Former development minister Mak Chai-kwong and assistant highways director Tsang King-man were convicted yesterday of defrauding the government out of HK$700,000 in housing allowances.
In a convoluted arrangement, the men entered into a "bogus" cross-leasing deal whereby they actually owned - or had a financial interest in - the flats they said they were renting.
Mak is the highest ranking government official to be found guilty of a criminal offence since the handover.
Before handing down his verdict, District Court Judge Johnny Chan Jong-herng said: "Mak and Tsang each knew that the means they employed were dishonest, that they had a financial interest in the flat [they were renting] and hence were not entitled to [the Private Tenancy Allowance]."
Mak, 62, was charged with two counts and Tsang, 57, with three counts of using documents with intent to deceive the government. They were convicted on all counts.
Mak stepped down just 12 days after being appointed development secretary last July after the media exposed the scam.
The prosecution said that Mak and Tsang were the actual owners of City Garden flats that they rented to each other in 1985. They leased them in their wives' names to conceal their financial interest. It was illegal for civil servants to apply for allowances for a flat in which they owned or had a financial interest.
Chan's ruling cleared doubts over the legitimacy of cross-leasing as he accepted former secretary for civil service Joseph Wong Wing-ping's testimony that the practice in itself was not seen as illegal. But he said he saw no reason why Mak and Tsang "should take positive steps to conceal their identities as co-owners and use only their wives as landlords in the lease".
In an effort to show their arrangement was not premeditated, Mak told Independent Commission Against Corruption officers he met Tsang when they queued up to buy the flats.
But Chan said this was "too good to be true".
Eric Kwok Tung-ming SC, for Mak, had argued the pair were allowed to use cross-leasing to pay for their investments and they had no motive to do it in the way suggested by the prosecution.
But the judge said that with a scheme of "bogus" cross-holding leases, the pair could receive the housing allowances while living in a flat in which they had a beneficial interest. "They could spend money in the flats where they resided and decorate them in the way they liked," he said.
Mak and Tsang will repay HK$700,000 and HK$1.2 million respectively to the government.
The pair, free on bail ahead of sentencing on August 8, refused to comment outside court.
Veteran China-watcher Ching Cheong, a close friend of Mak, said he would probably appeal.