We have all seen the images and read the news reports: critics jailed for speaking out against the government; bags stuffed with cash allegedly making their way to rotten justices; gangsters and the courts apparently in cahoots; a former president dragged along the ground to a kangaroo court trial.
Countless international observers have stated that the Maldivian judiciary is politicised and regularly fails to dispense justice. That’s putting it politely. At long last, though, with the ruling party in control of the executive and legislative branches, the Judicial Services Commission has the power and inclination to clean up the justice system, expose corruption, and hold judges to account.
It is not just political activists who can breathe a sigh of relief. Maldivian businesses and foreign investors also desperately need judicial reform, and a competent judiciary that dispassionately upholds the rule of law.
My wife Eva and I opened our first resort, Soneva Fushi, in 1995 when the Maldives was not considered a luxury travel destination. Over this period of time, we have seen up close and personal the damage a weak judiciary has done to the Maldivian economy. Firstly, the failure of the legal system to support the banking community has created damaging knock-on effects to the economy.
Take the case of Noonu, Maavelavaru. The island was awarded for development back in the 2000s. To develop it into a resort, a local businessman borrowed a considerable sum from major, regional banks. But after a few years, having built three-quarters of the resort, he ran out of money and the resort was never finished. For 10 years, the banks which lent the money have been trying to seize the island and recover their investment. But the judicial system has stood in their way.
The initial legal process dragged on for years. The banks eventually received a court ruling in their favour, and instructed a real estate broker to sell the island. The broker found some buyers, but just before the banks were about to sell, the court case was overruled by an appeal.
In and out of court, for close to a decade, the banks tried to get ahold of the island in vain. Meanwhile, the uncompleted resort phyiscally deteriorated and interest payments grew. Rather than being able to recover all, or a majority, of what they lent, the banks will probably recover no more than 30 to 40 per cent of their investments. Earlier this year, the banks finally received a Supreme Court ruling in their favour.
The example of Noonu, Maavelavaru – and there are other examples like it – make international investment banks more reluctant to lend to Maldivian businesses and entrepreneurs, because they cannot rely on the legal system to uphold contracts or help recover investments if there is a default. When banks do lend, they charge higher interest rates because of the extra risks involved. This means fewer and more expensive loans for local businesses, less investment in the economy, fewer jobs, and less prosperity to go around.
The impact of just this one case probably resulted in US$ 500 million of lost investments in the economy, because the two international banks became less inclined to lend to Maldivian businesses.
– Guilty Until Proven Innocent –
The second major problem investors and businesses face is the Maldives Inland Revenue Authority (MIRA), the Maldives’ tax authority, and the way it abuses the judicial process in its favour.
MIRA has the power to impose and collect taxes on behalf of the government. Originally set up as something akin to the United States’ IRS, over the years it has sadly become both politicised and overbearing. One could sum up MIRA’s approach to taxpayers as ‘guilty until proven innocent’.
I will share with you our personal experience. Around five years ago, MIRA claimed that Soneva owed them GST on the sale of a private residence. They then seized the money they claimed was owed from our bank account. We sued them for this because, in the opinion of two of the big four auditors, KPMG and PWC, GST was not payable on the residence. We won the first case. MIRA then appealed, and we won again. Finally, MIRA took the case all the way to the Supreme Court on an issue of procedure. Apparently, we should have deposited the money with MIRA and then filed the claim. But, with regards to the principal case, the court still ruled in our favour.
In 2016, MIRA made some further claims judging that GST was due on some of our early private residence sales. This time we followed procedure to the letter: we deposited the money with MIRA and lodged a legal case to recover the funds. But three years on, we are still waiting for our day in court. Our lawyers tell us that when it comes to the Supreme Court, sometimes a case will be heard and judged within a week, sometimes it will drag on for years.
MIRA has a habit of making (often erroneous) claims on businesses, including huge interest payments, that can cripple a company’s finances. MIRA’s demands result in cash-flow problems for companies that in turn create late payments to suppliers. Suppliers often charge punitive interest on the late payments, further compounding a company’s cash-flow problems.
Our run-ins with MIRA have not affected our resolve to invest in the Maldives, because Eva and I have made a personal commitment to the country. But like the case of Noonu, Maavelavaru, MIRA’s bullying creates a ‘chilling effect’ on people who are contemplating investing. The result is that the Maldives is not realising its true economic potential.
Foreign investors are often drawn to the Maldives by stories of great returns but are spooked by issues similar to those mentioned above. As such, they don’t invest. The number of foreign investors, who make repeat investments in the country, can be counted on one hand. This is a shame, because the Maldives should be much richer than it is today. This is why businesses and investors, along with all law-abiding people, should hope that the process of judicial reform is speedy, succinct and successful.
By Sonu Shivdasani, CEO and co-founder of Soneva resorts.
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