Singapore's High Court underscores management's duty to uphold ethical decisions
Singapore's High Court recently dealt with a case involving fraudulent practices in a company's financial operations, raising important considerations for corporate governance and employee conduct.
The case centered around a series of deceptive transactions orchestrated by high-ranking executives, which ultimately led to criminal charges.
While the details are intricate, the core issues revolved around the misuse of financial instruments and the responsibilities of company leaders in maintaining ethical business practices.
Company’s financial troubles
The case involved a timber flooring company and its supplier, whose long-standing business relationship spanned 15 to 20 years. The timber flooring company's CEO and founder, along with the supplier's managing director, became embroiled in a scheme to obtain bank loans through fraudulent means.
At the heart of the matter were five charges of cheating against the CEO, who was accused of deceiving banks with false invoices and delivery orders to secure loans totalling over $2 million.
The supplier's managing director faced charges for abetting these actions. The timber flooring company had post-shipment invoice financing facilities with three banks, which allowed them to obtain loans to pay suppliers after the supposed purchase and delivery of goods.
The court heard how the company submitted applications for invoice financing to various banks between September 2012 and March 2015, using supporting documents that did not represent genuine transactions.
This practice allowed the company to obtain loans without actually receiving the timber described in the documents. The banks would disburse money directly to the supplier based on these fraudulent applications.
The defence’s arguments
The CEO's defence team argued that there was no deception of the banks, presenting two main arguments:
- The "Consolidated Invoice Defence" claimed that some documents, while inaccurately worded, represented genuine consolidated past transactions between the timber flooring company and the supplier.
- The "Earmarking Defence" suggested that for certain charges, the timber described in the documents existed and was "earmarked" for the company, even if not physically delivered. The defence claimed this was sufficient for obtaining post-shipment financing.
However, the court found these arguments unconvincing, noting that the supporting documents were entirely fictitious and created solely to obtain financing from the banks.
The court pointed out that the documents lacked essential details like pallet numbers and purchase order numbers, which would have been present in genuine transactions.
The supplier's side
The supplier's managing director claimed he lacked the intent to aid in cheating the banks. His defence argued that he was unaware of how the invoices were prepared or that they would be used for improper financing.
They also contended that the payments were recorded as deposits and used for legitimate business transactions between the two companies.
The court, however, found evidence that the managing director had instructed his employee to prepare fictitious invoices and was aware of their purpose. His police statement revealed knowledge of the scheme:
"Actually our invoice number don't start with 'TT-', it starts with 'A'. All invoice that start with 'TT' was specially prepared for JPS to get financing from the bank, because they need an invoice from us to get financing from the banks."
The court's decision
The High Court ultimately dismissed the CEO's appeal against his conviction and sentence for the cheating charges. The court enhanced the CEO's aggregate sentence from 36 months' imprisonment to 44 months' imprisonment, citing the need for deterrence in cases involving the misuse of financial instruments.
The court emphasised the importance of preserving the integrity of financial systems, stating:
"It is clear that general deterrence is the primary sentencing consideration in cases, such as the present, which entail the misuse of a financial instrument or facility which threatens the conduct of legitimate commerce."
Additionally, the court allowed the prosecution's appeal and convicted the CEO of an additional charge under the Companies Act for providing illegal financial assistance in connection with a share acquisition.
This charge related to the use of fraudulently obtained funds to finance the purchase of shares in the company's holding company during its initial public offering.
The supplier's managing director, initially acquitted, was also convicted on appeal for abetting the cheating offences. The court found that he had facilitated the commission of the crimes by instructing his employee to prepare fictitious documents and possessed knowledge of their essential elements.
In its conclusion, the court highlighted the seriousness of the offences:
"The credit extended by banks is a vital lifeline for businesses. I agree with the prosecution that a deterrent sentence is warranted to prevent offences like the present from pervading Singapore's financial ecosystem, which may lead to banks imposing stricter rules of compliance or withdrawing their trade financing services entirely."
This case serves as a reminder of the legal and ethical responsibilities placed on company executives and the severe consequences of engaging in fraudulent financial practices.
