ICAC Landmark Cases - The Unmaking of a Legend (Carrian Fraud Case)

The Unmaking of a ‘Legend’

Throughout his meteoric rise to fame, the Carrian chairman had wrapped himself in mystery. In both his personal and public incarnations, he was portrayed as a big spender. He splashed out huge sums on recruiting financial stars and professionals to act as his right-hand men, he worked in an ornate office, lived in a luxurious mansion and drove expensive cars. When caught in the limelight, he exuded immense charisma and persuasive powers. However, he generally maintained a low profile, rarely giving media interviews or granting photo-opportunities. As a result, the aura of mystery surrounding his rise to fame became even more intense. What people did perceive was the continued expansion of his businesses thanks to seemingly limitless injection of capital. At the time, many speculative reports regarding his origin and sources of finance were published, none of them conclusive.

In 1982, Sino-British talks on the future of Hong Kong began to shroud the city in uncertainty. The property market was sluggish and property prices were drifting downward. The economy suffered and the Carrian Group could not remain unaffected. In September 1982, Carrian still managed to report a profit of HK$269 million for the previous six months. Soon, however, the company announced its cash-flow problem. Instantly, its share price tumbled and Carrian’s primary bank creditors petitioned for the company to be put into liquidation. The Group tried every means and made desperate attempts to re-organise its debts but to no avail. On 3 January 1983, the doomsday of a business empire that once reigned supreme, the Stock Exchange suspended trading of Carrian stock, following which the subsidiary companies were wound up one after another.

A sluggish economy was just a catalytic factor leading to the collapse of the Carrian Group. The ‘deadliest’ blow in fact was struck by the Carrian chairman’s own corrupt and fraudulent conduct in generating capital for himself and creating a fictitious profit bubble.

The truth was that Carrian was already deep in debt and the sale of Gammon House was in fact never actually completed. The profits claimed to have accrued from the deal were never actually accounted for. As the then ICAC Chief Investigator Danny Lo King-wing put it, the Carrian Group’s financial position was like ‘trying to cover ten tea-pots with nine lids’. Investigations revealed that the finance company offering the many sizeable loans to Carrian was Bumiputra Malaysia Finance Limited (BMFL), a deposit-taking company set up in Hong Kong by Bank Bumiputra Malaysia Berhad (BBMB). To facilitate the acquisition of Gammon House, BMFL alone held out a staggering US$292 million credit to a new ‘two-dollar’ company solely controlled by the Carrian chairman. Such a huge loan arrangement was as unprecedented as it was extraordinary.

Changes of Carrian share prices

Date		Share Price (HK$)	Relevant events
1979	3 Dec	1.50	A Carrian subsidiary acquires 52% share of listed company Mai Hon Enterprises Ltd. (Mai Hon) at HK$6 per share.
1979	31 Dec	5.60	The Mai Hon share price quadruples in less than a month.
1980	10 Jan	5.90	A Carrian subsidiary signs an agreement to acquire Gammon House.
	14 Aug	11.20	Carrian announces the issue of bonus shares - three for every five shares.
	1 Sept	13.70	Mai Hon is renamed Carrian Investments Limited (CIL).
	8 Sept	14.80	CIL is officially traded under the Carrian ‘label’ on the Stock Exchange.
	3 Nov	17.30	Carrian announces a dividend of HK$0.30 per share and a two-for-five bonus issue.
	5 Nov	17.90	Carrian stock price peaks.
	26 Nov	11.30	Carrian issues 4.5 million new shares at HK$14.3 each.
1981	19 May	8.80	Carrian announces its profits for 1980.
1982	26 Mar	3.975	Carrian announces its profits for 1981.
	16 Sept	2.55	Carrian announces its profits for the first six months of 1982 and pays an interim dividend of HK$0.12 per share.
	26 Oct	1.07	Carrian announces cash-flow problem.
	2 Dec	0.63	Carrian share price falls to its all-time low.
1983	3 Jan	-	Trading in Carrian shares suspended.

Note: Neither Mai Hon nor Carrian was a constituent stock of the Hang Seng Index(HSI). Their price variations therefore had no influence on the movement of the HSI.

The Carrian and Bumiputra affair

Bank Bumiputra Malaysia Berhad (BBMB) was originally set up by the Malaysian government to provide banking services and professional business advice to Malaysian farmers of various ethnic groups. Soon it extended its business to overseas markets. Banking regulations in Hong Kong, however, did not permit BBMB to set up a branch in the territory. BBMB therefore set up a subsidiary company, Bumiputra Malaysia Finance Limited (BMFL), which was to be managed and operated in Hong Kong by several of its senior executives.

As a new lending house, BMFL had to be aggressive in building up a strong clientele. Carrian meanwhile badly needed money to finance its many business expansion programmes. The two companies were a perfect fit. In mid-1979, BMFL released its first HK$5 million loan to Carrian. The Carrian chairman initially dealt only with the general manager of BMFL, but contacts were later established with other BMFL senior executives including its chairman, director and alternate director.

As revealed in ICAC investigations, although the credits Carrian obtained from BMFL were all substantial, most were approved without adequate guarantees or supporting documentation, nor was there evidence to suggest that the loans had been subjected to the prescribed credit procedures.

Dissecting the Scam

As early as 1982, BBMB headquarters was suspicious about its Hong Kong subsidiary’s credit-approval procedures. The bank therefore dispatched an internal auditor from its Kuala Lumpur headquarters to act as assistant general manager supervising BMFL accounting and credit matters, and with an unspoken task to examine BMFL’s books from the inside. At the same time, BBMB also issued an order to BMFL halting any further loans to the Carrian Group of companies without prior headquarters’ approval.

On 18 July 1983, the internal auditor was reported missing. Two days later he was found dead inside a banana grove in Tai Po, New Territories. The then Organised and Serious Crime Bureau (OSCB) of the Hong Kong Police Force was tasked with investigating the case.

As the police investigations progressed, the ‘mysterious’ finance company behind all Carrian deals was finally brought to light. But what was it that motivated BMFL to grant Carrian huge credits one after another? How many problem loans had already been released prior to BBMB headquarters becoming suspicious and taking action to curb BMFL’s credit-approval authority? Had those loans ever been repaid? Who was involved? These were all questions to which BBMB urgently wanted answers.

Sidebar Story - The death of the Internal Auditor

One morning in July 1983, police officers from the Organised and Serious Crimes Bureau (OSCB) gathered in a banana grove in Tai Po to investigate suspected murder.

The dead body was that of a male. Tied around the body’s neck was a waist belt from a bathrobe. No identification document was found on the body. After a careful search, a Malaysian coin was found inside the pocket of his pants. A check of the Missing Persons Report revealed that the assistant general manager of BMFL had earlier reported that one of his colleagues from Malaysia responsible for credit matters was missing. It was later confirmed that the identity of the dead body matched the Missing Persons Report.

According to information provided by the complainant, the ‘missing’ person was supposed to meet the Carrian chairman on the afternoon of 18 July 1983 to sign a US$4 million loan agreement. However, the ‘missing’ man did not show up, although he did call the complainant twice to say that he was busy with something else. It turned out that the chairman of BMFL had arrived in Hong Kong from Malaysia that same day and had instructed the complainant to approve the loan without delay. Since the complainant had never had any authority to approve loans, he hesitated to follow the instruction. However, when the ‘missing’ Malaysian colleague called the second time, he was heard to merely utter the words “Wait, wait!” Then the line went dead and from that point on the man just vanished. Because of this extraordinary incident, coupled with repeated pressure from the BMFL chairman, the complainant felt he had no choice but to release the loan to the Carrian chairman. After the phone call, the complainant heard nothing further about his ‘missing’ Malaysian colleague until the body was found.

The deceased was the internal auditor of BBMB in Malaysia. He was seconded from the bank’s headquarters in Kuala Lumpur in 1982 to take up the post of assistant general manager overseeing BMFL’s accounting and credits services in Hong Kong. In fact, the bank’s headquarters had long suspected that BMFL had deviated from the established procedures when approving loans in Hong Kong. The Bank therefore sent over an auditor for a secret investigation, only to see him vanish in a foreign country.

The police investigated on the basis of witness statements and the circumstantial evidence found at the crime scene. A Malaysian man was identified as the prime suspect and was promptly arrested. Hotel staff confirmed that the suspect had a meeting with the deceased in the hotel on the day of the crime. At dawn, the suspect sought help from hotel staff to move a heavy piece of leather luggage into a taxi. The taxi-driver said that he also helped the suspect move the luggage, weighing possibly in excess of 100 pounds, into another hire-car. It was later confirmed that the suspect had hired a car that same day, and when the car was returned the wheels were covered with mud. The bathrobe belt tied around the deceased’s neck was found to be hotel property.

The murder case was detected in no time and the murderer jailed. But the true motive behind the murder remains a mystery to this day.

The Noordin Committee

The death of the internal auditor suggested that serious irregularities had occurred in the loan arrangements between BMFL and the Carrian Group. In January 1984, the Malaysian government set up a three-man committee of enquiry, consisting of the country’s Auditor-General, Mr Noordin, an accountant and a lawyer, to conduct a thorough investigation. The Noordin Committee spent several months interviewing BBMB staff and going through all the loan-related papers including the valuation report on Gammon House. The Committee was astonished to find that, from 1979 to 1983, BMFL had released a total of US$800 million (equivalent to HK$6 billion) in loans to the Carrian Group and to other companies controlled by the Carrian chairman. But the most staggering revelation was that most of these loans were approved without adequate security collateral or guarantees, and some were even released before assessment procedures had been completed. The Committee came to the conclusion that it was highly probable that senior executives of BMFL, including the chairman, the director and the alternate director, had accepted advantages from the Carrian chairman as rewards for approving the loans. However, by the end of October 1983, all three of these senior executives had resigned from BBMB and had fled Malaysia.

Since the alleged bribery took place in Hong Kong, it was considered proper for a Hong Kong law enforcement agency to investigate the matter. In April 1985, the Noordin Committee sent a representative to Hong Kong, with the assistance of the then Legal Department, to lodge a formal corruption complaint with the ICAC.

(Christopher Chui recalls the lodging of complaint by a Noordin member at the ICAC)
(in Cantonese only)

The BMFL scandal prompted the Malaysian government to set up the Noordin Committee to investigate the matter. After revealing that the scandal involved corruption and fraud, the government sent a Committee member to Hong Kong to lodge a corruption complaint. In April 1985, the Noordin Committee member arrived in Hong Kong to file a complaint.

Since most of the loans released involved corruption, the then Legal Department decided that the ICAC should handle the case.