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CP speaks at Anti-Fraud Symposium


The following is a keynote speech by the Commissioner of Police, Mr Tsang Yam-pui on "Business Fraud as an Intelligent Crime and Its Impact on the Community, Business Activities and Professional Life" to the Hong Kong Society of Accountants (HKSA)'s Anti-Fraud Symposium held at the Hong Kong Convention and Exhibition Centre today (October 25).

Mr President, Ladies and Gentlemen, good morning. It gives me great pleasure to address you this morning on the subject of business fraud and its impact on Hong Kong.

Many in the audience today will undoubtedly remember the alarming scenes in 1998 when investors in the C.A. Pacific company suffered losses exceeding $900 million. Distraught, they demonstrated in their hundreds taking their grievances to the offices of the Securities and Futures Commission, as well as our own Police Headquarters. C.A. Pacific had declared a capital base of just HKD$16 million at the time of its collapse but had borrowed HKD$548 million against client collateral.

Similarly, but more recently, we had to consider the impact on investor confidence caused by the arrest and prosecution in Mainland China of the Chairman of a Hong Kong listed company for his complicity in a large scale international investment scam. Again huge public investment met with problems and many minority shareholders in Hong Kong fell victim to securities investment malpractices.

The issue of these and other business frauds have increasingly captured world headlines in the past few years. Large corporate failures, due in no small part to corporate misconduct, and at times outright theft, have occurred around the globe, posting a timely reminder of the need for solid, well structured corporate governance. Hong Kong as a leading business centre has not been immune from such failures, as the cases to which I've just referred bear witness.

Indeed the lessons learnt from these cases are two-fold. Firstly financial regulation has to be stepped up. The second lesson lies in the inherent dangers of investing in the securities markets. Of course, when the economy is thriving, most people win in the investment game. But Hong Kong, along with the rest of the world, has had to learn hard lessons of minimizing one's personal financial risk whenever considering such investments.

Corporate governance is a subject with which the Society of Accountants is very much concerned and, as an organization, I believe you have already displayed your commitment to improving this facet of business within the Hong Kong SAR. The Police Force also has a vital role to play in corporate governance in Hong Kong and I will return to discuss our role in this regard shortly.

Before doing so however let me focus specifically on corporate fraud. I would like to discuss the current situation as far as fraud is concerned, how we should tackle it, as well as what we can all do to improve the odds of minimising it as a threat to business in our community.

Firstly, I believe it would be accurate to say that the prevalence of fraud anywhere in the world undoubtedly far exceeds that reported to the police or regulatory authorities. Two of the Big Four accountancy firms recently completed extensive surveys on the subject which raise some interesting points from the Hong Kong perspective.

Price Waterhouse Cooper's Global Economic Crime Survey, published in July this year, provides a comprehensive assessment of the nature and impact of fraud around the world, including the Hong Kong SAR. Referring briefly to that report, asset misappropriation and cyber crime were identified as the most prevalent forms of fraud in Hong Kong. 35% of respondents stated that they had suffered from some form of asset misappropriation. 64% of companies in Hong Kong expect fraud to increase or remain the same in the next five years and 28% of companies who responded expect their greatest fraud risk to continue to be asset misappropriation.

The recently released KPMG Forensics 2003 Fraud and Misconduct Diagnostic Survey polled a total of 2,000 Hong Kong entities, including all those listed on the Hong Kong Stock Exchange. All were asked to comment on their ability to manage the risks posed by fraud and other types of misconduct and unethical activity. 65% of respondents felt that the responsibility for managing fraud risks within their organisation is poorly defined or that the responsibilities need better definition. This survey focused on the prevention of fraud, and I believe Mr Paul MacKellar from KPMG who will speak later today, will expand further.

One of this symposium's supporting organisations, The Association of Certified Fraud Examiners, produced a 'Report to the Nation' in June 2002 on fraud across the United States. The study covered 663 occupational fraud cases that caused over US$7 billion in losses. The survey estimated that 6% of company revenues would have been lost in 2002 as a result of occupational fraud and abuse. This translates to losses of approximately US$600 billion in total, or about US$4,500 per employee, which is a staggering amount. Of interest to the symposium today perhaps is that 'fraudulent statements' are the most costly form of occupational fraud in the USA, with median losses of US$4.25 million per scheme. Another discovery from this survey was that the most common method for detecting occupational fraud is via disclosure from an employee, customer, vendor or anonymous source. Interestingly, the second most common method is by accident.

The findings of these three extensive fraud surveys would suggest that the situation in respect of corporate fraud is similar around the globe. But what of the specific situation in Hong Kong? Although we have seen some high-profile cases recently in Hong Kong, involving large amounts of money, the first nine months of 2003 witnessed a decrease of 2.5% in serious commercial fraud complaints (76 to 74) when compared to the same nine month period of 2002. In monetary terms however there was a 59.5% increase in the amount of reported losses, with HK$590 million recorded in January to September 2002, and HK$941 million in the corresponding period of this year.

Notwithstanding these figures the fact exists that the number of cases and monetary losses represent a relatively small percentage of the overall business activity in Hong Kong. (There are around 1000 listed companies alone). However the sums involved are nevertheless very large, and the frauds leading to these losses have ranged from simple instances of false accounting by individual employees, to large scale intricate deceptions at the corporate level. The effects of corporate fraud, particularly on this larger scale cannot be underestimated in terms of the threat they pose to confidence in the integrity of Hong Kong's financial structure. Therefore there is absolutely no room for complacency in our approach to these problems.

Furthermore, advances in Information Technology pose another challenge. Although the situation is not serious by any means, we remain vigilant and are monitoring possible fraudulent activity that may arise from the increasing use of e-commerce. As more business is completed electronically, so the threat of fraud may increase. Industry estimates indicate that Internet based 'B2B' (business to business) e-business will grow to US$5,700 billion by 2004. Over 50% of online trading is expected to take place through e-market places - web sites where multiple buyers and sellers will interact and transact. With regard to Hong Kong, it is estimated that the value of e-business transactions will grow from US$2 billion in year 2000 to US$70 billion in 2004. This is an area the police has been preparing for, and is the reason why we have an established Technology Crime Division in Commercial Crime Bureau (CCB).

The international investment scam I highlighted earlier certainly underlined the dangers of investment in certain securities. However it too also revealed a positive side. By this I mean the significant progress which has been made in developing solid cooperation between law enforcement agencies around the world. In this case alone, CCB investigators had to work closely with our counterparts in Mainland China, the Netherlands, Republic of Korea, Japan, and USA. Indeed our police force enjoys excellent relations with the Public Security Bureau in the Mainland. The police forces of Hong Kong, Macau and Guangzhou regularly hold 'Tripartite' anti-crime conferences whilst we have established direct links locally in Hong Kong with the FBI, US Secret Service, Royal Canadian Mounted Police and the Australian Federal Police to name but a few.

This brings me to Hong Kong's 'multi-agency' approach to market regulation. Involved are bodies such as the Hong Kong Exchange, the Securities and Futures Commission, the Companies Registry, and for instances whereby criminality or corruption is suspected, the police and the ICAC. Of course, the Government oversees the work of all agencies, and it is noted that the Financial Services Branch has recently produced a consultation paper on the 'Oversight of Public Interest Activities of Auditors and the Financial Reporting Review Panel'. Such developments can only be for the good of furthering a sound corporate governance framework in Hong Kong.

Our police force enjoys a good relationship with all these authorities. Within the last year, CCB has seconded two officers to the Securities and Futures Commission, and again joint investigations have already produced prestigious results. The recently successful Gay Giano prosecution and conviction for market manipulation is one example. The Companies Registry is now enjoying a closer relationship with the police force than ever before with a direct communications and case-referral link having been established between us for nearly a year now.

In this context, the Hong Kong Police Force also receives excellent assistance and support from the Department of Justice. Three of the five sections of the Commercial Crime Unit of the Department of Justice are concerned exclusively with advising on and preparing for trial, commercial crime cases. Lawyers in this unit advise on cases presented by the Commercial Crime Bureau, and other investigating authorities responsible for policing particular aspects of Hong Kong's financial and business affairs.

Commercial crime cases often necessitate the tracing of funds moved to jurisdictions outside Hong Kong and the cases often seek the extradition of offenders from countries where they are located. To this end, the SAR Government has signed Mutual Legal Assistance Agreements with 15 countries, and Surrender of Fugitive Offenders Agreements with 13 countries. Therefore we are very well equipped to deal with multi-jurisdictional investigations, and extradition is a common aspect of the work of the CCB.

It is also appropriate to draw attention at this juncture to the fact that there are three teams of Treasury Accountants headed by a Senior Treasury Accountant permanently attached to the CCB to assist in our investigations. These skilled accountants often have, and will continue to give expert evidence in the area of forensic accounting, and provide invaluable advice to our officers during an investigation.

Police officers in our CCB have to undergo comprehensive training in commercial investigations, financial and banking systems, financial instruments, fundamental accounting principles, and the operations of the securities markets. Officers also attend overseas training courses and we often reciprocate with officers from overseas law enforcement agencies attending our training in Hong Kong.

Relations with the private sector, and with the banking industry in particular, are very good. We have ties with your Society, which I now anticipate will only grow stronger.

Legally, we are empowered to do much in the fight against organized crime and serious fraud. The police is able to invoke powers contained in the Organised and Serious Crimes Ordinance to demand the production of documents, electronic or otherwise, require potential witnesses to provide us with crucial evidence, restrain ill-gotten gains in bank accounts and increase sentences where considered necessary. The amendment to the Theft Ordinance, providing a new offence of 'Fraud' under Section 16A of that Ordinance, has assisted police in clearly delineating and defining an offence to cover the subject area of this symposium.

So, now that I have outlined what we, the police are capable of doing, what can you do to assist us in the fight against fraud? In some of the reported fraud cases, people may ask, where were the professionals in those companies who should have spotted the irregularities in the early stages, yet did nothing about it? To the accountants, lawyers and professionally affiliated financial advisors, present here today, may I remind you that society relies upon your professional judgment and ethical duty to report any criminal activity you come across. May I therefore appeal to you to take the lead of doing so?

I appreciate there are some of you here today who are not accountants or lawyers, but business leaders and managers. What should you do when you find that someone is committing fraud in your company or organization? Who can and should you turn to? This is not always an easy question to answer, from your point of view, when you have the best interests of your company in mind. However, you do have responsibility to take action when a suspected fraud occurs.

If you have some suspicion but you are unsure that you have a case of fraud, you should consider seeking immediate advice. There are a number of places you can go for this. You should consider involving your accountant as early as possible, assuming, of course, he or she is not involved! You should consider seeking immediate legal advice and involve your legal expert. You may wish to gather more evidence, and you may employ one of the many accounting firms who specialise in conducting forensic accounting. Based on the advice of one or all of these potential sources, you may decide to do a number of things. One option would be to minimise publicity by firing the person or persons involved. That will perhaps save the company's reputation and will remove the problem in the short term. But this is not what I would recommend you to do.

From the point of view of establishing sound corporate governance principles in your firm, and to act as a deterrent against further misconduct however, you should report the matter to the police, so that we may look into the criminality of the activity discovered. In addressing you today I seek to reassure you that this is the best solution for you and your company in the long run. Firstly, as I have already mentioned the Hong Kong Police have the expertise, resources and professionalism to deal effectively with your report and bring those involved in fraud to justice. Secondly, all parties concerned, the board, investors and employees would benefit from the individuals responsible being brought to justice. Fellow employees or board members might think twice about attempting to "cook the books" or run away with the company's money, if the company is seen to take positive action against those who do. Investors would see that the company takes corporate governance issues seriously, and indeed such action and publicity may attract investment. The results can only be positive, in my view.

Police do have an important role to play in corporate governance, where a realistic fear of possible criminal prosecution for corporate misconduct provides an important psychological deterrent. But your assistance in reporting fraud is vitally important. A recent property fraud case in the New Territories, illustrates this point perfectly. As a result of excellent forensic work performed by an accounting firm, police were able to arrest and charge the two directors of a property development company within 10 days of receiving the case. There are a few other examples where we have demonstrated resolve and resilience in pursuing the suspects in major fraud investigations. The importance of the initial evidence you secure and provide as accountants and senior managers cannot be over-emphasised. Your information may not immediately result in arrest and criminal prosecution, but by reporting to the police you will allow us the opportunity to examine the evidence available and then advise you whether the case is worthy of further investigation and if not, what other appropriate action you may wish to take.

Even if your situation does not reveal a prima facie case of criminality, our intelligence systems can collate the activities and modus operandi of suspected persons and syndicates. This may prove essential in any future investigation where prosecution may well result. Your willingness to assist the police, coupled with an understanding that prosecutions can only have a positive effect on the company, shareholders, management and employees, will greatly improve the situation surrounding corporate fraud in the long term.

So to recap:

- Hong Kong as a major business centre is not immune from corporate fraud.

- Whilst the number of cases and monetary losses seen in Hong Kong represent a relatively small percentage of overall business activity in the city, the sums involved are still very large and the cases themselves can seriously impact on investor confidence.

- The Hong Kong Police's experience in recent years with this type of crime has helped us establish an excellent working relationship with law enforcement agencies around the world. In turn this has greatly enhanced our abilities to tackle 'white collar crime'.

- In similar vein our relationship with financial regulating bodies in Hong Kong, together with the expertise our own Commercial Crime Bureau has developed ensures the Hong Kong Police Force's ability to effectively address corporate fraud, and finally;

- I have already sought to encourage you through this address to report suspected frauds to Police. The positive benefits of companies doing this is, in my view clear to see.

Thank you.

Police Report No.2

Issued by PPRB

End/1330 hours, Saturday, October 25, 2003 (CS/TK)


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