• ‘Illegality major part’ of deal involving Skandaliaris family

• Cosmetics store tried to ‘circumvent’ Bahamians owning

• VAT, Business Licence, Immigration, NIB laws breached

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Chief Justice has ruled that “illegality was a major part” of a Bay Street retail ‘fronting’ deal involving one of Nassau’s most prominent Greek-Bahamian families.

Sir Ian Winder, in a March 3, 2023, verdict, found that ZRK Ltd, owned and controlled by the Skandaliaris family, had signed an agreement with two US investors that was designed to “circumvent” the National Investment Policy’s stipulation that retail businesses are reserved for Bahamian ownership only.

The deal, which involved the operation of a Bay Street beauty and cosmetics store under the Truffoire/Lionesse brand names, is “oft described in the Bahamian vernacular as a ‘fronting operation’”, he noted. And Sir Ian said the venture appeared to have violated multiple Bahamian laws including those related to Immigration (work permits); the VAT and Business Licence Acts; payment of National Insurance Board (NIB) contributions; and exchange controls.

The Chief Justice’s verdict thus shines a rare light on the long-known practice of Bahamians ‘fronting’ for foreign investors so that the latter can secretly operate businesses in sectors of this nation’s economy purportedly reserved for local ownership only, while hiding their control and earning most - if not all - the profits that are then sucked out of this jurisdiction.

Tribune Business has over the years received multiple complaints and allegations of such practices, but those making the claims have either failed to provide supporting evidence or declined to place their assertions ‘on the record’. This has made it extremely difficult to investigate such arrangements, but Bay Street retailing - especially in the luxury goods and cosmetics area - is a sector where ‘fronting’ complaints have frequently surfaced.

The case involving the Skandaliaris family only came to light as a result of the two foreign investors, Tal Nemzer and Zvi Yosifon, initiating Supreme Court legal proceedings against them in 2017 for alleged breach of the two sides’ management agreement and purported “negligence” in living up to its terms.

While Sir Ian gave the Skandaliaris family and their ZRK vehicle some credit for bringing the parties’ business relationship to an end, so as “to avoid becoming further embroiled in violations of the law”, he added that their involvement in an “invalid” deal “cannot be denied or ignored”.

The August 2016 management agreement stipulated that Nemzer and Yosifon would operate the cosmetics/beauty business from a property situated at the junction of Bay Street and Market Street, which they were to lease from ZRK Ltd for a five-year period.

The duo were to pay rent to the property owner, an affiliate of ZRK, with the latter acknowledging that it “could not run the business without” them. In return, Nemzer and Yosifon were to receive a management fee equal to “100 percent of the business’ net profit”. They were also made responsible for paying all due taxes and ensuring the operation complied with all applicable Bahamian laws and regulations.

“The plaintiffs pleaded that they paid ZRK a security deposit, along with the first and last month’s rental payments, towards the lease of the Bay Street property,” Justice Winder wrote in his verdict. “In addition to the monthly rental, the plaintiffs aver that they spent additional funds to renovate and outfit the property in order to carry on business from the property.

“However, on March 15, 2017, the plaintiffs aver that despite owing no rent to ZRK, one of the directors of ZRK breached the management agreement by serving an eviction letter with immediate effect on them. ZRK admits to serving the eviction letter on the plaintiffs. They say that the plaintiffs were operating contrary to the laws of The Bahamas, and as such they were compelled to end the business relationship with the plaintiffs.”

The letter, signed by John Skandaliaris, said he was “extremely unhappy” with how ZRK was being managed. He cited multiple grievances, including the failure to collect “any taxes for the Government to-date” including VAT. Besides breaching the VAT Act, he accused Nemzer and Yosifon of operating a second location without a valid Business Licence - also in breach of the law.

“You consistently fly employees into The Bahamas to work without the proper work permit/authorisations,” John Skandaliaris complained. “Your excuse is that they will get permits later. However, this is once again against the law. This is a violation of the Immigration Act.

“Only yesterday I walked by your store and noticed a new foreign employee working. I asked your manager if she had a work permit, and he responded that she did not but that she will have one in the future.... You currently have no or maybe one Bahamian working in your stores. I have instructed both of you that, according to our Immigration regulations, you are supposed to be training and employing Bahamians.”

Asserting that the duo themselves had not been approved to work on The Bahamas, something he described as “highly illegal and unethical”, John Skandaliaris also said he was not receiving monthly financial reports as required. Stating that he “no longer has any interest in continuing this business”, he added that he was “immediately” closing the bank accounts and gave 30 days’ notice to close the business and vacate.

Nemzer and Yosifon sued for loss of income resulting from the premature end of their five-year lease, plus the loss of $60,000 held in bank accounts with CIBC FirstCaribbean International (Bahamas); $36,000 related to their security deposit and half the last month’s rent; and their $100,000 investment in the operations fixtures and furnishings. Additional damages were also sought.

ZRK and the Skandaliaris family filed a defence, and counter-claimed for loss of income and profits from the Truffoire business as well as compensation for “litigation risks” and connected costs from the lease’s early termination. They also sought damages for purported “serial frauds” that were committed.

Besides the failure to obtain the necessary Bahamas Investment Authority (BIA) and Central Bank approvals, and work permits for staff, the Skandaliaris family accused their former partners of perpetrating “a plethora of frauds on the [Department of Inland] Revenue, the Business Licence department, Customs and the National Insurance Board”.

“In short, the plaintiffs operated illegally from premises owned by George Skandaliaris and exposed both the defendant and Mr Skandaliaris to severe criminal and civil penalties,” ZRK and the family alleged. At trial, Yosifon testified that the deal had its origins in a meeting between himself and the Skandaliaris brothers - Antonius, John and Emmanuel - when he visited The Bahamas on holiday in 2015.

Both he and Nemzer said the deal was structured so that ZRK owned the cosmetics/beauty retail business while they managed it. Yosifon also claimed that Emmanuel Skandaliaris, as one of ZRK’s directors, had taken responsibility “for obtaining all regulatory approvals necessary” to run the operation.

John Skandaliaris, meanwhile, admitted that he “agreed to put the business in his name knowing that the plaintiffs were not yet approved to open their own business by the Bahamas Investment Authority. He orally agreed to do this for a fee of $5,000 per month but was not paid”.

He asserted that Nemzer and Yosifon were responsible for obtaining the necessary permits and approvals to operate, not himself and his family, but the duo “went ahead and opened the cosmetics store without the proper licences and only a ‘piece of paper’ saying that they had applied for a licence.

“To his knowledge they also did not register for VAT or get a VAT exemption for tourist sales even after a Business Licence was obtained,” Justice Winder noted. “Skandaliaris says that he also believed that only two of the ten foreign employees, who were brought in by the plaintiffs to work in the cosmetics business, possessed work permits.”

In its arguments, ZRK said Nemzer and Yosifon had sought to “camouflage” themselves as a Bahamian company. While it was intended that John and Emmanuel Skandaliaris were to become shareholders in the retail venture with their foreign partners, ZRK alleged this never happened as the latter continued to operate as if the company were owned by Bahamians.

Sir Ian, though, noted that the Business Licence submitted in evidence was in the name of Emmanuel Skandaliaris. He added that the key question for the Supreme Court to determine “is whether the contract is void for illegality”, as the judicial system will provide no aid in such cases.

“The enterprise engaged in is restricted to Bahamian ownership,” the Chief Justice said, noting that there was no dispute to the fact Bahamian public policy reserves cosmetic/beauty retail ventures for local ownership only. “Respectfully, the primary object of the management agreement was to permit the plaintiffs to own and operate a business in The Bahamas which, but for the cloak of ZRK, they would be unable to do,” Sir Ian ruled.

“The Business Licence states that it was granted to ZRK Ltd as Truffoire on August 12, 2016. The management agreement entered into by the parties is oft described in the Bahamian vernacular as a ‘fronting operation’. Simply put, the plaintiffs were the true owners of the cosmetics business, with a fee to be paid to ZRK to ‘act’ as the Bahamian owners.”

He based this on the management fee that was equal to Truffoire’s net income, meaning the two foreign investors were to receive 100 percent of the profits. And the Chief Justice said he was “not convinced” about their professed naivety of what was required to operate a business in The Bahamas, the need to obtain permits and approvals, and the fact they were in an industry which public policy has reserved for Bahamian ownership only.

“The illegality was a major part of the agreement and not merely peripheral. But for the agreement the business would not materialise,” Sir Ian said. “It appears that the management agreement between the parties was used to facilitate the circumvention of a widely-known public policy in this country; that retail business in cosmetics is reserved for Bahamians.

“I am satisfied that this is not merely a public policy issue by a statutory illegality as the true owners of the business are not reflected on the Business Licence. If that had been properly reflected in the application there would likely have been no licence issued.

“Additionally, the venture appears to have been operated in contravention of various laws relating to Immigration, National Insurance and VAT. Agreements such as the management agreement entered into by the plaintiffs and ZRK are to be avoided.”

Having found the deal to be invalid, Sir Ian said it followed that it was “unenforceable” and rejected the plaintiffs’ claim bar ordering that their security deposit be returned. And, for the same reason, he rejected the counterclaim by ZRK and the Skandaliaris family.

“While the management agreement is invalid, ZRK’s decision to avoid becoming further embroiled in violations of the law by evicting the plaintiffs was nonetheless reasonable in the circumstances,” Sir Ian wrote. “However, ZRK’s involvement in the creation if the invalid management agreement cannot be denied or ignored. It likewise cannot, having regard to its part in the illegality, pursue claims against the plaintiffs.”