HOW A LAWSUIT COULD BANKRUPT THE ISLE OF MAN

On the surface the Isle of Man is an attractive place to live.  This idyllic, if windy, Crown dependency in the middle of the Irish sea and less than 40 miles from the English coast has an upper tax rate of 21 percent.  And there is no capital gains, stamp duty or inheritance tax.  Its 85,000 permanent residents include some of Britain’s richest people, notably Baroness Michele Mone, Tyson Fury, the former World Heavyweight boxing champion, TV presenter Noel Edmonds, cycling Olympian Sir Mark Cavendish and John Whittaker, the reclusive billionaire property tycoon. 

For the past 40 years the island has been a safe secretive offshore haven for tax avoidance investments, companies, trusts and managing assets for high-net-worth individuals, including Russian Oligarchs in the past.

But today the Isle of Man is facing a crisis.  The police are conducting no less than 10 active international money laundering inquiries, and online casinos are being investigated by the island’s gambling commission.  But less well-known, and potentially far more serious, is a lawsuit in which the Isle of Man government has been accused of deleting texts, withholding and tampering emails and suppressing minutes of meetings in a £120 million legal claim which could bankrupt the offshore tax haven.

The court case concerns a plan by the property company Sondica to build a state-of-the-art shopping, leisure complex and homes on the waterside of the island’s capital, Douglas.  The project included a new Marriot hotel and a Michelin-starred restaurant.  But a rival firm unexpectedly won the £55 million contract awarded by the government.

In response Sondica is suing the Isle of Man and Lambert Smith Hampton (LSH), owned by Connells, one of Britain’s biggest estate agents, which in turn is owned by Skipton building society, for alleged illegal interference and negligence over the award of the contract.  It claims their proposal to build the complex was endorsed by LSH but then two Isle of Man government departments illegally persuaded the estate agents to favour a rival bidder, according to court documents.

The litigation has dragged on for seven years while the complex remains unfinished with a car park looking like a bomb site, according to residents.  LSH and the Isle of Man Treasury, the defendants, face a legal bill of £120 million if it loses the case, according to lawyers involved. 

The lawsuit could trigger a debt default and a threat to the island’s much-coveted Aa3 stable credit rating - the same as the UK as calculated by the international agency Moody’s.  And if interest rates increase, the spiralling debt will jeopardise its reputation as a financially secure location.

The lawsuit has come at the worst possible time for the Isle of Man.  In October an inspection of the island by Moneyval – the European Anti-Money Laundering and Counter Terrorist Financing regulator – will take place.  This agency has the power to “grey list” this offshore economy which could threaten its prized credit rating at a potential cost of £660 million per year. 

At the heart of the dispute is Sondica’s claim the Isle of Man government illegally interfered with their bid to design and build the new complex.  They allege the Department of Infrastructure persuaded LSH, the estate agents, to change their report to favour the rival bidder, according to court filings.  They also claim key sections of text were deleted, minutes of meetings withheld and the amended report advocating the winning contractor was neither “independent” or “expert”, according to their statement of claim.

The company’s lawyer, Victoria Unsworth, alleged in court “a number of emails have clearly been tampered with by the Isle of Man Treasury and Department of Infrastructure”.  And “it is unbelievable these emails are not in the possession of these defendants and inadvertently been missed in the disclosure searches over the course of six years”.

But the Isle of Man government strongly deny all the allegations and describe Sondica’s case as without foundation.  “This claim is misconceived”, stated their defence.  “It is an abuse of the process of the court to bring damages claim in respect of a public law decision the legality of which was never challenged and never sought to be set aside”.

LSH also strongly deny the allegations.  “The overwhelming majority of the claim is directed towards the Treasury and Department of Infrastructure and assert facts which are outside the knowledge of LSH and irrelevant to the purported claim against LSH”, stated its defence.  “The claim against LSH is without basis and is denied.  LSH owed no relevant duty of care to Sondica and acted in a competent manner in respect of the task which it carried out”.

But delays by the island’s lawyers and bureaucracy have seen consultants’ fees and legal costs spiral out of control, according to the Judge.  At one hearing the Judge told the court he “nearly fell off his chair” after the Isle of Man’s Attorney General’s office requested a fee of £500,000 to search for a batch of documents.  He said the estimate “defies common sense”, “makes a mockery of litigation and such a cost to taxpayers is “unacceptable”

It is rare a low-key planning dispute in a sleepy offshore tax haven has major ramifications for its gold standard credit rating on the City of London.  But that appears to be the case in a modest court room in the Isle of Man.