Production manager Mr. Wong was deployed to oversee the whole mechanical production process in the mainland and award production order to suitable factories. Two manufacturers offered him kickback for placing more production orders.
A mechanical engineering company in Hong Kong had operated a factory in the Mainland. Its production manager Mr. Wong was deployed to oversee the Mainland mechanical production process. Mr. Wong had worked in the company for eight years and won the praise and trust from his boss. Since some of the production procedures were subcontracted to other local manufacturers, Mr. Wong was also responsible for sourcing suitable factories and awarding the production orders. As such, Mr. Wong got acquainted with many other manufacturers, and was frequently invited to social activities after work. Two of them suggested offering him a kickback as a reward for placing more production orders and they would inflate the price of the orders to compensate the extra cost, i.e. the kickback to Mr. Wong. Succumbing to the temptations of monetary rewards, Mr. Wong accepted RMB575,000 in bribes and then deposited the bribe money into his bank account in Hong Kong
Would Mr Wong breach any laws? How could companies avoid such malpractices from happening?
Under Section 9 of the Prevention of Bribery Ordinance (POBO), it would be an offence for Mr Wong (an employee), without the approval of his employer, to accept advantages (i.e. RMB575,000 illegal kickback from the two manufacturers) for placing more production orders with the two manufacturers. The offeror of the bribe would also be guilty of the offence. It shall be an offence under POBO if any act of bribery (includes promising, agreeing, soliciting or accepting advantages without permission) takes place in Hong Kong. By depositing the bribe money back into the bank account in Hong Kong, Mr. Wong might still violate the POBO.
Mr Wong’s close relationship with the manufacturers had affected his objectivity when discharging his official duties. Though entertainment is an acceptable form of business behaviour, many past cases have shown that small favours such as free meals and small gifts etc. always breed corruption. It is therefore important for business manager to remind their staff of the need to handle their relationships with care, and to avoid accepting excessively frequent or lavish entertainment from them.
Furthermore, business organisations should also establish clear policies on acceptance of advantage and declaration of conflicts of interest, and inform their suppliers or subcontractors of such policies. In the event that staff have violated the law or company policies, prompt action should be taken to report the case immediately.
Mr. Chung had established a toy manufacturing enterprise in the Mainland in partnership with his friends. He solicited rebate from a Mainland supplier as a reward for placing purchase orders…
Mr. Chung had established a toy manufacturing enterprise in the Mainland in partnership with his friends. Holding 10% of the shares, he was mainly responsible for supervising the manufacturing process. Since Chung had the authority to purchase materials for the company, he hinted to a Mainland supplier that he expected a rebate equivalent to 5% of the transaction amount as a reward for placing purchase orders. When the incident was exposed, the ICAC found that none of the shareholders in the enterprise had any knowledge of Chung’s acceptance of advantages. Besides, the company did not establish any clear policies on such acceptance of advantage either for its shareholders or staff. It was revealed that Chung had accepted a total of $50,000 over a period of eight months. Chung was sentenced to imprisonment for committing a bribery offence.
In Hong Kong, according to the Prevention of Bribery Ordinance (POBO), it is an offence for any agent (generally the employee), without the permission of his principal (generally the employer), to solicit or accept an advantage as a reward for doing an act on relation to his principal’s business. Moreover, if any part of the bribery act takes place in Hong Kong, it shall still be an offence under the POBO. Although Chung was one of the shareholders of the enterprise, he was still an agent as defined by the law. He therefore must seek approval from the company before accepting any advantages.
Business organisations should take the initiative to govern the acceptance of advantages by all levels of staff (including directors) in relation to company businesses. The company should state clearly amounts of advantage that the staff are permitted to accept, and conditions of such acceptance. The policy should also list out the declaration procedures and enquiry channels for staff compliance.
Moreover, the company should establish detailed procurement procedures in order to ensure that the products purchased are of good quality and to prevent staff from abusing their authority or engaging in corrupt practices in the purchasing process. Staff should be reminded constantly of the importance of selecting suppliers in a fair and impartial manner.
To meet sales quota, a sales executive of a finance company conspired with a machine supplier, by turning a blind eye to the false invoices during a loan application.
An SME owner wanted to buy new machines by hire and purchase (HP) loan at 90% of the purchase value, but banks could only lend up to 60%. A machine supplier issued an inflated invoice so that the SME owner could borrow more. The supplier then referred the SME owner to a finance company's Sales Executive who was a friend of the supplier. Despite spotting the scam, the sales executive turned a blind eye and sought credit approval for the loan, in order to meet his sales quota. Having succeeded once, the sales executive conspired with the machine supplier to help a number of other SME clients who faced similar difficulties to obtain HP loans, with bogus machine purchase transactions. The scam was exposed by some SMEs’ default payments and internal audit’s investigation.
Facing keen competition in the industry and pressure to secure loan business in the bank, a bank staff may cross the line. Over reliance on sales staff to provide borrowers’ information without counter checks would increase the risk of manipulation.
The Sales Executive, an employee (agent) of the finance company (the principal), intended to deceive/mislead the company by using invoices which contained false information. Notwithstanding he did not receive any bribes, he might have contravened Section 9(3) of the Prevention of Bribery Ordinance (POBO).
The Sales Executive, machine supplier and SME owners could be charged with fraud against the finance company, or conspiracy to defraud the finance company.
The Sales Executive rationalized his acts by regarding his practice as helping the finance company to secure more loan business, at the same time helping the SMEs to overcome difficult situations. However, the fact that customers had to obtain higher loans through a fraudulent means suggested that they are high risk customers. Granting them higher loans increased the risk exposure of the finance company.
Approving a higher loan based on inflated collateral value or bogus transactions might also result in an unusual increase in bad debt cases, and internal review by the finance company would detect the irregularity involved.
Banks should adopt good control practices such as setting up a central team to conduct vigilant due diligence on high credit risk customers, conducting independent assessment of machine suppliers involved in HP transactions to ascertain their reliability, gauging reasonableness of the sales prices on invoice, and conducting regular assurance check to detect irregularities/unusual trend.
A relationship manager of a bank, without his client’s knowledge, forged documents to deceive the bank in approving an increase in the client’s credit limit and a new loan. He then transferred the money to an account he controlled.
A relationship manager of a bank was responsible for managing portfolios of his corporate clients. He noticed that one of his SME clients, Client A, had been lax checking his account statements. Without Client A’s knowledge, the relationship manager took a series of malpractice in Client A’s account, for example, fraudulently applying for an increase of credit line, forging the client’s instruction to draw funds from the credit line and transferring the money from the client’s account to an account he controlled. Later, Client A raised his doubts about the balance of the credit line, the relationship manager lied that it was caused by an error in the computer system.
On another occasion, the relationship manager also forged a loan application under Client A’s name by using another client as guarantor and forged signatures. He wanted to use the loan to settle the debit balance in Client A’s credit line to cover up his scam earlier. During the credit approval and fund transfer process, the backend staff members had their doubts but only went to the relationship manager for clarifications. The supervisor of the relationship manger also raised questions about the irregularities but he easily accepted the explanation given by his subordinate without follow-up. Later, with Client A’s persistent enquiries and complaints about the questionable credit balance to the bank supervisor, the scam by the relationship manager was finally exposed.
Nearly all bank staff members who misuse customers’ funds believe that such action is only temporary and can be rectified shortly. However, crime is committed once the funds are misused and such action cannot be ‘rectified’ even if the funds are ‘repaid’ before the crime comes into light. In this case study, the relationship manager (an agent) might have violated Section 9(3) of the Prevention of Bribery Ordinance (POBO) by using forged documents to deceive his bank (the principal) in approving an increase in Client A’s credit limit and Client A’s fraudulent new loan. Also, the relationship manger could be liable for a series of other crimes including theft (transferring money from client’s account to his own), fraud and forgery.
From the perspectives of customer service, it may be desirable for a relationship manager to provide personal service and act as the bank’s single point of contact for important clients. However, if all verification/clarification of questionable or doubtful transactions are routed through the relationship manager, it will undermine checks and balances and create opportunities for manipulations by unscrupulous relationship manager.
Moreover, banks should adopt good control practices to remind supervisors to stay vigilant to potential risk of corrupt practices and make thorough enquiries into any suspected irregularities.
Mr Chow, one of the four shareholders of a chemical engineering company in Hong Kong, was in charge of procurement for its mainland factory. A Hong Kong supplier tried to secure orders from Mr Chow by presenting him expensive gift and offering him rebate
Mr Chow started a joint venture with three of his friends by setting up a chemical engineering company in Hong Kong and a chemical manufacturing factory in Guangdong. The four of them were all directors of the company, each holding 25% of the company shares.
As Mr Chow had substantial experience in operating factories in Chinese Mainland and had developed an extensive business network in Hong Kong and Chinese Mainland especially with Mainland suppliers and government officials, he offered to manage the Mainland factory as the paid General Manager in charge of the business there.
Mr Chow often boasted that the success of the Mainland factory was due to his networking clout. At the same time, he kept grumbling that he had to cover the enormous entertainment expenses with his own money. As the General Manager of the Mainland factory, Mr Chow was entrusted with key procurement decisions. When one of his Hong Kong suppliers learned that Mr Chow had recently bought a property in Chinese Mainland, he presented Mr Chow with an expensive audio- visual set-up, hoping that this gift would secure a contract for the supply of chemical raw materials.
This seemingly thoughtful present soon brought its reward in the form of a first order from Mr Chow. To secure future business, the supplier also offered 5% of the transaction amount as a rebate to Mr Chow at his request. Subsequently, the bribe money was deposited into Mr Chow’s bank account in Hong Kong.
Under the Prevention of Bribery Ordinance (POBO), the principal of a company is the entire Board of Directors, while individual shareholders or directors are considered as agents. In this case, Mr Chow was an 'agent' as he was one of the shareholders and the paid General Manager of the factory. Prior to any solicitation or acceptance of any advantage in the course of business, Mr Chow should have obtained permission from the Board of Directors.
The principal’s permission should be definite and given in advance in accordance with Section 9 of the POBO. Otherwise, the agent has to apply for permission as soon as reasonably practicable after the acceptance. In addition for such permission to be lawful, the principal must have carefully considered the application before granting permission.
Mr Chow’s company had not stated clearly in advance whether or not its staff members could accept advantages in relation to their duties. During the investigation, Mr Chow claimed that he had notified other shareholders that the rebates concerned were used to cover the entertainment expenses incurred in Chinese Mainland. Nevertheless, he had, in fact, only casually brought this matter to the attention of just two of the shareholders. Furthermore, the arrangement had not been discussed at any board meeting or formally approved, and there was no record of the accepted rebates, nor how they were dealt with. As such, Mr Chow was considered not to have obtained the company’s permission to accept the rebate at the material time. Moreover, he had not applied for retrospective approval from his company, and his acceptance of the rebates was not known to and approved by all shareholders. Thus Mr Chow accepted the rebates without the principal’s permission.
To protect the interest of the companies and their stakeholders, companies should take the initiative to formulate rules and regulations governing the acceptance of advantages by their board members and staff and to state clearly in writing the company’s stance and policy regarding acceptance of advantages, and entertainment. The procedures for declaring acceptance of advantages and the channels for making enquiries should also be laid down and made known to all staff.
