Report says Manx politicians backed UK tax evasion: The inquiry into the Isle of Man bank failure in 1982 ran up against a wall of silence over 'funny money' deals and Revenue dodgers, writes Tony Faragher

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The Independent Online
SENIOR Isle of Man politicians and officials were accused yesterday of backing UK tax evasion schemes run by a Douglas-based bank that later crashed with debts of pounds 42m.

A report into the Isle of Man Savings & Investment Bank, which collapsed more than a decade ago leaving 3,000 mainly small savers with no deposit protection, shows:

Returns sent to government bank supervisors made plain the SIB was insolvent 16-18 months before the crash, but were ignored.

Peter Duncan, commercial relations officer and deputy of the Manx Treasury, was accused of involvement in attempts to establish 'funny money' deals with the bank on a commission basis.

After the government closed the bank and set up the Chadwick inquiry, Manx politicians and officials refused to speak to investigators.

The SIB was closed and its licence withdrawn by William Dawson, the Manx government treasurer, in July 1982.

The 500-page report, compiled by John Chadwick, QC, assisted by the SIB's joint liquidators, accountants Anthony Jordan and Timothy Beer, tells the bank's story since it was licensed as a deposit taker under the Manx Banking Act in 1975.

Before the act, there had been no legislation for banking regulation on the island. The act put local banks under the control of politicians at the Treasury, with Mr Dawson and Mr Duncan the senior officials.

Banks approved under the act were allowed to pay interest to non-resident depositors without deduction of tax. The report says many of the SIB transactions could only be understood on the basis that UK tax evasion was regarded as a 'legitimate objective, condoned in the Isle of Man'.

When the UK Inland Revenue went on a 'fishing expedition' in October 1979, the bank's managing director, Robert Killin, told taxmen there was a framework of legislative and administrative secrecy and confidentiality.

Insisting these could be used to advantage by UK tax evaders, he said this was an important element in the financial strength of the island, recognised in government circles.

When the revenue officers secured a court order requiring the bank to disclose details of the accounts of two UK building companies, Manx authorities protested that their tax haven status was being threatened. The court order was set aside.

Financial problems began for the SIB in 1980, and the report states that the bank's quarterly return for February 1981, sent to Mr Dawson, the treasurer, showed it was by then already insolvent.

The warning signs went unheeded that year, although all subsequent returns confirmed the bank was insolvent.

More bells were set ringing at the end of 1981 when an SIB customer approached Mr Dawson and Mr Duncan with allegations of fraud and bribery at the bank, the report says. Mr Killin and his fellow directors denied these and the bank stayed open for another seven months, attracting many new customers on a growing deposit base.

Mr Duncan, a chartered accountant, quit in May 1982, two months before his boss moved in and closed the SIB. His role in the affair is given particular attention by the Chadwick team, who speak of their 'serious concern' over his relationship with SIB directors.

One of these told the inquiry that Mr Duncan, who was supposed to be supervising the Manx banking industry, was involved with the SIB in trying to set up multi-million dollar 'funny' or 'ghost' money deals. Documents seized by the investigators after the crash showed huge volumes of telexes relating to loans ranging from dollars 50m to dollars 1,000bn.

'It is unlikely that many of the banks in the world could handle loans of this size,' the report continues. 'It would clearly have been impossible for SIB.' Closer examination showed the funds on such deals would pass in and out simultaneously, and a half per cent commission would be charged. On such huge sums, the 'funny money' commission would still be considerable, says the report. Mr Duncan, said to have been offered a commission on a dollars 500m deal, denied involvement when questioned by the Chadwick team.

The team could not accept this. 'We are obliged to conclude that the official of the Treasury who was primarily responsible for supervision of the banking sector (was) prepared to engage in transactions of this nature, then deny his involvement.'

Mr Duncan and Mr Dawson refused to talk to the investigators. In 1984 they applied for a court order to compel the two to give evidence, but their government-funded lawyers argued that the appointment of Mr Chadwick was a nullity, and no right existed to demand evidence from anyone.

The inspectors comment: 'We found this submission, made on behalf of the Treasurer on whose application we had been appointed two years earlier, startling.' This unwillingness to co-operate with the inquiry spread through the island. Political heads at the Treasury, who ordered the probe, refused to give evidence, as did lawyers representing them, accountants and even a number of SIB customers who lost heavily in the failure.

In 1986, after three-and-a-half years of investigation, they said: 'We cannot be satisfied we have uncovered the whole truth in every area we have examined.'

The report identifies the bank's beneficial owner, Victor Gray, an Essex garage proprietor and property developer, as the central character in the events that led to the collapse of SIB. His company bought the SIB after he took advice on how to move his personal assets out of the reach of the UK taxman.

Mr Gray, 67, was not shown to be involved with the bank, although he was clearly the man looked to for important decisions, the report says. He was the principal defendant in the aborted fraud trial of SIB directors and advisers, but was freed because deemed too ill to defend himself.

After a series of complex transactions and the making of massive bad loans, the investigators found that the SIB was hopelessly insolvent by December 1980. 'Window dressing' of accounts resulted in the true position being hidden on the balance sheets.

Deposits, all subsequently lost, rose from pounds 28m to pounds 42m in 1981. Customers were lodging cash unaware that the SIB was making loans and advances that were unlawful and completely irrecoverable, and while already insolvent itself. That is the basis on which leaders of the 10-year campaign for the depositors, such as Gwendolyn Lamb, are fighting for full compensation.

(Photographs omitted)