. This means that unless there is malice or some improper motive of the auditors in making incorrect statements, the auditors will win any defamation lawsuits against them.

The Informatics affair 2

Continued from previous post.


Some of Infomatics' top executives were charged in court with the creative accounting practices used by IGSPL (Informatics Group Singapore Pte Ltd). They were Wong Tai and Ong Boon Kheng.

Wong Tai, Chairman and non-executive director of IHL Ltd, was charged under the Securities and Futures Act with 2 charges of making false statements by misstating the company's profits in 2 quarterly income statements by by $4.18 million and $0.84 million. He pleaded guilty to 2 charges, with 2 others to be taken into consideration.

The District Court considering facts that he was a first time offender and was not personally involved in the
preparation of the financial statements fined him $120,000 on each of the charges.

Ong Boon Kheng, Chief Executive Officer of Informatics at the relevant time, claimed trial. He was charged with 4 counts, 3 of which related to false accounting in the first, second and third quarters 2003 financial statements of the company while the 4th related to a statement made to the Singapore Exchange, SGX.

Tan Cheng Han, specialist district judge (and also Dean of the Faculty of Law, National University of Singapore) sentenced him to a total fine of $445,000.

Ong was also ordered to pay prosecution costs of $45,400 for the 28 day trial.

The sentences were upheld by High Court judge Tay Yong Kwang on appeal.

The above convictions are probably sufficient to disqualify the above 2 directors from acting as directors under the Companies Act.

The Informatics affair 1

Informatics Holdings Ltd is a listed company which is one of the largest education providers in Singapore. One of its subsidiaries is Informatics Groups Singapore Pte Ltd (IGSPL). False accounting issues in relation to IGSPL's 2003 financial statements involved approved in principle revenue (AIP revenue) and international student recruitment revenue (ISRR).

AIP revenue involved student fees from local students. IGSPL has standing arrangements with financial institutions to provide loans to students for to finance their studies. It is not totally clear but it appears that the students only signed up with the school on the basis that their student fees would be paid through loans arranged by the school. The school here recogised revenue from student fees when the student was registered, rather than when approval for the student loans were obtained.

ISRR is revenue from foreign students studying in Singapore. Under Singapore law, each such student can only commence his studies after approval from the government body, Immigration and Checkpoints Authority (ICA). However, IGSPL recognised the revenue from these students even before approval had been obtained fro ICA. This was based on its past experience that

The above 2 accouting procedures adopted by IGSPL contradict the accounting principle that revenue from services should only be recognised when the service has been rendered to the customer.

Bank officer's fraud

Former bank officer, Ms Lynette Ng Pei Ling, was sentenced to 3 months for her offence of forgery in July 2007. As a relationship manager with United Overseas Bank, she had forged a letter purportedly from the bank guaranteeing a customer Mr Lok Kok Seng 10% returns per annum for 4 years. She made full restitution, an important fact in the court sentencing decision.

She later jointed HSBC but in court, said that she had lost her job.

She was supposed to obtain a $1,440 commission from the sale of a $150,000 investment to Mr Lok.

Punishment for fraud

The courts take into account many factors in sentencing including the degree of planning, the amount of money involved and the restitution made (in other words, whether the criminal has repaid the victim for the loss).

One interesting fact is that if you want to steal a million, from the punishment point of view, it is better to take it all at one go rather than take the amount through several actions. In the first case, it is sometimes possible to argue that it was done in a moment of weakness and the court might be slightly lenient. In the second situation, with repeated offences, the court will note that the acts were done with deliberation and if they took place over a periood of time, the sentence may well be on the high side.

Digging through rubbish

One method used by business competitors to steal trade secrets is by digging through your trash or rubbish bin.
Is this allowed under the law? What can you do about such dirty tricks?

One possible response is to report to the police and claim that it is theft under the Penal Code. However, since a dishonest intention is required, it is unlikely that the police will take action. Of course, if you wish, your lawyer can help you start a private prosecution for theft.

A civil lawsuit agaisnt the rubbish takes is also possible in order to recover damages and perhaps obtain an injunction against the use of any information obtained.

An interesting case which did not come to a firm conclusion about the legal effect of what is sometimes called dumpster diving is

Obegi Melissa and Others v Vestwin Trading Pte Ltd and Another
[2008] SGCA 4.

Questioning employees suspected of fraud

What is the legal position in the following situation - when you question your subordinate employee suspected of fraud and he refuses to answer. Later, when he is sued in court, he gives an answer which you feel he should have mentioned to you earlier.

Under section 116 of the Evidence Act, the court is allowed to draw adverse inferences. The court will have to take into account all facts including any excuses and explanations from the employee about his earlier failure to answer. If it thinks fit, the court can presume that the employee is lying in court and his answer is something concocted by him recently. If on the other hand, the employee gives a good explanation which the court believes, then his failure to answer will not be held against him.

There are no hard and fast rules as to the court's response in such situations but the court is expected to take into account normal human responses in such situations.

Lawyers and clients monies

Lawyers are often entrusted with large sums of their clients' monies which may be held by the lawyers for later use, eg, pending completion of a major business deal or a payment deadline under a property transaction.

The law has strict rules on dealing with these sums held by the lawyers. They are required to bank the monies into a special account called the Client Account. This is a separate account from the law firm's own bank account which is called the Office Account. The Office Account is used to pay for expenses of the firm such as salaries, rent, etc. Since it is the lawyers' own monies, they are free to agree on how to use it.

On the other hand, the Client Account is a trust account. Monies there are only to be used according to the client's instructions. Monies of one client also cannot be used for another client's purposes. If the money is misused by the lawyers, the criminal offence of criminal breach of trust will be committed with jail sentences being almost always being the punishment. If the lawyer is honest, then even if he becomes bankrupt, the monies will be safe in the Client Account, and cannot be taken by the lawyer's personal creditors.