Fighting the good fight

Hong Kong remains one of the least corrupt places on the planet, according to Transparency International. But it wasn’t always so.

A little over a decade after the British occupied Hong Kong in 1839 during the First Opium War, the colony suffered its first big corruption scandal. At his 1857 trial, American pirate Eli Boggs claimed that the territory’s secretary of Chinese affairs Daniel Caldwell had been in cahoots with the other pirates to create a very profitable protection racket. The scandal became known as the “Caldwell Affair,” and its namesake was accused of all manner of crimes, including being a brothel owner and a pirate himself. True or not, those allegations were quickly imprinted in the public’s imagination. The city quite rightly acquired notoriety for vice, given the thriving opium trade at the time. (See “The American pirate who kicked off one of Hong Kong’s earliest major political scandals,” by Joshua Berlinger, CNN, Dec. 22, 2020, and “Flagrant harbour: the sordid affair that cemented Hong Kong’s reputation for vice and corruption,” by Stuart Heaver, South China Morning Post Magazine, Feb. 22, 2014.)

By the time Tony Kwok was born in Hong Kong, corruption and other types of crime were still very much part of the landscape. But the 72-year-old former deputy commissioner of the city’s legendary graft-fighting agency considers himself very fortunate, as the circumstances of his birth molded him into the widely respected anti-corruption expert he is today.

“Hong Kong was very corrupt when I was born and grew more and more corrupt as I grew older,” Kwok tells Fraud Magazine, remembering how in his youth the police would turn a blind eye to opium dens and illegal gambling joints on street corners. “But when I say I am lucky, it’s because I was able to witness and participate in Hong Kong’s transformation.”

In the 1960s and 1970s, corruption among public officials was widespread, organized and out in the open. In return for regular bribes from taxi drivers, the traffic police distributed labels with easily recognizable images of tigers or pigs for the drivers to stick on their front windscreens, signaling to fellow officers that they could violate traffic rules and parking bans as they pleased.

Yet the traffic police weren’t the only corrupt group. Well-organized syndicates seeking bribes were pervasive throughout government agencies at the time, impacting the everyday lives of Hong Kongers, often in horrible ways. Corruption was commonplace whether it was tipping the fireman to turn on the water hose or providing the ambulance driver with some money before they would pick up a sick person.

Perhaps even worse, corruption extended to the building of subsidized housing for the poor, who had little option but to live in badly constructed high-rise buildings often under the threat of collapse. “These were the conditions in Hong Kong in the 1970s,” says Kwok. (See “Hong Kong’s Fight Against Corruption Has Lessons for Others,” by Anna Wu, Hong Kong Journal.)

Corruption in Hong Kong became so corrosive during that decade that Hong Kongers took to the streets in mass demonstrations after Peter Godber, the then-chief superintendent of police, fled to the United Kingdom in 1973 when he came under suspicion for corruption. This marked a turning point for the colony and Kwok. The following year the government set up the Independent Commission Against Corruption (ICAC), and in 1975, Kwok joined the anti-corruption agency, which is credited with transforming Hong Kong into a relatively corrupt-free place that other nations hold up as a model to emulate.

“I was a young man, and like many other young men, we saw this as an opportunity and were attracted to what the ICAC recruitment called a sense of mission,” he says.

A world of experience

Kwok has been fighting corruption ever since he joined the ICAC, working his way up from a junior investigator to become the deputy commissioner and head of operations, the first Asian to hold this top post at the agency. His experience as a corruption fighter spanned 27 years at the ICAC. Since retiring in 2002, he’s dedicated his time to sharing his knowledge with other countries around the world, where he has helped set up anti-corruption agencies from Mauritius to Indonesia.

Kwok is this year’s Cressey Award winner, which the ACFE bestows annually for a lifetime of achievement in the detection and deterrence of fraud. He was a keynote speaker at the 33rd Annual ACFE Global Fraud Conference. “I feel extremely honored, particularly when I look at all the distinguished people who have previously received the award,” Kwok says. “I feel great pride.” His experience and that of the ICAC provide some important lessons for CFEs and their work in fighting fraud. Within a few years, the ICAC was able to declare that corruption syndicates no longer existed in Hong Kong after the authorities had extradited Godber back to Hong Kong and imprisoned him. But this success came with some painful battles. (See “Empirical Knowledge for Strategies on Corruption, The Hong Kong Experience,” by Peter Allan, commissioner, ICAC, February 1992, and “Hong Kong’s Fight Against Corruption Has Lessons for Others,” by Anna Wu, Hong Kong Journal.)

The anti-corruption campaign led to the arrest of hundreds of police officers, sparking protests and an assault by several hundred officers on the ICAC headquarters in 1977.

Yet while authorities, in an effort to defuse tensions, gave in to calls for an amnesty, they also moved to clean up the police force and bring in officers committed to fighting graft. (See “The ICAC: how Hong Kong’s corrupt police force became ‘Asia’s finest’,” by Ed Peters, South China Morning Post, Nov. 2, 2019, and “1977-2017: A brief history of Hong Kong police union action,” by Ellie Ng, Hong Kong Free Press, updated March 31, 2020.)

Cleaning up

The ICAC has successfully transformed the graft-ridden city into one with a reputation of being clean, and now global institutions consistently recognize it as such. In 2021, Hong Kong ranked 12 among 180 countries on Transparency International’s corruption perception index. That’s up from the ranking of 17 it earned when the index was first launched in 1995, and above countries such as Canada, the U.S., Ireland, Australia and Japan. (See “Corruption Perception Index (CPI) – 2021,” Transparency International.) With the exception of Singapore, few countries have achieved such a transformation in so little time. The ICAC has suffered some controversies over the years. But its reputation as an anti-corruption body remains largely intact. Indeed, the ICAC’s exploits are legend locally, and the agency’s battles against corruption have been the basis of a whole series of Hong Kong films. (See “Louis Koo: We are serious about anti-corruption, the ‘integrity universe’ in the ‘small circle’ of Hong Kong films,” inf.news, May 13, 2022.)

Kwok acknowledges that the city’s success in battling corruption required primarily a strong political will, which isn’t necessarily easy to replicate in other countries. Nevertheless, he takes an optimistic view that Hong Kong’s experience proves it can be done elsewhere, and the ICAC’s strategy is a useful model to tackle corruption.

“Hong Kong demonstrates that with the political will and professional investigators, you can succeed in turning around a very corrupt nation,” he says.

Beyond political will, the ICAC’s three-pronged strategy of deterrence, prevention and education was also instrumental in not only clamping down on corruption but changing a culture where graft was part of everyday life. (See sidebar "The right strategy" at the end of the article.)

“There is no single method to tackle corruption. You need a comprehensive approach,” he says. “I like to emphasize that when you investigate a case, it’s not just a case or about only putting someone in jail. You also benefit the entire society. This is the important thing.”

Fighting corruption in the private sector

By the 1980s, the ICAC had moved from cleaning up the public sector and was faced with a growing problem of corruption and fraud in the banking sector as the island territory grew into a major financial center with a freewheeling reputation.

A global recession in the early 1980s and uncertainty over the transition of Hong Kong to Chinese sovereignty helped fuel a financial crisis. And, as often happens in these cases, the downturn exposed some of the dirty dealings that banks could more easily hide during boom times.

The ICAC was brought in to investigate after several banks collapsed. This included Hong Kong’s third-largest bank, the Overseas Trust Bank (OTB), which went under in June 1985 only to be shored up by the government. Kwok, who led a joint task force of police and ICAC officers investigating the case, soon discovered that OTB’s downfall, aside from reckless lending, stemmed from large-scale fraud and corruption.

This partly revolved around the close personal relationship between the then-chairman Huang Tiong Chan and Simon Yip, a Hong Kong businessman who acted as the Dominican Republic’s honorary consul in Hong Kong. Yip carried out a check-kiting fraud scheme: A fraudster writes a check that’s larger than the account balance they have in bank A and then deposits it in bank B. They then proceed to withdraw that amount from bank B before the check clears. (See “What Is Check-Kiting? How to Avoid Getting Scammed,” by Renee Morad, Magnify Money, updated Jan. 11, 2021.)

In this case, OTB was effectively bank B, lending the money to Yip until the check cleared, which back then took several days. Yip could keep the scheme going for multiple years as he used the extra funds to speculate in the gold market, often profitably, and hence cover any shortfall in the check amounts. Or he recycled the funds he obtained from new fraudulent checks at other financial institutions. At one point, OTB was providing Yip with $10 million daily, says Kwok. “He used the second check with a larger amount to cover the first check and used the surplus for his gold speculation, so for some time it was OK,” says Kwok. “But it wouldn’t work today as you can now transfer money in seconds.” (See “2 Held in Hong Kong Fraud,” Reuters, The New York Times, print archive, May 5, 1986.)

The fragile scheme eventually collapsed in 1982 when Yip was unable to cover checks totaling $66.8 million and they bounced spectacularly. That was enough to sink OTB. But instead of taking legal action to try to recover the losses or writing off the damage and provisioning against it for all to see, top executives fearing for their reputations conspired with Yip to cover up the scheme. To counter the losses, they manufactured false loans to ghost companies, creating what on the surface appeared to be valuable assets on their books. By the time the bank collapsed in 1985, Yip’s fraudulent activity had cost it around $90 million in additional liabilities. (See “Brothers: Knitwear Pioneer Yap Chuin-siu and Financier Simon Yip,” by York Lo, The Industrial History of Hong Kong Group, Aug. 12, 2019, and “Corruption Related Fraud in the Financial Sector,” by Tony Kwok Man wai, Financial Fraud Seminar, Shanghai, 1995.)

Race against time

In addition to the police and his own agents at the ICAC, Kwok employed accountants to unravel the complicated web of fraud. The team had to gather solid evidence, and quickly, as Yip had escaped to the U.S. and, according to Kwok’s intelligence, he was about to flee to the Dominican Republic, which had no extradition treaty with Hong Kong.

“We weren’t totally ready, but this guy was about to leave. It was one of the most difficult decisions of my career,” says Kwok. “Should I start the arrest proceedings with the risk of failing to get the extradition? I decided to take the risk.”

With just 45 days to present a reasonable, prima facie case to U.S. authorities, Kwok’s team went into full gear, working day and night in OTB’s top floor offices, where the directors once cooked up the fraud the ICAC was now investigating. “We had to keep running five or six photocopiers to get the documents, put them in folders and give them to the magistrate for their signature,” says Kwok.

The workload for the case was enormous, and finding evidence buried in thousands of bank documents was daunting. So instead of sifting through every questionable asset, the task force focused on a few big problem loans to garner evidence against the guilty parties and find witnesses who could testify. At one point, they interviewed about 60 witnesses in just two days. “This was really an auditing exercise,” says Kwok. “Sometimes when you carry out fraud investigations, you need professional support from forensic accountants.” (See “The Collapse of OTB – The Inside Story,” ICAC.)

The task force put together some 12,000 pages of documents in 23 bound volumes and hand-delivered them to the U.S. Department of Justice. That was enough to satisfy the U.S. authorities, and the ICAC was able to nab Yip in time and extradite him back to Hong Kong. It did the same with the former chairman who had also fled to the U.S., while also bringing a whole raft of C-suite executives to justice, including the Managing Director Patrick Chang Chen-tsong, who pleaded guilty to defrauding the bank of $66 million. (See “Banker Pleads Guilty,” Reuters, The New York Times, July 14, 1986, and “Foreign News Briefs,” UPI Archives, July 14, 1986.)

“There are very few cases where we prosecuted all of the senior members of a bank,” says Kwok. “It was a very successful case. In the end, they all pleaded guilty, which meant we did a good job. The evidence was strong, and they all went to jail.”

Better oversight

The case was successful in other ways too as it — along with other big bank fraud cases at the time — made the Hong Kong authorities realize they needed stronger regulatory oversight. This spurred the eventual creation of the Hong Kong Monetary Authority in 1993 and other regulatory bodies to strengthen investors’ confidence in the city’s financial system. (See “Hong Kong Bank Collapse Spurs Reformers,” by Dinah Lee, The Washington Post, June 12, 1985, and “A Quick Guide to Hong Kong’s Financial System and Services,” the Chin Family.)

Indeed, the extent of corruption and fraud in the financial sector became apparent throughout the 1980s as the ICAC helped expose more wrongdoing, including the famous Carrian case and the 1988 Hong Kong Stock exchange’s chairman Ronald Li case that were also instrumental in strengthening the financial system. (See sidebar "Corruption at Carrian" at the end of the article.)

Law enforcement accused Li of taking bribes in exchange for allowing companies to list on the stock exchange. But instead of accepting cash, he took bribes in the form of preferential shares, which typically soared in price on the first day of trading. “He was very clever,” says Kwok. “In other countries you might not have been able to prosecute him for bribery because he didn’t receive any money. He paid for the shares.”

But ICAC could arrest him under Hong Kong’s prevention-of-bribery ordinance, which had a broader definition of a bribe, including a gift, a loan, a service or a favor. “So, this was a favor and he got prosecuted for that,” says Kwok.

Li was put away for four years for his crime. Kwok saw the case as a major achievement as it resulted in changes in management at the stock exchange and the creation in 1989 of an independent watchdog — the Securities and Futures Commission. “Now Hong Kong is recognized as a well-regulated stock exchange,” he says. (See “Our role,” Securities and Futures Commission, and “Ronald Li, ‘Godfather’ of HK exchange, dead at 85,” by Josh Noble, The Financial Times, Dec. 31, 2014.)

Kwok sees this as part of the ICAC’s broader mandate of improving society’s lot and attracting investment through the elimination of corruption. “One of the purposes of investigating corruption and fraud is to maintain a level playing field,” he says. “We want to make it fair so that you don’t have to go through back doors. This is the competitive advantage of Hong Kong.”

New position, new challenges

By the 1990s, the scheduled handover from the U.K. to China in 1997 was raising concerns that the city would lose its clean reputation and become more like the mainland where corruption remained a larger problem. It was against that backdrop that Kwok was appointed as the first Chinese deputy commissioner and head of operations of the ICAC in 1996. And he wanted to prove the naysayers wrong. “My first big challenge was how to ensure that Hong Kong remained clean after the return of sovereignty,” he says.

Following the transition Kwok says he was able to ask for more resources, which he used to invest in units specializing in witness protection, forensic accounting and computer forensics, to name a few. “This was reformed on my proposal because I wanted to make the ICAC a more professional organization, and this worked well,” he says.

In the following years, the ICAC continued to investigate corruption at all levels, says Kwok, with successful convictions on senior government officials, foreign buyers and mainland businessmen, demonstrating that ICAC remained effective and Hong Kong remained clean after the return of sovereignty.

The need for anti-corruption agencies

Since his retirement, Kwok has been sharing his experience and knowledge with the aim of helping other countries battle the corruption that so damages societies and the well-being of the average person.

While some countries are openly corrupt much like Hong Kong was back in the 1970s, others aren’t so flagrant and don’t show the telltale signs of wrongdoing. But that doesn’t mean they’ve beaten corruption entirely, says Kwok. Indeed, it’s sometimes difficult to gauge the depth and seriousness of corruption unless there’s an agency like ICAC taking a proactive approach to unearth wrongdoing.

“A lot of countries treat corruption as a passive crime. If there is a corruption scandal in the newspaper, they will look into it, but if there are no reports or complaints, nobody would do anything,” says Kwok.

“That is the case for many countries that don’t have anti-corruption agencies, which are important because corruption exists everywhere. You should ask people questions, observe, spot check and find out if there is any corruption. We don’t just sit back.”

Kwok says that this proactive approach to corruption is one of the keys to ICAC’s success, and he’s been a strong advocate for anti-corruption agencies even in countries with reputations for being clean. After all, they too are vulnerable to corruption, although the signs of wrongdoing may not be immediately apparent.

The accounting scandal at German payments firm Wirecard and large-scale money laundering through Denmark’s Danske Bank are some of the most obvious examples, but many more exist. According to Transparency International, a lack of oversight of banks in the European Union remains a big problem, leaving that sector vulnerable to the money laundering of corruption proceeds.

Corruption in these countries also extends to the political sphere. The advocacy group notes that it was only in 2020 that Germany introduced a lobbying register for members of parliament (MPs) after one MP was found lobbying for a company which had offered him stock options and a directorship. And a recent report by Transparency International showed that European countries still lacked adequate measures to check undue influence on public policies and decision-making. (See “CPI 2020: Trouble at the Top – An Analysis,” Transparency International, Jan. 28, 2021, and “Debugging Democracy – Open Data for Political Integrity in Europe,” Transparency International, Oct. 12, 2020.)

Political will

Since he retired in 2002, Kwok has acted as an international anti-corruption specialist, traveling to 26 countries on 250 missions and taking up consulting projects at various global institutions such as the World Bank and the European Commission. He’s also helped the University of Hong Kong design the first international postgraduate certificate course in corruption studies. (See “17th Postgraduate Certificate in Corruption Studies,” The University of Hong Kong, Nov. 5-28, 2019.)

Kwok has also been instrumental in setting up anti-corruption agencies in several countries. This includes Indonesia, where the Corruption Eradication Commission (KPK) has earned a reputation for successful graft busting since its inception in 2003.

But as in all countries, the political winds shift and can blow against the independence of anti-corruption agencies. And Indonesia is no exception. Critics say that a recent revision of KPK’s founding statute and a new civil service exam that has resulted in the firing of several KPK employees is a political move to undermine the anti-corruption agency’s ability to take on big cases. (See “Hobbling Indonesia’s anti-corruption body,” by Usman Hamid, The Interpreter, The Lowry Institute, June 29, 2021, and “Indonesian graft agency could be doomed, says sacked investigator,” by Stanley Widianto and Kate Lamb, Reuters, June 3, 2021.)

Indeed, stamping out corruption requires constant vigilance and often appears too ingrained to eliminate. Even Kwok struggles to name other countries that have been as successful as Hong Kong, though he remains optimistic and likens his advisory and education work post-retirement to sowing the seeds for future success.

“I can’t control the political will, but many of these countries have people who are well-qualified investigators and who know how to do corruption prevention and how to investigate,” he says. “I think I have planted enough seeds.”

Paul Kilby is editor-in-chief of Fraud Magazine. Contact him at pkilby@ACFE.com.

[See sidebar: “The right strategy”.]

[See sidebar: “Corruption at Carrian”.]