On the subject of the regulation of offshore financial services, the Commons Select Committee (CSC) observed that the UK has strong reasons to ensure that Overseas Territories' financial industries are well regulated.

They present serious risks to the UK's reputation as well as potential financial liabilities, including compensation costs where the UK has direct responsibility and, in the worst case scenario, aid dependency should a sector collapse.

Seven of the Overseas Territories currently have financial services industries. The National Audit Office found that they all faced a challenge in responding "adequately to growing pressures to reinforce defences against money laundering and terrorist financing".

According to the Committee report, Bermuda, the British Virgin Islands (BVI) and the Cayman Islands are the largest financial centres. Bermuda is the international leader in insurance, BVI is a leading global player in licensing international business companies, and the Cayman Islands are a leading world player in financial services, particularly banking and hedge funds.

In addition to this, the CSC reported that it had received mixed evidence about the quality of financial regulation in these Territories.

The Leader of Government Business in the Cayman Islands told them that the Territory had "a very strong compliance culture, underpinned by modern legislation, which complied with international best practice" and emphasised the Cayman Islands Monetary Authority's independence from government.

During a visit to the Cayman Islands, ministers also called for the Territory to be listed in the UK Treasury's list of equivalent jurisdictions for anti-money-laundering. They were also told that the UK's Financial Services Authority had initially objected to the Cayman Islands Monetary Authority (CIMA) joining the International Organisation of Securities Commissions, but that CIMA now had the support of the FSA, and had signed a Memorandum of Understanding with the agency.

The Premier of the BVI emphasised that since BVI's Financial Services Commission had been set up in 2002, it had "enhanced the financial services in the Territory and gained worldwide recognition for running a very good regime".

He told the Foreign Affairs Select Committee that laws and regulations were frequently updated.

To prevent money laundering and other crimes associated with money and the proceeds of drug trafficking, every effort is made to stop every possible loophole — the minute anything happens, a red flag is raised and it is dealt with immediately, it was announced.

BVI's Financial Services Commission itself argued that:

"Often the claim is unfairly made that the so-called offshore centres are not properly regulated and are a haven for tax evasion, money laundering and terrorist financing. These claims are mostly made by those in the developed world with whom we are in material competition for business and too often no effort is made to give recognition to the regulatory advances of such jurisdictions as the BVI."

The FCO provided some support for this view in its evidence to the inquiry, stating that:

"We need to recognise that there is significant international pressure to limit the role of the Overseas Territories in providing international financial services. The Overseas Territories are often expected to apply higher standards of regulation than some OECD countries."

During a visit to Bermuda by the Committee, they met the CEO of the Bermuda Monetary Authority who told them about the steps being taken by the Territory to improve anti-money-laundering standards.

Moving on to Gibraltar, the Committee stated that although its financial services industry is not large by international standards, it provides a wide range of services, including banking, insurance, fund management, trusts and advisory business, and is increasing its share of this market.

For many years, Gibraltar was the object of allegations of financial impropriety — mostly but not only from Spain.

Its firm rebuttals of these allegations were not helped by the opacity of its system of financial regulation, the Committee's report argued.

However, in 1989, the government of Gibraltar overhauled its regulatory framework and set up a Financial Services Commission. Gibraltar received very good assessments for compliance from the International Monetary Fund in 2001.

The Leader of the Opposition told them that in his experience in the past "the UK gave bad advice, things turned out wrong and they subsequently blamed us".

The financial services industries of Anguilla, Montserrat and the Turks and Caicos Islands, for which the UK retains direct responsibility, remain small.

The National Audit Office found that Bermuda, BVI, the Cayman Islands, and Gibraltar, were "leaving in their wake the weaker regulatory capacity" of these three financial centres.

The report further announced that the Public Accounts Committee had concluded that the FCO, the Financial Services Authority, the Treasury and the Serious Organised Crime Agency, needed to "deploy their expertise and capacity jointly to manage the risks better".

In particular it highlighted a lack of investigative capacity properly to scrutinise suspected money laundering activity.

The Committee found that the Governors in the three smaller financial centres had not used their reserve powers fully, and described it as "complacent" for the UK to allow these Territories to manage the risk themselves.

It recommended that the FCO and UK agencies should bring in more external investigators or prosecutors to bolster capacity until the Territories could be self-sufficient in this area.

The CSC also asked the leaders of these Territories for their assessments of standards of regulation in their financial sectors.

The Chief Minister of Anguilla told it that Anguilla was trying its "best to put all the regulations and Acts in place" and stated that the Minister of Finance had brought many measures to Anguilla's House of Assembly.

The Chief Minister of Montserrat told them that his Territory had "almost completed putting into place and enacting the legislation" that would bring it "up to date with the rest of the international community" and explained that Montserrat had also received expert advice and shared resources from CARICOM (the Caribbean Community) and other countries.

The Turks and Caicos Islands' financial sector is small by international standards, but significant, behind tourism, within its local economy.

The Premier of the Islands reported that a lot of activity in this area was "tied to the construction boom of condominiums and second homes, and the persons and trusts that use the jurisdiction for estate planning".

He stated that TCI believed in operating a "clean and high-quality" financial services industry, and emphasised that the Territory had an independent financial services commission and had recently introduced a series of laws, including proceeds of crime and anti-money-laundering legislation.

However, during their inquiry, the CSC received allegations of investments into TCI from businessmen with links to criminal activity.

When visiting the Turks and Caicos Islands, the Foreign Office met the Managing Director of the Financial Services Commission and the Chairman of the Board. They called for help with drafting regulations.

Another issue raised was staff training. They explained that TCI had difficulties persuading speakers to come to the Islands. They claimed that the Commission had received an offer of assistance from the United States, but stated that the UK had failed to respond quickly when the Commission asked whether it could accept this offer.

The Public Accounts Committee noted that the FCO had accepted that standards needed to improve, and had employed a financial services adviser based in the Caribbean, but argued that it was "improbable" that a single specialist was "sufficient to address the scale of the risk".