EC World Reit CEO sponsor’s ‘erroneous instructions’ led to illegal mortgages, legal adviser says

An investigation into the matter found that the CEO of EC World Real Estate Investment Trust (REIT) gave incorrect instructions to employees, which led to unauthorized mortgage loans being taken out.

In January, the manager revealed that three properties owned by EC World Reit had been mortgaged without his consent or knowledge. The loans were linked to the local government of Fuyang, China, which provided Forchn with bailout funds.

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

The unauthorized mortgages for Hengde Logistics and Fu Heng Warehouse have already been written off, and Fuzhou E-Commerce is the last unauthorized mortgage. The proceedings to cancel the unauthorized mortgage for Fuzhou E-Commerce have been initiated.

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

The manager added that the cause was the use of paper forms instead of a proper electronic approval process and that the incident took place in secret without informing the staff involved in the electronic approval process.

According to the Reit manager, CEO Forchna wrongly assumed that the company had the right to mortgage the relevant properties and gave appropriate instructions to the CFO.

In addition, the CEO, as well as Forchn’s chief treasury officer and treasury manager, stated that they did not follow the electronic approval process because they mistakenly believed that they should follow the approval process used by the sponsor’s treasury department, in which the CEO makes the final decision.

The REIT manager provided the update in a filing with the stock exchange on Sunday (September 1) evening, along with explanations regarding other major factors that led to the unauthorized mortgage lending.

Apart from the alleged misconduct by CEO Forchn, some employees at the Reit property manager believed there were no problems in carrying out the instructions of either Forchn or the CEO.

This is because the employees not only manage the assets of the Reit, but also perform work for Forchn, which is also the parent company of the property manager.

Employees also were unaware of the general structure of a REIT, the differences between REIT assets and sponsor assets, and the severity and potential legal consequences of making unauthorized mortgage loans.

In response to advice from legal counsel, the Reit manager has carried out an internal restructuring “to ensure that the property manager only provides services in relation to EC World Reit assets”. It also assured 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 seals, stamps and group deeds are segregated and held by different authorised personnel.

Trading in EC World Reit units on the Singapore Stock Exchange was suspended on 31 August 2023.