City Harvest Appeal Decision Explained – Episode 1

The City Harvest Church appeal decision was released by the High Court on 7 April 2017. In a rare split decision, two out of the three appeal judges (the “Majority”) significantly reduced the sentences of Pastor Kong Hee and 5 others. Before one is able to form a balanced view or to comment fairly on the decision, one should seek to understand the High Court’s grounds of decision. However, the detailed grounds of decision were a massive 298 pages long. Most people will never read it, let alone in full. In Episode 1 of this blog post, I will attempt to summarize the complex facts of the City Harvest case and to explain the grounds for the Majority’s decision to largely dismiss the appeals against conviction, before moving on in the next post (Episode 2) to explain why the Majority reduced the charges to a less serious form of criminal breach of trust and their decision to reduce the sentences, and then analyzing in a final post (Episode 3) the illuminating views of the dissenting judge (the “Minority”), and to set out the practical implications of this case for various people and organizations.

A. THE FACTS

A.1 Introduction and Overview

The facts are complex, but they are important in order to understand the decision – as well as to appreciate the nature and degree of dishonesty and concealment present in this case. A case of such public importance, which has tremendous implications on how companies, charities and Churches are run and how they deal with trust assets or donations, deserves an in-depth reading. The numbers in square brackets are references to the relevant paragraph(s) in the 298-page City Harvest Church Appeal Decision (which is downloadable here).

Bear with me, as we recount the facts of the case.

Sometime in September 2001, City Harvest Church (“CHC”) decided to embark on a project that used popular music for evangelism. In 2002, this project came to be known as “the Crossover”. The Crossover involved (amongst other things) Ms. Ho Yeow Sun (“Sun Ho”) recording and launching secular music albums in order to reach out to people who might otherwise never step foot into a church to listen to a preacher ([1]). In short, it was an evangelistic endeavour to spread the gospel through the secular music of Sun Ho ([21]).

In 2004, the CHC leadership took a decision to expand the Crossover into the market in the US. Wyclef Jean (“Wyclef”) was brought on board as an executive director. He commanded substantial fees, and his participation, together with the expansion of the Crossover, led to a significant increase in the amount of funding that was necessary ([2]). Where would the funds come from? As it turned out, between 2007 and 2009, the funding eventually came from CHC’s Building Fund (“the Building Fund”) and General Fund (“the General Fund”), under circumstances which amounted to a criminal breach of trust (“CBT“), and which involved 6 persons from CHC (as will be described below). A total of S$50.64 million was misused.

These 6 persons are Kong Hee, John Lam, Tan Ye Peng, Chew Eng Han, Serina Wee and Sharon Tan ([3]). A brief summary of each of them is provided at [7]-[12]. All of them were on the CHC Management Board (“the CHC Board”) at one time or another, save for Sharon who was never on the CHC Board.

These 6 were charged and convicted in the State Courts by the Presiding Judge of the State courts (“the Judge”) ([4]), of 3 broad categories of charges: (1) “sham investment charges”; (2) “round-tripping charges”; and (3) “account falsification charges” ([13]-[20]). It should be noted that Sharon is not involved in the sham investment charges, while John Lam and Kong Hee are not involved in the round-tripping charges and account falsification charges ([19]). The sham investment charges and the round-tripping charges are collectively referred to as “the CBT Charges”.

All 6 appealed against their conviction and sentences ([4]). The Prosecution appealed as well, arguing that the sentences were manifestly inadequate ([4]). The High Court arrived at a split decision. The Majority’s grounds of decision spanned 436 paragraphs and 222 pages, while the Minority’s grounds of decision took up 123 paragraphs ([437]-[560]) and 75 pages.

Before we carry on with the “summary” (somewhat long, I know) of the facts, it may be noted that the more questions were asked (whether by a church member or the auditors) about the sources of funding for the Crossover (and other pertinent queries), the more the appellants took steps to distance the Church from the project, by adding layer upon layer of corporate entities or purported financial transactions / “investments” between the Church and the Crossover, to mask the fact that ultimately, massive amounts of Church funds were transferred and used for the Crossover project. CHC’s own lawyers and auditors did not know the true state of affairs, and crucial information was often withheld from them. Even when an extraordinary general meeting (“EGM”) of Executive Members was held after investigations by the CAD had commenced (to obtain resolutions to ratify the transactions), the true nature or substance of the transactions continued to be obscured. All these will be evident as you read on.

A.2 The Roland Poon Incident and an Attempt to Distance CHC from the Crossover

Going back in time, in 2001 and 2002, the Crossover was directly funded by CHC. In January 2003, an ordinary member of CHC, Roland Poon, alleged that CHC was misusing its funds in connection with Sun Ho ([22]). In response, the CHC Board published a statement in a local newspaper that church funds had not been used to purchase Sun Ho’s albums or to promote her career. Similarly, Kong Hee told the executive members of CHC (“the Executive Members”) at an annual general meeting that no church funds had been used for the Crossover. As the Majority pointed out, it “cannot be disputed that this was not true” ([22]). In other words, church funds were then used for the Crossover.

After the Roland Poon incident, CHC began to place some distance between itself and the Crossover in a bid to avoid negative publicity. This eventually led to the concept and creation of Xtron Productions Pte Ltd (“Xtron”) a few months later on 18 June 2003 ([23]). John Lam, Eng Han and Eng Han’s wife were its founding directors and shareholders. On the same day, Xtron entered into an artist management agreement with Sun Ho ([23]). Xtron also obtained funding to finance Sun Ho’s secular music activities ([24]).

In other words, the original direct connection between CHC and the Crossover, became less direct, with Xtron being placed as an intermediate corporate entity. However, as will be made clear below when examining the Majority’s grounds of decision, Xtron was in reality at all material times controlled by Kong Hee, Ye Peng, Serina and Eng Han.

In early 2003, Kong Hee saw an opportunity for the Crossover to extend to the US. He started communicating with a producer, Justin Herz (“Justin”) ([25]).

A.3 The Need for Funding, leading to the Sham Investments into Xtron Bonds

When Wyclef was engaged as an executive producer in May 2006, his fees contributed to a significant increase in the amount of money needed to fund the Crossover ([26]). Kong Hee, Ye Peng and Eng Han began to consider methods to obtain such funding, including whether Xtron should take a loan of S$2.5 million from the Building Fund ([26]).

We pause briefly here, where a short description of the Building Fund is needed. The Building Fund was where the donations of CHC’s members to a campaign known as “the Arise and Build Campaign” were deposited. The purpose of the campaign was to raise funds (projected aim up to S$310 million) for CHC to build its church building in Jurong West. The pledge cards that were used for the campaign in 2007 and 2008 (for members to pledge their commitment towards fulfilling the projected targets) stated that the monies in the Building Fund were to be used “for the purchase of land, construction costs, rentals, furniture and fittings” ([27]). In other words, these were Church members’ monies donated for a specific purpose, i.e. building a physical Church.

In June 2007, Eng Han came up with the idea of Xtron issuing bonds which CHC would purchase with funds from the Building Fund ([28]).

How was this achieved?

The idea was packaged as an investment policy. The investment policy was approved by CHC’s investment committee (“Investment Committee”), which was formerly known as the finance committee. At that time, the Investment Committee comprised of inter alia Ye Peng, Eng Han, John Lam and Serina. John Lam took the lead in drafting the investment policy. The CHC Board unanimously approved the investment policy. See [28]-[29]. However, the final layer of approval had to be sought – from the Executive Members of CHC.

The Executive Members of the Church were told by Kong Hee at an EGM on 7 July 2007 that CHC were unlikely to find a building to acquire any time soon, and it would be better for the monies in the Building Fund to be invested to generate financial returns rather than left sitting untouched. The Executive Members passed a resolution approving the investment policy, and CHC appointed AMAC Capital Partners (Pte Ltd) (“AMAC”) as its fund manager to manage the initial sum of S$25 million from the Building Fund that would be invested. However, at this EGM, there was no mention of Xtron, the potential investment into Xtron bonds or the Crossover. See [28]-[30]. It should also be noted that Eng Han was the sole director and major shareholder of AMAC (70%) ([10]).

The 1st Xtron BSA and the transfer of S$13 million

On 17 August 2007, Xtron and AMAC (as fund manager of CHC) entered into a bond subscription agreement (“the 1st Xtron BSA”). Basically, CHC bought S$13 million worth of bonds from Xtron, at an interest rate of 7% per annum and a maturity period of 2 years. However, when these bonds were purchased, Xtron had a net loss of S$3.44 million in the previous financial year. See [30].

Thereafter, from August 2007 to March 2008, S$13 million was transferred from the Building Fund in 4 tranches pursuant to the 1st Xtron BSA. These transfers are the subject of the first two sham investment charges. These monies were used, as intended, on the Crossover. See [31]. The Majority would later hold the 1st Xtron BSA was not in substance a genuine investment.

A.4 Questions from Auditors, leading to the Sham Investments into Firna Bonds

From June to July 2008, the auditors raised various concerns pertaining to Xtron ([33]-[34]). These concerns may be summarized as follows. First, the value of the Xtron bonds might have to be written down or impaired given Xtron’s consistently loss-making position as well as the uncertainty of repayment. Second, CHC and Xtron might be considered related parties, and CHC would have to disclose that it subscribed for bonds in a company “in which a key employee is related to one of CHC’s Management Board members”. Third, Sun Ho was a “key player” in Xtron, so the auditors required disclosure of all transactions between Xtron and CHC. It thus appeared that as long as Sun Ho was managed by Xtron, CHC would be required to disclose this information.

Did the appellants make the necessary disclosure?

No. Instead, in these circumstances, a plan was formulated to take Sun Ho out of Xtron. Sun Ho was transferred from Xtron to another company, Ultimate Assets (“UA”), and further funds were used from the Building Fund to purchase bonds from PT The First National Glassware (“Firna”) in order to finance the Crossover.

Both UA and Firna were related to Wahju Hanafi (“Wahju”), an Indonesian businessman who was and is a loyal member of CHC. UA was fully owned by Wahju, while Firna was an Indonesian company in the business of glassware (with Wahju owing 80.4% of the shares while his father-in-law owned the remaining 19.6%). See [22] and [35]. Wahju would turn out to be an important figure in some of the key transactions (including the manner in which restitution was subsequently made).

The Firna BSA and the Secret Letter

On 7 October 2008, CHC and Firna entered into a bond subscription agreement (“the Firna BSA”). In short, CHC purchased S$24.5 million worth of bonds, at an interest of 4.5% per annum, with a maturity period of 3 years. The plan of Eng Han, Ye Peng and Serina was to use the Firna bonds to fund the Crossover in the following way: (1) CHC would pay money to Firna for the bonds; (2) Firna to transfer the money to UA; (3) UA to then transfer the funds to Justin’s company for the Crossover. See [39].

In other words, instead of the flow of funds being from CHC to Xtron (1st bond issuer / old management company of Sun Ho) to the Crossover, it became more layered as follows: CHC to Firna (2nd bond issuer) to UA (new management company of Sun Ho) to the Crossover. Essentially, Xtron was replaced with Firna and UA as intermediate corporate entities, as conduits through which the monies from CHC are to be ultimately transferred towards the Crossover.

However, there was a minor issue: Wahju’s father-in-law, who was the minority shareholder in Firna. Under the Firna BSA, there was an option for CHC to convert the Firna bonds into shares in Firna (presumably, a form of security for the monies invested). This was called a “convertibility option”. A “secret letter” was signed by John Lam on behalf of the CHC Board on 8 September 2008, before the Firna BSA was entered into, whereby CHC gave the written assurance that if CHC exercised its convertibility option, it would sell the Firna shares back to Wahju and his father-in-law for US$1. With this secret written assurance, Wahju’s father-in-law went along with the plan and signed the Firna BSA. See [40].

In other words, Firna’s shares would not in any way be affected or transferred to CHC should the Firna bonds not be repaid. The undertaking given by CHC by way of this secret letter meant that CHC, the investor, lost an additional security feature. CHC’s lawyers were never informed about, and were never asked to provide advice on, this secret letter.

From October 2008 to June 2009, a further S$11 million was transferred over 5 tranches from the Building Fund to Firna pursuant to the Firna BSA. These transfers are the subject of the third of the sham investment charges. Out of this S$11 million, about S$7.56 million was used for the Crossover and S$2.5 million was used by Wahju for his personal expenses. See [41]. The Majority would later hold that the Firna BSA was not in substance a genuine investment.

By now, i.e. from August 2007 to June 2009, a total of S$24 million had been transferred out of the Building Fund under unauthorised circumstances: (1) S$13 million under the 1st Xtron BSA; and (2) S$11 million under the Firna BSA.

A.5 “Round-Tripping” Redemptions

After a meeting on 9 April 2009 with the auditors, Ye Peng, Sharon, Eng Han and Serina decided that the Xtron and Firna bonds had to be redeemed before the end of CHC’s financial year (i.e. 31 October 2009) ([43]). The transactions pursuant to which the redemptions took place are very complicated, but to put it simply, further funds from CHC’s Building Fund and General Fund were used (from 2 October to 29 December 2009) to redeem the bonds (instead of Xtron and Firna using their own monies to repay or redeem the bonds).

Let me try to explain the “round-tripping transactions”, involving a further S$26.64 million of CHC’s funds being misused, which took place broadly in 3 tranches (see [45]): (1) S$5.8 million in early October 2009; (2) S$5.6 million in mid-October 2009; (3) S$15.24 million in November to December 2009. I will explain each set of round-tripping transactions in turn.

Tranche 10 of the SOF

First, in early October 2009, CHC transferred S$5.8 million from the Building Fund to AMAC as payment for Tranche 10 of a Special Opportunities Fund (“SOF”) administered by AMAC. This was recorded as an investment. The monies went from CHC’s Building Fund to AMAC, on to UA, then to Firna, before Firna transferred S$5.23 million back to CHC, which was recorded in CHC’s books as a partial redemption of the Firna bonds. The monies journeyed in one big circle (from CHC, and eventually back to CHC), hence, the term “round-tripping”. The new “investment” of S$5.8 million into the SOF was used to partially redeem the earlier “investment” in the Firna bonds.

Tranche 11 of the SOF

Second, in mid-October 2009, CHC transferred S$5.6 million from the General Fund to AMAC as payment for Tranche 11 of the SOF. Again, this was recorded as an investment. The monies went from CHC’s General Fund to AMAC, on to UA, then to Firna, before Firna transferred S$6.06 million back to CHC, which was recorded in CHC’s books as redemption of the remaining Firna bonds with interest. Again, the monies were round-tripped (from CHC, and eventually back to CHC). The new “investment” of S$5.6 million into the SOF was used to redeem the earlier remaining “investment” in the Firna bonds.

With the aforesaid October 2009 transactions (i.e. Tranches 10 and 11 of the SOF), the Firna bonds were redeemed (by using CHC’s own funds, rather than being repaid by Firna’s own money), to create the appearance that Firna had fulfilled its obligation to CHC. The Majority would later hold that Tranches 10 and 11 of the SOF were not genuine investments.

The ARLA

Third, after 15 October 2009, CHC signed an Advance Rental License Agreement (“ARLA”) with Xtron. Under the ARLA, CHC was to pay a total of S$53.27 million (consisting of S$46.27 million in advance rental, together with S$7 million as security deposit) to Xtron in exchange for the right to use and occupy the premises provided by Xtron for 8 years.

On 31 October 2009, an entry was made in CHC’s books whereby the bigger amount due to Xtron from CHC under the ARLA was set off against the smaller amount due from Xtron to CHC under the 1st Xtron BSA, which resulted in the “Redemption of Xtron bonds”. After the set-off, Xtron no longer owed money to CHC, but CHC still owed money to Xtron.

On 6 November 2009, CHC transferred S$15.24 million to Xtron as “Advance rental to Xtron”, with S$12 million being part payment of the advance rental under the ARLA while the remaining sum of S$3.24 million was GST for the advance rental (i.e. 7% of S$46.27 million). The monies went from CHC to Xtron, on to Firna, then to UA, and then to AMAC, before AMAC transferred S$11.48 million (comprising S$11.4 million in principal and the rest in interest) back to CHC to redeem Tranches 10 and 11 of the SOF (under which S$11.4 million was paid out from CHC to AMAC, as explained above). Yet again, the monies were round-tripped (from CHC, and eventually back to CHC).

Under the above third set of round-tripping transactions, an appearance was created that Xtron and AMAC had fulfilled their obligations to CHC (when in truth, CHC’s own money was used for such redemptions). The Majority would later hold that the ARLA was not a genuine building-related expense.

Together with the Xtron and Firna bonds, and the round-tripping transactions, a cumulative total of around S$50.64 million had been transferred out of CHC’s Building Fund and General Fund: (1) S$24 million under the Xtron and Firna bonds; and (2) S$26.64 million under the 3 sets of round-tripping transactions.

Net Result of Round-Tripping Transactions

The net result of the round-tripping transactions – parts of which were the subject of the round-tripping charges and account falsification charges – was that the Xtron and Firna bonds (totaling S$24 million in principal sums) were redeemed. Through the transactions, AMAC’s liability under Tranches 10 and 11 of the SOF (totally S$11.4 million in principal sums) was also discharged. In essence, the liability owed by Xtron and Firna to CHC under their bond subscription agreements was transferred to a liability on Xtron’s part to provide premises to CHC under the ARLA. See [46].

It appears that subsequently, pursuant to the ARLA, Xtron provided CHC with premises at the Expo for a period of time.

A.6 Events in 2010 – Termination, Investigations, Attempt to Ratify & Restitution

In January 2010, CHC acquired a stake in Suntec City. Subsequently, the ARLA was terminated on 31 March 2010. On 31 May 2010, the CAD commenced investigations and raided the offices of CHC, Xtron and some other companies as well as the residences of the appellants ([47]).

On 1 August 2010, CHC convened an EGM with the Executive Members, seeking to ratify the transactions that had taken place and which were the subject of the investigations ([48]). As will be seen below when examining the Majority’s decision, certain misrepresentations were made by some of the appellant(s) at this meeting whereby the true nature or substance of the transactions continued to be masked, and the Executive Members were misled.

On 4 October 2010, Xtron repaid CHC a total of S$40.5 million (out of which was the S$7 million security deposit) which was due as the ARLA had been terminated. Xtron appeared to have been put into funds to effect repayment through the obtaining of loans from various individuals ([49]). As set out in the Minority’s decision, the loans amounted to approximately S$30 million, and were procured from 4 individuals affiliated to the appellants or CHC, and they were detailed in an excel sheet prepared by Serina dated on 15 April 2010 as being provided by “Surhardiman”, “Labelindo”, “Roy Tirtaji” and Wahju (see [541]-[542]). The manner in which the loans were used to repay CHC under the rescinded ARLA will be discussed further when we analyze the Minority’s decision (in particular, how the Minority felt that little weight, if any, can be given to the fact of restitution).

With the facts “summarized”, we can now move on to consider what the Majority had decided in relation to the appeal against conviction.

B. MAJORITY’S DECISION ON CONVICTION (CBT CHARGES)

B.1 Issues on Appeal (CBT Charges)

5 main elements must be proved in order to make out the CBT Charges, which were brought under Section 409 of the Penal Code, against the relevant appellants ([62]), namely: (1) the relevant appellants were entrusted with dominion over CHC’s funds; (2) this entrustment was in the way of the relevant appellants’ business as agents; (3) monies from CHC’s funds were misappropriated for various unauthorised purposes in pursuance of a conspiracy to misuse CHC’s funds; (4) the appellants abetted each other by engaging in the above conspiracy to misuse CHC’s funds; and (5) the appellants acted dishonestly in doing so.

4 main issues were raised on appeal in relation to the appeals against conviction on the CBT Charges ([63]):

  • Issue 1: Whether the relevant appellants (namely, John Lam, Ye Peng and Kong Hee) were entrusted with dominion over CHC’s funds for the purposes of the CBT Charges ([65]-[87]);
  • Issue 2: Whether the relevant appellants (namely, John Lam, Ye Peng and Kong Hee) were entrusted with the monies in the Building Fund and General Fund “in the way of [their] business as … agent[s]” under Section 409 of the Penal Code (see [88]-[122]);
  • Issue 3: Whether there was “wrong use” of CHC’s funds [123]-[170]);
  • Issue 4: Whether the appellants had acted dishonestly ([171]-[315]).

In relation to Issue 1, the Majority held that the relevant appellants had been entrusted with dominion over CHC’s funds ([87]). The fact that innocent directors on the CHC Board had, together with the guilty director(s), approved the plans devised and proposed to them by the appellants, merely facilitated the commission of the breach of trust, and does not absolve the appellants of criminal liability ([87]).

In relation to Issue 2, the Majority held that the Section 409 of the Penal Code must be interpreted to cover “professional agents” and not simply “casual agents”, that the relevant appellants were “casual agents”, and that therefore they should only be convicted under the offence of CBT simpliciter under Section 406 of the Penal Code, rather than Section 409. This will be analyzed further in Episode 2 of these series of blog posts.

For the rest of this article, we will examine the Majority’s decision on Issues 3 and 4 in detail.

B.2 Issue 3 – Whether there was “Wrong Use” of CHC’s Funds (Sham Investment Charges)

For the CBT Charges to be made out, it must be proven that the appellants had misappropriated the funds (either from the Building Fund or the General Fund) that were entrusted to them ([123]). Misappropriation is defined as “the act of setting aside or assigning to the wrong person or wrong use” ([123]).

On the issue of whether there was “wrong use” of CHC’s funds with respect to the sham investment charges, this ultimately turns on whether the Xtron bonds and Firna bonds constituted genuine investments ([126]). To the extent that the Xtron and Firna bond transactions cannot be properly characterised as investments, any drawdown on the Building Fund for the purpose of the bonds would constitute a “wrong use” of the Building Fund ([130]).

Xtron bonds not genuine investments

With respect to the Xtron bonds (see [132]-[144]), the Majority held that it was not in substance an investment (at [143]):

“In the light of all the above, we agree with the Judge that the Xtron bonds were not in substance investments which the appellants were legally authorised to use the funds in the [Building Fund] for. The Xtron bonds were in effect a means through which the appellants could take out funds from the [Building Fund] to use on the Crossover. The Judge was thus correct to have found that the use of the funds in this manner was an unauthorised or “wrong use” of the monies from the [Building Fund].” [Emphasis in bold added]

In arriving at this conclusion, the Majority considered the following factors, amongst others: (1) Xtron was controlled by some of the appellants; (2) It is doubtful whether the interest rate of 7% per annum for S$13 million was a commercially justifiable rate of return commensurate with the risk CHC was taking on (seen against the background that someone else was only willing to lend the smaller sum of S$9 million to Xtron for the purpose of funding the Crossover at a far higher interest rate of 16% per annum); (3) At the time the 1st Xtron BSA was entered into, Xtron was not in a sound financial state and had been in a loss-making position for a number of years; (4) No due diligence or cash flow projection was properly done on CHC’s behalf before the execution of the 1st Xtron BSA to determine if Xtron was financially sound or if the bonds could be repaid with interest on maturity; (5) The Appellants, not Xtron, bore the responsibility of ensuring that the bonds could be redeemed. See [139]-[141].

Firna bonds not genuine investments

With respect to the Firna bonds, the Majority agreed with the Judge’s findings, i.e, they were not an investment ([146]-[147]). The Majority held that the “true nature of the transaction was a loan of monies to Kong Hee and the other appellants, which they would use on the Crossover and for other purposes (eg, extending a loan of [S$2.5 million] to Wahju)” ([147]). The Majority went on at [149] to hold that:

“… the reality was that the Firna bonds were devised as a means through which the appellants could obtain monies from the [Building Fund] to fund the Crossover, as well as extend a loan to Wahju presumably so as to secure his cooperation. Put simply, the appellants were working backwards to ensure that they could obtain funds from the [Building Fund] for the financing of the Crossover.”

See [145]-[155] for the factors considered by the Majority in arriving at this conclusion, and holding that the true substance of the Firna bond transaction was not an investment, but instead:

“… the appellants wanted a method of extracting funds from the [Building Fund] for the Crossover and were content to effect it through any means possible.”

In the circumstances, the Majority agreed with the Judge that there was “wrong use” of the monies from the Building Fund, and that the drawdowns under the Firna BSA constituted a misappropriation of the monies in the Building Fund ([145]).

B.3 Issue 3 – Whether there was “Wrong Use” of CHC’s Funds (Round-Tripping Charges)

With respect to the round-tripping charges, the Majority held that they were “part of a whole plan devised by Eng Han, Ye Peng, Serina and Sharon to redeem the Xtron and Firna bonds” ([161]). The Majority’s comments on these transactions were damning (161]):

“In our judgment, when considered on the whole, the round-tripping transactions were nothing less than a perpetuation of a fraud, or at the very least, a devious scheme to use the funds in the [Building Fund] and the [General Fund] for unauthorised purposes… The disbursements of funds pursuant to that scheme amounted to a misappropriation of those funds.” [Emphasis in bold added]

See [156]-[163] for the factors considered by the Majority to hold that Tranches 10 and 11 of the SOF were not a genuine investment (since the appellants knew that CHC would not obtain any genuine financial return from Tranches 10 and 11), and were hence a “wrong use” of the funds. As the Majority held at [162], these transactions were motivated by a desire to get the Firna bonds off the accounts given that the auditors had asked questions:

“These transactions were clearly not motivated or dictated by any genuine investment objectives. On the contrary, the reason for these transactions was to redeem the Firna bonds so as to get them off CHC’s accounts, as questions in relation thereto had been raised by the auditors.” [Emphasis in bold added]

In relation to the ARLA, the Majority found that it was “merely a mechanism which the appellants used to enable funds to be transferred from CHC to Xtron” ([165]). It was not a “commercially justifiable agreement that provided CHC with fair value for the sums that it contracted to pay thereunder” ([168]). The payment of S$15.2 million (which included a GST component of S$3.2 million) to Xtron for the purported purpose of advance rental constituted a “wrong use” of the Building Fund because the whole arrangement was “not genuine” ([169]). The Majority went on to chastise the relevant appellants in relation to the GST component (at [169]):

“Indeed, we find it egregious that the appellants were willing to allow CHC to incur a GST expense of $3.2m on the ARLA for the purpose of conveying the impression that the ARLA was a genuine agreement, despite their knowledge that it was merely a tool to extract funds from CHC to effect repayment of the Firna and Xtron bonds.” [Emphasis in bold added]

In the end, the Majority used strong words when they agreed fully with the Judge that (see [170]):

“… the series of round-tripping transactions was nothing less than the perpetuation of a charade which involved the appellants using CHC’s own money to create the impression that other entities (ie, Firna, AMAC and Xtron) had fulfilled their obligations to CHC.” [Emphasis in bold added]

To summarize, the Majority found that there was “wrong use” of CHC’s funds with respect to the Xtron bonds, the Firna bonds, and the round-tripping transactions.

B.4 Issue 4 – Whether the Appellants had Acted Dishonestly (Disclosure to Third Parties)

Next, the Majority considered whether the Appellants had acted dishonestly. The pertinent question, in the assessment of dishonest in a CBT charge, is “whether the accused intended to do an act that would cause wrongful gain or wrongful loss to another in circumstances where he knew that he was not legally entitled to do that act” ([184]).

The appellants argued that they had disclosed the transactions to, and sought the advice of, the auditors and lawyers for the Xtron and Firna bonds and the round-tripping transactions, and that they had informed the CHC Board of the round-tripping transactions – and they were therefore not dishonest ([185]). The Majority found this argument unmeritorious.

No Full Disclosure to Auditors and Lawyers (Xtron)

The appellants failed to give their lawyer the full picture with respect to the Xtron bonds (see [189]). Similarly, the auditors were given the impression that Xtron and CHC were independent entities, but the Majority had no doubt that Xtron’s appearance of independence was a false one and that Xtron was in reality at all material times controlled by Kong Hee, Ye Peng, Serina and Eng Han ([190]-[193]).

No Full Disclosure to Auditors and Lawyers (Firna)

The Majority agreed with the Judge that two crucial pieces of facts were not revealed to the auditors and lawyers, i.e. that Kong Hee and the other relevant appellants treated the monies lent to Firna as theirs to use, and that Firna and Wahju did not bear the responsibility of repaying CHC ([194]). After assessing other factors ([195]-[198]), the Majority held that (see [199]):

“Not only did the appellants fail to heed the advice of the lawyers when they did receive it, they also painted a misleading version of the transaction to the professionals.”

Round-tripping transactions

The Majority held that it was clear from the evidence that the appellants did not inform the professionals of the full details of the round-tripping transactions or the fact that the various transactions were designed as part of an overarching plan to redeem the Xtron and Firna bonds ([200]-[202]).

In addition, the mere fact that the CHC Board had approved an earlier version of the round-tripping transactions is hardly adequate for the Majority to conclude that the appellants must be believed they were legally entitled to carry out the round-tripping transactions. This is because at no time was the proposition that the funds for redemption of the Firna bonds would originate from CHC itself placed before the CHC Board for approval, and secondly, the fact that false information was given to the CHC Board, that the auditors and lawyers had been consulted and did not raise any issues with the round-tripping transactions, meant that the approval was obtained on a false premise. See [205].

In summary, the Majority held that the “withholding of crucial information from the professionals says it all” ([206]).

B.5 Issue 4 – Whether the Appellants had Acted Dishonestly (Each Individual’s Role & Intention)

The Majority then examined each appellant’s role and intention, in particular, whether each appellant could be said to have engaged in a conspiracy to commit the offence of CBT, and whether they can be said to have acted dishonestly ([208]). See generally [208]-[315].

 (1) John Lam

The Judge had found that John Lam, who held key positions of financial responsibility such as being the Investment Committee chairman and an Audit Committee member, was the “inside man” of the appellants from within CHC’s trusted inner circle ([210]).

Xtron bonds: With respect to the Xtron bonds, the Majority was satisfied that John Lam was involved in the conspiracy by “drafting and assisting in the passing of the investment policy to facilitate the Xtron bond transaction” ([214]), and that he “could not have genuinely believed that Xtron had the ability to redeem the bonds upon maturity given his knowledge of its financial status” ([216]). The Majority agreed with the Judge that John Lam, albeit having less involvement and knowledge in the transactions than Kong Hee, Ye Peng, Eng Han and Serina, “was dishonest and was part of the conspiracy to misuse the [Building Fund] to purchase the Xtron bonds” ([222]).

Firna bonds: Similarly, the Majority held that there was no basis to interfere with the Judge’s finding that John Lam was part of the conspiracy and was dishonest in respect of the Firna bonds ([231]). One important factor is that John Lam was unable to satisfactorily explain why he was willing to sign the secret letter, which sanctioned an undertaking that would cause CHC, the investor, to lose an additional security feature, without raising any objection or demanding a more formal explanation, and without consulting the CHC Board at the earliest opportunity after signing it ([228]). “His silence in this regard is telling” ([228]).

(2) Kong Hee

It is undisputed that Kong Hee was the leader of the Crossover and that the other appellants generally took the cue from his leadership ([232]). On his own account, he had oversight of the budgeting and financing of the Crossover ([232]).

Xtron bonds: The Judge relied on 5 reasons and found that “Kong Hee must have known that the Xtron bonds were not genuine investment instruments and were instead merely a means to divert funds from the [Building Fund] to finance the Crossover, and were an unauthorised use of the funds from [Building Fund]” ([232]).

The Majority dismissed Kong Hee’s two main arguments on appeal in relation to the findings on dishonesty with respect to the Xtron bonds.

First, they found that Kong Hee had obscured the true nature of the relationship between Xtron and CHC from the professionals, which reflects a dishonest state of mind (see [235])]:

“For the reasons the Judge gave… it is clear that Kong Hee knew that Xtron and CHC were not independent entities. Yet Kong Hee deliberately obscured (or had directed the other appellants to obscure) the true nature of the relationship between Xtron and CHC from the professionals… The fact that Kong Hee had misrepresented the relationship of the two entities to the auditors not only bars him from relying on the argument that he had consistently and repeatedly sought professional advice to ensure the propriety of their actions, but also reflects a dishonest state of mind.” [Emphasis in bold added]

Second, the Majority found that Kong Hee was aware that the projection (closest in time to the 1st Xtron BSA) of 200,000 units of album “would be insufficient for the redemption of the Xtron bonds” ([238]), or that at the very least, even if such projection was merely a “worst-case scenario”, Kong Hee and the others were “at the very least… indifferent to the issue of whether Xtron had the financial means to redeem the bonds because they did not regard the bonds as a genuine investment” ([239]-[240]).

In the circumstances, the Majority agreed with the Judge that “Kong Hee played a role in the conspiracy and had acted dishonestly in that he knew that the Xtron bonds were not a genuine investment and that they were not legally entitled to use the funds from the [Building Fund] for that purpose” ([241]).

Firna bonds: With respect to the Firna bonds, the Majority found that “Kong Hee must have known that the Firna bonds were also not a genuine investment but were merely a means through which funds could be diverted from the [Building Fund] to the Crossover” ([242]). As found by the Judge, “the evidence shows that Kong Hee, together with Ye Peng and Eng Han, had orchestrated the entire arrangement and the flow of the funds” ([242]). In addition, the substance of the transactions was not made known or disclosed to the professionals, the totality of the circumstances as well as the fact that the vehicle of Firna was chosen lend weight to the conclusion drawn by the Judge that Kong Hee knew that the professionals were given a misleading picture, and the appellants generally acted under Kong Hee’s instructions or acquiescence ([244]). Furthermore, during the EGM on 1 August 2010 with the Executive Members (whereby the transactions under investigation were ratified), Kong Hee “allowed Ye Peng to actively mislead the [Executive Members] on the true substance of the transactions” ([245]).

In the circumstances, the Majority found no reason to disturb the Judge’s finding that “Kong Hee was part of the conspiracy and was dishonest in respect of the transactions relating to the Firna bonds” ([246]).

(3) Ye Peng

Xtron bonds: The Judge found that Ye Peng was Kong Hee’s second-in-command, and that Ye Peng’s state of mind in respect of the Xtron bond transaction was indistinguishable from Kong Hee ([247]).

The Majority agreed that the Judge’s findings fully accord with the evidence: (1) Like Kong Hee, Ye Peng was fully aware of Xtron’s lack of independence, the true purpose of the Xtron bonds, the likelihood that Xtron would not be able to redeem the bonds on maturity, and the fact that CHC might have to provide Xtron with the funds to redeem the bonds notwithstanding that CHC itself was the bond holder; (2) Ye Peng was not only aware of this, but had taken on part of the responsibility for ensuring that Xtron would have enough funds to redeem the bonds by thinking of ways in which CHC would transfer money to Xtron under the guise of legitimate transactions; (3) Ye Peng assisted in misleading the auditors in respect of Xtron’s true relationship with CHC. See [247].

Ye Peng’s key arguments on appeal mirror those of Kong Hee, and both arguments were similarly dismissed ([248]-[249]). With respect to Ye Peng’s argument that he had sought the advice of professionals, the Majority held as follows (at [249]):

“… Ye Peng knew that the directors of Xtron were mere figureheads and that the executive decisions were in fact made by him and Kong Hee. However, Ye Peng intentionally misled the auditors not only by telling that CHC and Xtron were not related parties but by going further to tell them that Xtron was “independent” from CHC… his repeated attempts to obscure the truth from the auditors reveal a dishonest state of mind.” [Emphasis in bold added]

In the circumstances, the Majority held that there was no basis to disturb the Judge’s finding that “Ye Peng was part of the conspiracy and was dishonest in respect of the transactions pertaining to the Xtron bonds” ([250]).

Firna bonds: With respect to the Firna bonds, the Majority held that “Ye Peng knew that the Firna bonds were not a genuine investment and therefore they were not legally entitled to use the funds in the [Building Fund] for that purpose” ([251]). His dishonest intentions and knowledge that they were not legally entitled to use the funds in that manner may be inferred from his misleading statements to the auditors and lawyers ([252]-[253]), and additionally, Ye Peng was “also the person who had misrepresented the substance of the Firna bond transaction to the [Executive Members] at the EGM on 1 August 2010” ([253]).

In the circumstances, the Majority found no reason to disturb the Judge’s finding that “Ye Peng was part of the conspiracy and was dishonest in respect of the transactions pertaining to the Firna bonds” ([254]).

Round-tripping transactions: With respect to the round-tripping transactions, Ye Peng was “privy to the whole scheme”, and played a “key role in overseeing and approving the plans which the other appellants came up with” ([255]). The Majority agreed with the Judge that Ye Peng was clearly involved in the conspiracy to carry out the round-tripping transactions to create an impression that the Xtron and Firna bonds had been redeemed, and that he knew that: (1) Tranches 10 and 11 of the SOF were not genuine investments; and (2) the payment of S$15.2 million under the ARLA was not in truth for advance rental ([256]). The Majority found that “Ye Peng had intentionally misrepresented the state of affairs to the CHC Board in an effort to obtain its approval for the proposed transactions” ([259]).

In addition, based on a “highly incriminating” series of Blackberry messages between Sharon, Ye Peng, Eng Han and Serina (see [260]), Ye Peng knew that they could not and would not be above-board with the auditors about the true nature of Tranches 10 and 11 of the SOF, which shows that he knew that they were not genuine investments and strongly indicates that he knew that they were not legally entitled to carry out those transactions ([261]). Finally, after investigations into the transactions had commenced, Ye Peng had misrepresented to the Executive Members at the EGM held on 1 August 2010 that the “advice of lawyers and other professionals” were relied on “at every step” ([262]). On this point, the Majority held as follows:

“That Ye Peng continued to mask the true nature of the Xtron and Firna bond redemption even after investigations had commenced in an effort to obtain ex post facto ratification of the transaction casts serious doubt on his credibility.”

The Majority concluded that the Judge was “fully entitled to find that Ye Peng’s participation in the round-tripping conspiracy was dishonest and we see no reason to disturb the Judge’s finding in this regard” ([263]).

(4) Eng Han

It is undisputed that Eng Han was the Crossover’s financial specialist, and was involved in the financing of the Crossover ([264]).

Xtron bonds: He was in fact the one who devised the plan to use the Xtron bonds as a means of funding the Crossover ([264]). He also testified candidly in court that “Xtron was controlled by Kong Hee and Ye Peng” ([265]).

On appeal, Eng Han argued that he had been misled and deceived by Kong Hee and the rest to think that Sun Ho’s album sales were very good, which caused him to have the reasonable belief that her album in the US (from which the funds for the redemption of the Xtron bonds were to come) would be profitable ([266]). However, before the 1st Xtron BSA was signed, Eng Han knew of the projection (E-1) that only 200,000 albums could be sold and knew that Xtron would have difficulties in redeeming the bonds, and that even if there were other more optimistic projections, he was at least indifferent to whether Xtron had the financial means to redeem the bonds ([267] and [240]).

The Majority was satisfied that Eng Han “knew that the Xtron bonds were not a genuine investment” given that there was no proper assessment done of the potential financial returns (which ought to correspond to the risk undertaken), the appellants had blatantly disregarded the fact that Xtron had a poor track of profitability, and had even recognised Xtron as an “insolvent company” ([269]). In addition, the Judge had found that Eng Han had “participated in conveying misleading information” to the auditors, the lawyers and one other member of the Investment Committee, and that this reflected a dishonest state of mind on his part. This finding was not disturbed on appeal ([270]-[271]).

In the circumstances, the Majority saw no reason to disturb the Judge’s finding that “Eng Han had acted dishonestly and had conspired with the other appellants in using the funds from the [Building Fund] to enter into the Xtron bond transaction” ([272]).

Firna bonds: As for the Firna bonds, the evidence shows that “Eng Han knew that it was not a commercial transaction into Firna but was yet another mechanism for them to funnel funds from the [Building Fund] to the Crossover” ([273]). For example, in response to Wahju’s email stating that “the whole set up was more for [AMAC] or Xtron purpose and Firna is only helping to pass thru the money”, Eng Han confirmed that “… of course in the end it is us who will take care of the repayment of the bonds when it matures… just as for the crossover costs” ([275]). In addition, Eng Han was also involved in the execution of the suspicious secret letter, which was kept away from his lawyer as a “calculated move” to give his lawyer a “misleading impression of the Firna bonds” ([276]).

Looking at the evidence as a whole, the Majority saw no reason to disturb the Judge’s finding that “Eng Han was part of the conspiracy and was dishonest in relation to the Firna bonds” ([277]).

Round-tripping transactions: With respect to the round-tripping transactions, Eng Han was the “main architect” and “chief designer”, and the eventual plan was his “brainchild” ([278]). He knew that Tranches 10 and 11 of the SOF were not genuine investments (as the so-called return came from CHC itself), and that the payment of S$15.2 million under the ARLA was not a genuine building-related expense (as the bulk of the funds would be round-tripped back to CHC as repayment of Tranches 10 and 11 of the SOF) ([278]). Eng Han even admitted during trial, in his own words, that Tranches 10 and 11 of the SOF were effectively monies going out of “one pocket of CHC” and “back into the other pocket” ([279]).

The Majority agreed with the Judge’s finding that Eng Han knew that the round-tripping transactions were not legally above-board ([281]), and found no reason to differ from the Judge’s finding that Eng Han “had acted dishonestly and had conspired with Ye Peng, Serina and Sharon to commit the round-tripping offences” ([283]).

(5) Serina

Serina was the administrator of the Crossover, and was responsible for preparing cash flow statements and projections which would keep track of the expenses and anticipated revenue from Sun Ho’s planned albums ([284]).

Xtron bonds: Serina “knew that the Xtron bonds were in substance not investments, but were a way in which the appellants could obtain funds to finance the Crossover” ([285]). In this regard, she was fully aware that Xtron was controlled by Kong Hee and Ye Peng, but she assisted in obscuring the relationship between Xtron and CHC by drafting false Xtron meeting minutes to create the appearance of executive decision-making when some of these meetings did not even take place ([285]). There was also irrefutable evidence that “she had participated in misleading the auditors” ([285]). She also knew about the projection of sales of 200,000 albums, and knew that there was no realistic prospect of Xtron having sufficient revenue for the redemption ([286]-[287]).

As such, the Majority agreed with the Judge that Serina was “part of the conspiracy and had acted dishonestly in respect of the Xtron bonds” ([291]).

Firna bonds: With respect to the Firna bonds, the Judge found that Serina must have known that it was not a genuine investment ([292]). Serina argued on appeal that she had genuinely regarded the Firna bonds as an investment. However, the Majority held that there was ample evidence which shows that she knew that Wahju (and Firna) was merely a conduit, and that she was aware that the Crossover was not to be funded by Wahju’s personal monies but by the funds that came from the Building Fund to purchase the Firna bonds. In addition, she played a very active and important role in arranging for sources of money other than Firna to repay the Firna bonds ([294]), was privy to the emails where Eng Han assured Wahju that they would take care of the repayment of the bonds, and was also privy to the suspicious secret letter ([294]). Further, Serina admitted to not having been completely honest with the auditors ([295]).

In these premises, the Majority agreed with the Judge that Serina “did not believe that the Firna bonds were a genuine investment and had acted dishonestly in causing CHC to transfer funds from the [Building Fund] to Firna for an unauthorised use” ([296]).

Round-tripping transactions: With respect to the round-tripping charges, the Majority agreed fully with the Judge that Serina had “acted dishonestly” ([303]).

(6) Sharon

Sharon’s position differs from the other appellants in at least two ways. First, she was an employee and was never a board member or part of the leadership in CHC ([304]).

Round-tripping transactions: At the time of the round-tripping transactions, she was the head of CHC’s finance department, a position that she took over from Serina in January 2008 after joining CHC’s finance department in January 2000. Second, she was not prosecuted for the sham investment charges, and it was not the Prosecution’s case that she knew that the Xtron and Firna bonds were not in substance investments. See [304].

However, Sharon knew that Tranches 10 and 11 of the SOF were not genuine investments, and that the payment of S$15.2 million under the ARLA was not a genuine building-related expense ([307]). The Majority, like the Judge, found Sharon’s “willingness to selectively record events at CHC’s meetings highly disturbing”, which included the retrospective insertion (into the minutes of 2 meetings) of the finalised advance rental figures under the ARLA, even though such figures were only finalised at a later stage ([309]). Other pieces of evidence were also considered (see [306]-[310]), and the Majority concluded that there was no reason to depart from the Judge’s finding that Sharon “was part of the conspiracy and had acted dishonestly” ([311]).

(7) Concluding observations in relation to dishonesty

Lastly, the appellants also argued that they could not be dishonest since the Judge had also found that they had “acted in what they considered to be the best interests of CHC” ([312]). The Majority accepted that “the appellants had acted in what they considered to be the best interests of CHC” ([313]).

However, motive must be separated and analysed in contradiction to intention ([313]). As the Majority held at [180]:

“One may have the most admirable of motives, but if the aim underlying that motive was achieved through unlawful means, this does not exonerate the accused from criminal liability. To put it simply, why an accused committed an offence is not relevant to what he thought or knew at the material time the offence was committed.”

All that is required for the Prosecution to prove beyond a reasonable doubt was that “the appellants intended to do an act that would cause wrongful loss to CHC in the knowledge that they were not legally entitled to do that act”. The Majority was satisfied that each of the appellants possessed the requisite dishonest intention for the purposes of the CBT Charges ([313]).

The Majority ended by stated at [314] that:

“The appellants may have had legitimate reasons for discretion and discreetness, but this would not give them carte blanche to carry out transactions on CHC’s behalf in any manner they deemed fit…

… The totality of the evidence shows that [the appellants’] discreet behaviour was motivated not only by a fear of negative publicity in the aftermath of the Roland Poon incident, but also because they knew that the transactions were not above-board and properly authorised.”

One further thought on this point. The appellants attempted, ex post facto, to get the Executive Members to ratify the transactions at the 1 August 2010 EGM, which took place after the CAD investigations had commenced. Given that various misrepresentations or concealment were made at this EGM by some of the appellant(s) (e.g. Kong Hee had allowed Ye Peng to actively mislead the Executive Members) pertaining to the true nature or substance of at least some of the transactions sought to be ratified (as explained above), the validity of the resolutions passed at this EGM are in serious doubt. In other words, it cannot be said that the transactions were approved by the members of CHC, let alone by every donor who has contributed to the Building Fund or the General Fund over the years. In the final analysis, it cannot be doubted that there were unauthorised misappropriations of massive amounts of church funds / donations.

B.6 Conclusion in Respect of the CBT Charges

As such, the Majority affirmed the Judge’s findings of fact concerning the appellants’ participation in the conspiracy and their dishonest mens rea ([315]). However, as the Majority held that Section 409 of the Penal Code covers only professional agents, they reduced and convicted the appellants on the reduced charges of Section 406 of the Penal Code ([315]).

C. MAJORITY’S DECISION ON CONVICTION (FALSIFICATION CHARGES)

With respect to the account falsification charges involving Eng Han, Serina, Ye Peng and Sharon, the Majority affirmed the Judge’s conviction of these appellants, and dismissed their appeals against conviction on these charges (see [316]-[341]).

D. CONCLUSION ON APPEALS AGAINST CONVICTION

In summary, the Majority had affirmed virtually all of the Judge’s findings of fact concerning the appellants’ participation in the conspiracy and their dishonest mens rea. Save for the reduction of the charges due to the “professional agent” point (for which the Prosecution has filed a criminal reference to the Court of Appeal on questions of law of public interest), the Appellants’ appeals against their conviction were dismissed entirely.

In Episode 2, we will consider Issue 2, i.e. why the Majority had decided that Section 409 of the Penal Code covers only professional agents and that the appellants were not professional agents, as well as to examine the Majority’s decision on sentencing, which in totality helps us to better understand why the sentences were significantly reduced on appeal, despite the Majority’s affirmation of the Judge’s decision below on the “wrong use” of CHC’s funds, the appellants’ participation in the conspiracy and their respective dishonesty.

The usual disclaimer: All opinions expressed on www.singaporelitigationlawyer.com are entirely my own. Importantly, my opinions do not constitute legal advice and you should definitely formally engage a lawyer to confirm, vary or refute my views.

To Sue or Not to SueDemystifying Litigation in Singapore@www.singaporelitigationlawyer.com © Dominic Chan, a Singapore litigation lawyer. All rights reserved.

The picture above is taken from https://commons.wikimedia.org

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s