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Tricks of the Trade

The property manager, assistant property manager and chief clerk had together defrauded the Telephone Company of millions of dollars. Since some documents relevant to the case were deliberately destroyed, it proved difficult to calculate the exact amount. Careful estimates, however, suggest losses running to over HK$2 million. How did these fraudsters run their operations?

How much was HK$2 million worth all those years ago?

According to Government statistics:

  • Average monthly income was HK$800
    You would have had to work for 208 years to earn that much!
  • The price of one Home Ownership Scheme (HOS) flat was HK$120,000
    Two million dollars would have purchased 16 HOS flats outright.
  • The unit price of a flat in Taikoo Shing was HK$200 per sq. ft.
    For HK$2 million you could have bought ten flats in Taikoo Shing, each approximately 1,000 sq. ft. in area.
1. Direct solicitation
2. Forming their own company
3. Inflated quotations and split orders

1. Direct solicitationChart

The cleaning contracts for the telephone exchange buildings and offices of the Telephone Company were awarded to a company called Healthy Washing (HW). A Mr Leung of HW recalled in court that the property manager started the ball rolling by requesting a commission equivalent to 10 percent of the contract amount from his company.

Subsequently, HW gave him his commission each month in the form of cash or a cash cheque. HW would record it as “floor cleaning fee” or “casual labour fee” in the books to cover up the bribe.

With the rapid expansion of the Telephone Company’s business the number of telephone exchange buildings and offices had increased tremendously. The commission given to the property manager shot up from $500 per month in 1962 to $6,000* per month in 1976, an eleven-fold increase. The collection of monthly commission never ceased during all these years.

*By 1976, the monthly salary of the property manager was $9,000.

2. Forming their own companyChart

In 1976, the Telephone Company had actually introduced a quotation system with a view to obtaining a competitive price for all repairs, maintenance and renovation works with the lowest bidder becoming the winner. However, this new arrangement completely failed to foil the corrupt schemes of those concerned.

As early as 1975, seeing that the level of service provided by HW was fast going downhill, the property manager reckoned his money spinner could not be counted on to stay in business. He turned this challenge into an opportunity, instructing his chief clerk to jointly set up a new cleaning company together with Mr Leung. This would be held in readiness to take over the whole range of Telephone Company cleaning jobs.

So in late 1975, the chief clerk (in the name of his girlfriend) joined forces with Mr Leung (in the name of his wife) to set up the new cleaning company. This successfully secured a one year cleaning contract for 38 offices and telephone exchange buildings of the Telephone Company by submitting the lowest bid. So the property manager continued to receive a monthly commission equivalent to 10 percent of the contract amount. Once again he had a working money spinner.

This was not the only money spinner that was generating wealth for the property manager, however. The assistant property manager also set up an engineering company with the chief clerk in the name of the assistant property manager’s mother to undertake repair and maintenance jobs for the Telephone Company.

To forestall queries, the assistant property manager and others set up different companies under different ownership, each of which would be awarded Telephone Company works contracts in turn. It often came down to simply using different typewriters for different quotations. So this really must be considered “first generation” tender rigging. Yet it still managed to hoodwink the management, and the Telephone Company quotation system soon ceased to exist except in name.

An Investigator says

3. Inflated quotations and split ordersChart

The assistant property manager and the chief clerk were not trade experts or insiders, so whenever the Telephone Company invited tenders for a project, they would first request contractors they knew to estimate the price. They would then raise this estimate by a certain percentage and submit a quotation to the Telephone Company in the name of one of the companies they had formed.

For instance, the electricity repair works fees for one office floor of office were found to have been inflated from $10,000 to $13,000, while the electricity installation fees for another office on another floor of the building were inflated by nearly 50 percent from $100,000 to $140,000.

After the works were completed, the differences after deduction of actual works fees for the contractors would be allocated to the property manager, assistant property manager and chief clerk in due proportion to their seniority-or should we say their position within the corrupt hierarchy.

Splitting orders was another common ruse. According to Telephone Company rules, the property manager could approve works or procurements below $15,000 without tendering. Large orders were therefore often split into small orders in order to get around the proper tender procedures.

Bad Apples in a Bad Barrel

Clearly, the Telephone Company would have been able to detect such widespread malpractices and so minimise its losses should it had had the proper supervisory mechanisms in place. Despite the considerable ingenuity used by the property manager and his cronies to hide their corrupt practices, no properly effective supervision would ever have allowed these to go on for a full 13 years.

Note for example that although the Telephone Company employment contracts stipulated that staff had to obtain prior approval before taking up any part-time jobs, the assistant general manager did not turn a hair when he found out that his chief clerk had privately contracted to run a staff canteen. This and other systemic slackness were a virtual invitation to the property manager, the assistant property manager and the others to stop at nothing and to keep on unscrupulously opening private company after private company to obtain contracts by deception.

Note that it should have been blindingly obvious that the offers in the unsuccessful quotations were very similar each time. If the Telephone Company’s senior managers had been more alert and followed a systematic vetting procedure, they could certainly have identified this as an issue and spotted many other loopholes.

Acknowledging laxity on a similar front, the Telephone Company’s general manager admitted in court that when he joined the company in 1974, he had heard a lot of rumours concerning the property manager. However, he continued, as the property manager had proved competent, he had not seen fit to make any further enquiries.

The ICAC’s Corruption Prevention Department had in fact conducted an assignment study on the Telephone Company’s tendering and procurement procedures in May 1977. The study report stated clearly that corruption preventive measures had not been thoroughly implemented, particularly in the Property Department where corruption opportunities were being generated from the award of maintenance and repair jobs.

Simply stated, this was a company that had had to cope with rapid market expansion and had also been plagued by cash flow problems.* Although some degree of internal supervision was in place, it existed in name only, enabling greedy staff to exploit each and every loophole.

*In the 70s, the Telephone Company went through a cash shortage crisis due to mismanagement, and the Government appointed a committee to look into the matter.

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