ICAC Landmark Case - The Collapse of Cheque-kiting Scheme (Overseas Trust Bank Corruption Case)

The Collapse of OTB - The Inside Story

On June 6, 1985, the senior management of the Overseas Trust Bank (OTB) shocked Hong Kong’s financial circles with a surprise announcement that it was on the brink of collapse. It was having severe cash-flow problems and a raft of unmanageable bad loans. Fearing that the bank’s failure would shake the confidence of the public and investors in the local banking system, the Government stepped in and took over OTB the following day. Bad debts held by the bank had reached US$89.5 million (about HK$700 million).

How could the third largest home-grown commercial bank in Hong Kong have suffered such massive losses? Something was fishy in OTB. The government responded by not only making a huge capital injection to keep the bank afloat, but also sending the Police Force’s Commercial Crime Bureau and engaging a team of professional accountants to conduct a thorough investigation into the bank’s downfall.

When preliminary findings revealed that serious allegations of corruption and fraud were apparent, the ICAC was brought into the investigation in March, 1986. A 30-man joint task force was created, forging an unprecedented alliance of officers from the ICAC, police from the Commercial Crime Bureau and a dozen accountants. That task force moved into the office of OTB’s senior management on the 6th floor of the bank’s headquarters in Wan Chai and a 16-month long in-depth investigation was set in motion.

Needles Found in a Haystack

Who would ever expect a bank to have offered a loan of as much as US$50 million to a newly-formed company in Sri Lanka - let alone without any guarantee or security? Similar loans of huge amounts were offered by OTB branch offices in Macau, the Persian Gulf, London and San Francisco.

Accountants sent by Ernst & Whinney (now renamed Ernst & Young) had for months buried themselves in piles and piles of bank documents in search for the cause of OTB’s “death”. They felt greatly relieved when they found documents that pointed to “abnormal” loan transactions. In these documents were the clues that led investigators to unravel the web of fraud that brought down a bank.

The accountants played a crucial role and contributed much, behind the scenes, in getting to the bottom of the OTB scandal. Their professional judgement had helped the joint task force collate sufficient evidence to bring the key suspects to justice one after another within the shortest time possible.

OTB was the first probe involving the ICAC, the Commercial Crimes Bureau and an accounting firm. Tony Kwok Man-wai, the commander of the ICAC-Police Joint Task Force and the then Head of Operations, has recalled how the case was solved.

The Pursuit

Mr Kwok said the Police launched the investigation into suspicions that something was very wrong at the bank. As more and more evidence pointed to serious allegations of corruption, the ICAC was drafted into the probe. Soon after the task force began work in March 1986, it received reliable intelligence that the chairman of OTB and the businessman under investigation had already fled to the US. And the intelligence had it that the businessman would head for a Central American country which had once appointed him as its honorary consul-general and which had no extradition treaty with Hong Kong. This meant that if immediate action was not taken, he would soon be beyond their reach for good. But was such action risky, given that the investigation had just begun and the task force may not have gathered sufficient evidence?

But once the decision was made, the task force immediately contacted the US Federal Bureau of Investigation (FBI) for assistance in tracking down the suspects. Meanwhile, all the members of the task force were weighed down by the pressure to meet the 45-day extradition deadline for collating sufficient evidence against them.

Kwok's Interview

Race Against Time

Mr Kwok said the fraudulent activities at the OTB was, in fact, not very ingenious. The most difficult task for investigators was to find crucial evidence buried amid tens of thousands of bank documents and to identify reliable witnesses who would testify. Therefore, instead of following the traditional investigating procedure of examining each and every bad debt, the task force chose to focus on several major problem loans, from which strong evidence would most likely be retrieved to bring the guilty parties to book. The search for sufficient witnesses was a large-scale operation in itself. To work their way through the transactions on every account on the suspicious list they had on one occasion mobilised the entire task force to interview 60-odd witnesses in just two days. The task was so meticulous that even the issue and filing of a single cheque had to be verified by more than 20 people - a daunting task even if there was no deadline!

Accountant Bon Ho Ka-kui, who led the group of financial experts assisting the investigation, said: “If we had not narrowed down the scope of our investigation, it would have been difficult for us to pinpoint the core of the problem. That was why we decided to focus on the large-sized commercial loans, and very quickly, we started to uncover several suspicious credit facilities in the region of between US$20 million and $50 million each. Like a jigsaw puzzle, the picture became clearer as we pieced together clues being found in those documents.”

First “Resident” Informant Fills in the Gaps

The task force had narrowed down the scope of investigation, but still it was no easy task. Mr Kwok said that to garner more evidence, the task force had, for the first time, applied for one of the bank directors to stay in the ICAC Detention Centre as a resident informant. It was aimed at allowing the director, who had turned tainted witness, to help fill in the gaps. In the meantime, task force members travelled between Hong Kong and the US to interview hundreds of witnesses and to conduct a number of search operations, grasping almost every opportunity from which incriminating evidence might be collected.

After working day and night for three consecutive weeks, investigators managed to put together some 12,000 pages of documents in 23 bound volumes as extradition evidence to be hand delivered to the US Justice Department by two task force members. The work was so neatly done that the Justice Department had remarked at that time that the file was “the biggest the US Government has ever received - and was the best prepared.”

As a law enforcement officer, Louis Cheung Wah-pong never imagined that he would be the subject of an inquiry. But that was what had happened at the South Korean airport when he and a police officer from the task force were in transit to the United States.

Carrying four huge metal boxes of extradition papers and appearing anxious, the two officers aroused South Korean customs officials’ suspicion. They stopped and detained the Hong Kong pair, demanding the boxes be opened for inspection. Knowing that they had to catch the US-bound flight to meet the extradition deadline, the two officers were even more anxious, but language barriers stopped them from communicating properly with the Korean officials.

As the clock ticked, their heart sank, according to Mr Cheung, then a Principal Investigator of the ICAC. It was not until the customs officials spotted the seal of the US Consulate General on the extradition papers that they finally let them off - just in time to catch the flight!

Eric Wong (left) proved the culprit wrong

“The fortune-teller told me that I would be caught by a lawsuit but I could easily ride out of it. He had already got half of it right and I am sure I will escape scot-free later,” one of the main culprits told ICAC investigator Eric Wong Kan-tat.

The culprit thought he had a magic way to get off the hook. He told Mr Wong: “How much do you earn now? You are quite smart… and if I can walk away from this, I’ll give you a job…?”

The offer obviously did not work. “The episode only made me more determined to bring him to justice. Surely dealing with a streetwise guy like him was not easy. Getting a statement from him was such a pain as he would talk about anything except things that were relevant to the case,” said Mr Wong, then an ICAC Chief Investigator.

“We (the task force) figured that the best way to prove him wrong was to unearth as much evidence as we could. And we did,” he said.

In the end, the culprit’s fate, quite different from what his fortune-teller said, was spending years behind bars.

Public Spared Cost as Defendants Plead Guilty

Tactics and the esprit de corps of the task force, auditors and counsel from the Legal Department were the recipe for success in the OTB case, Mr Kwok said. He said that in the celebrated Carrian financial scandal case, as an example, a whole year was needed to collate evidence before arrests were made. But in the OTB probe, the operation took less than two months to proceed to arrests - a record for the ICAC. And in face of the substantial supporting evidence collected by the task force, the two chief conspirators pleaded guilty.

These confessions created a domino effect, with all the other defendants pleading guilty, one after another. As a result, the Government was able to make huge savings in litigation fees - setting yet another record.

In the end, the former OTB Chairman was charged with publishing falsified year-end accounts and the other defendants with conspiracy to defraud. Although the OTB scam was a corruption-related case, the Legal Department decided to institute only fraud charges against them after taking into consideration that the defendants were mainly involved in fraud. Also, the extradition of the major defendants from the US to Hong Kong for trial could only be made possible if charges of conspiracy to defraud were laid against them, due to the difference between the two jurisdictions.

The defendants all drew severe punishment. The businessman was sentenced to eight years imprisonment, which was later reduced to six years on appeal; the former OTB chairman two years; the former managing director three years; the former chief general manager three years, cut to one year on appeal; and the former senior general manager four years.

The three ICAC investigating officers in charge of the OTB case - Mr Kwok, Peter Gregory, Louis Cheung Wah-pong - and three other police officers were later awarded the Governor’s commendation for their excellent performance and dedicated effort in the investigation of such a complicated case.

Kwok's Interview

A Determined Government

Postscript:

After taking over OTB, the Government restructured its debts, revived its business and found a buyer. Mr Kwok said he believed that cases handled by the ICAC often brought positive outcomes. Following the OTB case and the subsequent collapse of other banks, the government began to review the banking system and step up its supervision over the industry. In retrospect, it was largely due to effective monitoring measures imposed by the Government in the wake of these fraud cases that Hong Kong’s banking system was capable of remaining unscathed during the recent Asian financial turmoil.