After arresting Ms. Meng Wanzhou at the request of the US, Canada still had to decide whether to extradite her to the US. The core question for consideration behind this decision is: During the meeting with the HSBC executive in 2013, did Ms. Meng misrepresent the relationship between Huawei and Skycom as well as Skycom’s Iran office in 2013? Would her statements constitute criminal fraud? This question must be analyzed based the definition of fraud under common law.
Thanks to China Going Global Thinktank Service (CGGT) for sponsoring this post.
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- Fraud according to Canadian law
Under a civil law system, criminal fraud and civil fraud are differentiated based on the content of the fraud, the degree of the fraud, and the purpose of illegal possession.[1] Under a common law system, no such strict boundaries exist, and fraud is often associated with misrepresentation. Misrepresentation here refers to a representation contrary to the fact. It can be made through words or other means; it can be either an act or an omission. Black’s Law Dictionary, used primarily within the US legal system, defines misrepresentation as: a representation contrary to the fact, made by a person with a knowledge of its falsehood, and being the cause of the other party’s entering into the contract.[2]
There are three elements of a misrepresentation: (1) Misrepresentations must be false statements of fact. Statements of opinion do not constitute a statement of fact. (2) The representee must have a reason to rely on the representor’s statement. (3) The misrepresentation by the representor must have caused a loss of the representee.
In a common law system, misrepresentations can be classified into three types:
- Innocent misrepresentation, wherein a false statement of fact is made by a representor who was unaware at the time of presentation that the statement was untrue. Under a common law system, even a representor of innocent misrepresentation is subject to damages awarded by a court.
- Negligent misrepresentation, wherein a false statement is made carelessly by the representor and in breach of duty owed by Party A to Party B to take reasonable care that the representation is accurate. The remedy for negligent misrepresentation is possible damages and corresponding legal liability.
- Fraudulent misrepresentation, wherein a false statement is made by a representor either knowingly, or without belief in its truth, or not caring whether it’s true or false. A fraudulent misrepresentation is made knowingly or recklessly in order to induce the other party to act as suggested.
The three elements of fraudulent misrepresentation are:
The remedies for fraudulent misrepresentation are rescission and/or damages. In severe cases, the representor may be subject to criminal liability. For instance, Section 380(1) of Canada’s Criminal Code stipulates that:
“Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service, (a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding fourteen years, where the subject-matter of the offence is a testamentary instrument or the value of the subject-matter of the offence exceeds five thousand dollars; or (b) is guilty (i) of an indictable offence and is liable to imprisonment for a term not exceeding two years, or (ii) of an offence punishable on summary conviction, where the value of the subject-matter of the offence does not exceed five thousand dollars.”
2. The disclosed evidence could not justify fraud
Based on the details of Ms. Meng’s case that have been disclosed, she has been accused of fraud because her actions allegedly influenced HSBC to violated US oil and financial sanctions against Iran. The Iranian Transaction Regulations (ITR) and the Iranian Sanctions Act (ISA) stipulate that banks must obtain authorization from the TFI OFAC before providing financial or credit services to entities in Iran through the US, otherwise violations may result in criminal and civil penalties.
HSBC had been suspected of frequently violating ITR and ISA. Examples of their previous violations include allowing narcotics traffickers and others to launder hundreds of millions of dollars through HSBC’s subsidiaries; allowing approximately US$660 million’ worth of transactions prohibited by the OFAC to pass through US financial institutions, including HSBC US; and failing to screen and report OFAC prohibited transactions form Iran, Cuba, Sudan, Libya, and Myanmar for over a decade, with some HSBC employees even stripping the identification information from related payment messages. After a thorough investigation of these violations, US authorities indicted HSBC on multiple counts.
In December 2012, HSBC negotiated and signed a deferred prosecution agreement (DPA) with US authorities, under which they acknowledged the criminality of their actions and accepted severe criminal penalties including the enhancement of their compliance management commitments and the appointment of an independent external monitor. According to the DPA, US$1.256 billion was confiscated from HSBC and HSBC had to voluntarily pay an additional US$665 million in civil fines. No part of this agreement involved Huawei.
However, in September 2013, HSBC issued Huawei US$900 million in credit arrangement; and in 2014, HSBC, together with other international banks, provided Huawei with a syndicated loan of US$1.5 billion. These actions were the spark that fueled Ms. Meng’s current case. The ROCs submitted by the US to Canada as part of their extradition request accused HSBC of liquidating US$100 million for Skycom’s Iran-related business, a move that would have violated the financial sanctions against Iran. Under the DPA, if HSBC was found to have knowingly violated these sanctions, its financial license would be confiscated by the US. HSBC responded to the US accusations by saying they were unaware of Huawei’s and Skycom’s operations in Iran. HSBC also claimed that Meng, who had represented Huawei in a meeting with HSBC, had misrepresented the relationship between Huawei and Skycom. The ROCs further stated that Ms. Meng’s misrepresentation amounted to fraud.
The evidence used to back up these claims was the Chinese PowerPoint presentation Ms. Meng used during a meeting with an HSBC executive at a restaurant in Hong Kong in August 2013. After the meeting, Huawei provided an English version of the PowerPoint presentation to the bank at their request.
According to public sources[3], the PowerPoint presentation was titled Trust, Compliance & Cooperation and consisted of 16 slides, most of which outline Huawei’s understanding of the applicable sanctions regime and an outline of its compliance policies and practices. The sixth slide in the presentation described the business cooperation relationship between Huawei and Skycom, and stated that Skycom, as Huawei’s business partner, conducted sales and services in Iran with Huawei. It also stated that Huawei conducts regular business in Iran and provides civil telecommunications solutions that comply with global standards (such as ITU/3GPP) and both US and EU export control requirements. The seventh slide of the presentation described the relationship between Huawei and Skycom – Huawei was once a shareholder of Skycom and Ms. Meng was a board member of Skycom. The slide also says though that, in light of the US’s sanctions against Iran, Huawei had sold all its shares in Skycom and Ms. Meng has also withdrawn from the board of Skycom to ensure operational compliance. The eighth slide of the presentation stated that in 2011, Huawei publicly announced it would limit its business in Iran. The 16th slide discussed future cooperation and communication between Huawei and HSBC and stated that the cooperation between Huawei and Skycom was a “normal and controllable business cooperation”, with that relationship unlikely to change in the future. The slide ended by saying Huawei was looking forward to discussing compliance and best practices with HSBC in order to help Huawei further improve its compliance practices.
The presentation Huawei has made available indicates that Ms. Meng’s presentation clearly explained its past and present relationship with Skycom. It did not obscure the fact that Huawei was once a shareholder of Skycom or that Ms. Meng was once a board director of Skycom. It also stated that Huawei and Skycom were, at that time, two separate legal entities, and that Ms. Meng had already withdrawn from Skycom’s board. Even if Huawei and Skycom had a closer relationship than normal cooperation and Ms. Meng’s presentation did not clearly disclose the matter, staff of HSBC, as a storied business giant, included experienced managers and top legal experts and consultants. It is not unreasonable to have expected HSBC to clearly and rationally assessing the soundness of Huawei and Skycom’s business before engaging in any financial transactions with them. The previous indictments against HSBC had already painted them as an actor that was complicit with illegal behavior. HSBC illegally providing over US$100 million in liquidated assets for Skycom’s Iran-related business violated the US sanctions against Iran, but they most likely did so after independently deciding the risks were worth the commercial rewards.
Even if Ms. Meng’s presentation was not completely clear in disclosing just how close Huawei and Skycom’s relationship was, at most that could be considered a negligent misrepresentation. True fraud requires that the representor intends for the representee to act in reliance on the misrepresentation and that the representee does act in reliance on the statement, and in consequence, suffers loss. HSBC, as an experienced commercial legal person, would not have acted so recklessly as to commit to substantial business dealings based on a single presentation without any independent analysis and rational judgment of the business’s commercial soundness. This means that Ms. Meng’s statement lacked the elements that constitute a fraudulent misrepresentation.
It is impossible to determine if Ms. Meng was deliberately reckless with the truth, or if HSBC was acting so naively as to completely rely on Ms. Meng’s statement and cause its own harm. Even if there is damage, there is no direct causal relationship between those actions and Ms. Meng’s statements. Therefore, this article believes that Ms. Meng’s statement in the Hong Kong restaurant cannot be determined to constitute fraud or a violation of Section 380(1)(a) of the Canadian Criminal Code.
Ms. Meng’s lawyer has also pointed out that HSBC was aware of the relationship between Huawei and Skycom at the time of their dealings. HSBC could have, at the time, chosen to pay US dollars from or to Iran outside the US banking system without violating the Iranian Transactions and Sanctions Regulations (ITSR).
New reports from the media also indicate that Meng’s lawyers have since provided internal documents, disclosed by HSBC, that contradict the US’s ROCs, stating that the US assertions of what happened are “manifestly unreliable”. Before HSBC decided to offer financial services to Huawei, they had conducted internal risk assessments in their Know Your Customer (KYC) procedure when the Reuters reports on Huawei’s dealings with Iran came out in early 2013. At least one managing director at HSBC had known about the relationship between Huawei and Skycom long before Ms. Meng met with the HSBC executive in the Hong Kong restaurant in August 2013. Despite the potential risks, this managing director still recommended HSBC continue their business with Huawei. The 16-slide presentation deck Ms. Meng used was never even shared with HSBC’s Global Risk Committee, so could not have been used to mislead or defraud the committee.[4]
Thanks to China Going Global Thinktank Service (CGGT) for sponsoring this post.
[1] Generally speaking, the differences between criminal fraud and civil fraud are 1. Content: Civil fraud is the fraud of individual facts or partial facts, while criminal fraud is the fraud of complete facts or all facts. 2. Degree: The degree of fraud refers to whether a perpetrator’s fraud method would cause misunderstanding to the other party and lead them to dispose of property. If the answer is yes, it is criminal fraud. If the answer is no, it is civil fraud. 3. The purpose of illegal possession: A perpetrator of criminal fraud subjectively has the purpose of illegal possession, whereas a perpetrator of civil fraud has no purpose of illegal possession. See Chen Zhangliang: “Boundary Between Civil Fraud and Criminal Fraud”, “Research on the Modernization of the Rule of Law”, Issue 5, 2019.
[2] Bryan A. Garner, editor in chief (2009). Black’s Law Dictionary, Ninth Edition. US: Thomson Reuters. P.1091.
[3] https://asialawportal.com/2021/03/03/the-defense-of-huawei-cfo-meng-wanzhou-how-the, accessed on March 23, 2021
[4] John Ivison (2021). New evidence in the Meng case an opportunity for Lametti to end it, National Post, accessed on July 2, 2021 at https://nationalpost.com/opinion/john-ivison-new-evidence-in-the-meng-case-an-opportunity-for-lametti-to-end-it. Michael McCullough (2021). HSBC Documents Contradict Case for Meng Extradition, Lawyer Says, Bloomberg Technology, accessed on July 2, 2021 at https://www.bloomberg.com/news/articles/2021-06-29/hsbc-documents-contradict-case-for-meng-extradition-lawyer-says
