Facing keen competition in the industry and pressure to secure loan business in the bank, a bank staff may cross the line. Over reliance on sales staff to provide borrowers’ information without counter checks would increase the risk of manipulation.

The Sales Executive, an employee (agent) of the finance company (the principal), intended to deceive/mislead the company by using invoices which contained false information. Notwithstanding he did not receive any bribes, he might have contravened Section 9(3) of the Prevention of Bribery Ordinance (POBO).

The Sales Executive, machine supplier and SME owners could be charged with fraud against the finance company, or conspiracy to defraud the finance company.

The Sales Executive rationalized his acts by regarding his practice as helping the finance company to secure more loan business, at the same time helping the SMEs to overcome difficult situations. However, the fact that customers had to obtain higher loans through a fraudulent means suggested that they are high risk customers. Granting them higher loans increased the risk exposure of the finance company.

Approving a higher loan based on inflated collateral value or bogus transactions might also result in an unusual increase in bad debt cases, and internal review by the finance company would detect the irregularity involved.

Banks should adopt good control practices such as setting up a central team to conduct vigilant due diligence on high credit risk customers, conducting independent assessment of machine suppliers involved in HP transactions to ascertain their reliability, gauging reasonableness of the sales prices on invoice, and conducting regular assurance check to detect irregularities/unusual trend.

Under Section 9 of the Prevention of Bribery Ordinance (POBO), it is an offence for any agent, without the approval of his principal, to solicit or accept an advantage as a reward for or an inducement to perform an act in relation to his principal’s affairs or business. The offeror will also be guilty of the offence. 

In this case, the manager, an employee (agent) of the finance company (the principal), accepted commission (advantage) from the property developer as a reward for favourably recommending the loan proposal (an act in relation to the finance company’s business). Under the POBO, the manager was considered to have accepted the advantage even his wife received the advantage on his behalf.  Hence, the manager might have contravened Section 9(1) of the POBO for accepting bribes. The property developer might have contravened Section 9(2) of the POBO for offering bribes.

On the other hand, the manager might have breached Section 9(2) of the POBO for bribing the property valuer (agent of the property valuation agency) to inflate the value of the collateral, while the latter might have contravened Section 9(1) of the POBO for accepting bribes from the manager. They also might have contravened Section 9(3) by each submitting false, misleading valuation reports to their employers.

The manager might have also breached the Banking Ordinance which prohibits any employee of an authorized institution to receive any gift, commission etc. for his own personal benefit or advantage or for that of any of his relatives, for procuring or endeavouring to procure for any person any advance, loan, financial guarantee or credit facility from that institution.

The relationship manager (agent) might have contravened Section 9(3) of the Prevention of Bribery Ordinance (POBO) by using a false document (forged customer instruction) to deceive the bank (the principal).  He might also be liable of a series of other crimes including theft, fraud and forgery.

Some elderly customers may be vulnerable to exploitation as they may trust bank staff members (e.g. the relationship manager) to execute transactions on their behalves (e.g. signing blank instruction forms or giving their e-banking passwords) so as to save physical visits to the bank.

The practice of keeping account advices for customers to collect later on is vulnerable to falsification or concealing irregularities.

Furthermore, inactive, dormant accounts with a large balance or credit line are subject to the risk of exploitation, as the account owners may not monitor their accounts properly or may have changed addresses without informing the bank.

Banks should devise control measures to protect dormant accounts from possible abuse and to avoid fraud. These control measures may include alerts on unusual fund movements, verification and confirmation with the customers, requirements for supervisors’ review/ override for transactions on inactive accounts, and requirements for identification of account holder when making withdrawals in person.  Moreover, implementing requirements for staff members to take annual vacation leave, arranging and introducing a backup/ second officer to vulnerable customers, and practising staff rotation (say, on a three-year basis) may also help detect irregularities and misconduct at an early stage.

Laura might violate the Code of Conduct[1] of the bank by taking up a directorship outside the bank without her employer's prior permission. On this issue, her directorship in Ricky's company gave rise to a conflict of interest with her official duties, so she might have breached the bank’s Code of Conduct for approving facilities to the company in which she is interested. Moreover, she might commit an offence of conspiracy to defraud if she was aware of the fraud committed by Ricky and assisted him in the approval process.

[1] According to HKMA’s Supervisory Policy Manual CG-3, each authorized institute (AI) (bank) should develop its own Code of Conduct containing certain minimum conduct requirements which include “no member of staff should take up any directorship, employment or part-time commercial duties, whether paid or unpaid, outside the AI except with prior written approval as required by the Code of Conduct.” The Code should also require that “no member of staff should grant credit to himself, his relatives or companies in which he or his relatives have a personal interest.”

It is evident that Howard had received an unsatisfactory answer from the Managing Director.  Assuming his findings were accurate, he should present a report to the other directors of the company, setting out the details of his findings of the wrongdoings of Mr Szeto, the Purchasing Manager.

Mr Szeto might have committed offences under Section 9(3) of the Prevention of Bribery Ordnance (POBO) for using false procurement documents to deceive the company and claiming private expenses through company’s accounts. He might have also breached Section 9 of the POBO for accepting secret commissions from suppliers without the approval from the company. 

If the board did not take appropriate action to follow up on the case, Howard should consider reporting the matter to the appropriate authorities after seeking legal advice.  While maintaining confidentiality of company matters was an important consideration, Howard had to weigh this consideration against the public interest in disclosing such matters to the appropriate authorities.

Howard might consider resigning from the company in the worst case scenario that he no longer had confidence in the integrity of those charged with governance of the company.

Leonard could refer to the ETHICS PLUS ethical decision making model in solving his ethical dilemma at work. The following factors should be taken into consideration when identifying viable alternatives and choosing the best course of action:

1. Any violation to his professional, industry specific, or company code of conduct?

2. Is it against the Law?

3. Does it correspond with his self-values such as responsibility, fairness and honesty?

4. Can he disclose his decision to others openly and honestly without misgivings?

As far as professional conduct is concerned, Leonard should observe the fundamental principles of integrity, professional competence and professional behavior and comply with the Code of Ethics for Professional Accountants (HKICPA Code) when carrying out his duties as the accounting manager.  As the company policy stated very clearly that padding travel expenses was strictly prohibited, he should perform a guardian role and report any non-compliance to the management. He shall discuss with his immediate superior or a higher authority in the company, take appropriate steps to rectify or mitigate the consequences of the non-compliance, and decide whether it should be disclosed to the external auditor.

Moreover, it is an offence under Section 9(3) of the Prevention of Bribery Ordinance (POBO) for any employee to use false documents / receipts / account records with an intention to deceive the employer.  Customary behavior or ignorance of law is no defence. Department heads might have committed the above offence for using false expense vouchers and invoices to deceive the company. They might also have committed a criminal offence of deception contrary to Section 17 of the Theft Ordinance.

Professional accountants have a guardian role in safeguarding the governance of the company and protect the interests of different stakeholders. They should take remedial actions to help the company foster an ethical culture and enforce any related policies.

Financial Projection for Listing

Surely Patrick should handle the financial estimates and anticipated sales growth meticulously.  He should document his bases of assumptions and agree those with the Managing Director.  All these would be reviewed by the merchant bank which sponsored the listing as well as the reporting accountant, and the eventual delivery of the forecasts would be a matter of public and regulatory scrutiny once the company got listed.  Although the Managing Director did not bother which accounting method to use, Patrick should ensure that the accounting method followed all applicable Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and interpretations issued by the Hong Kong Institute of Certified Public Accountants.

Managing Director's Request for Manipulation of Management Accounting Data

Patrick should explain to the Managing Director that, first of all, a wilful act of manipulation of accounting data is a criminal offence.  Secondly, accounting information presented to banks would most likely be audited.  Once the banks realised that there were significant discrepancies between management accounting data previously presented and the audited accounting data, they would ask for explanations which would well call into question the credibility of the company.  In the worst case, banks could withdraw financial support to the company.

Request for a Cheque by the Assistant to General Manager

It would be a breach of the Section 9(3) of the Prevention of Bribery Ordinance (POBO) if the General Manger used false document e.g. false reimbursement records, to deceive his company. Furthermore, if the cheque payment was offered by the General Manager to the Mr Wong as an advantage in disguise to induce or reward for latter’s assistance in granting credit facilities to the company, both the General Manager and Mr Wong would breach Section 9 of the POBO.

Patrick should report the matter to the Managing Director and explain the legal consequences of being involved in such an act.  Patrick should take the opportunity to urge the Managing Director to issue a set of code of conduct to strengthen internal control of the company. He should report to the ICAC if corruption was suspected.

Offering of ‘Valuable Information'

The valuable information provided by Benny is likely to be insider information which, if used to deal in listed securities, could have severe legal consequences.  Patrick should make it clear to Benny that his evaluation of the banks was done in an objective manner and there would be no need for Benny to reciprocate with any 'gift' as a result of OPQ bank being appointed.  If Patrick's dinner with Benny is no more than a social entertainment, Patrick does not need to avoid it.  If by accident Patrick had heard of the valuable information from Benny but he did not deal, counsel nor procure other persons to deal in the securities, he would not breach the insider dealing provisions under the Securities and Futures Ordinance.