‘Wrong instructions’ by EC World Reit sponsor CEO led to illegal mortgages, says legal counsel

THE chief executive officer of EC World Real Estate Investment Trust’s (Reit) sponsor gave wrong instructions to employees, and this led to the creation of unauthorised mortgages, investigations into the matter have found.

In January, the manager revealed that three properties owned by EC World Reit had been mortgaged without its consent or knowledge. The loans were in connection with the Fuyang local government in China providing Forchn with rescue funds.

The properties – Fuzhou E-Commerce, Fu Heng Warehouse and Hengde Logistics – were mortgaged between Nov 20, 2023 and Nov 24, 2023, in favour of two Fuyang government-linked entities in China. The funds, approximately 268.6 million yuan (S$49.8 million), were provided to Forchn as arranged between the Fuyang government and the sponsor.

The unauthorised mortgages for Hengde Logistics and Fu Heng Warehouse have since been discharged, with Fuzhou E-Commerce as the final outstanding unauthorised mortgage. Proceedings to revoke the outstanding mortgage for Fuzhou E-Commerce have been initiated.

While the CEO of the sponsor Forchn denied that his conduct was intentional, “it could be reasonably suspected that he and the sponsor intentionally bypassed the (relevant internal approval process)“, said the manager of EC World Reit, based on investigations conducted by its legal counsel.

This is based on the use of paper forms instead of the relevant electronic approval process, and that the incident took place secretly without informing personnel involved in the electronic approval process, the manager added.

According to the Reit manager, Forchn’s CEO mistakenly believed that the company was entitled to mortgage the relevant properties, and thus instructed its treasury director accordingly.

Furthermore, the CEO, as well as Forchn’s treasury director and treasury manager, said that they did not follow the electronic approval process as they mistakenly thought they should follow the approval process used by the sponsor’s treasury department, where the CEO is the final approver.

The Reit manager gave this update in a bourse filing on Sunday (Sep 1) night, along with explanations of the other root causes which led to the unauthorised mortgages.

Aside from the Forchn CEO’s alleged misconduct, some of the employees of the Reit’s property manager were under the impression that there was no issue with following Forchn’s, as well as the CEO’s, instructions.

This is because the employees not only manage the assets of the Reit, but also carry out work for Forchn, which happens to also be the parent company of the property manager.

Separately, the employees also lacked awareness of the overall structure of the Reit, the distinctions between the Reit and the sponsor’s assets, and the severity and potential legal consequences of allowing the unauthorised mortgages.

In response to the legal counsel’s views, the Reit manager has performed an internal restructuring “to ensure that the property manager provides services in respect to the assets of EC World Reit only”. It has also ensured that these changes have been implemented by the property manager.

Further improvements have also been made by the Reit manager to the Reit’s internal controls and processes, based on a review by independent auditors. This includes ensuring that the group’s seals, stamps and title deeds are split up and held by different authorised personnel.

EC World Reit’s units have been suspended from trading on the Singapore Exchange since Aug 31, 2023.