4.3 While its territories retain this legislation the Government risks being in breach of important and fundamental international agreements, including the European Convention on Human Rights and the International Covenant on Civil and Political Rights. In addition, this exposes the UK to an avoidable contingent liability of costs and possibly damages. In keeping with our commitment to a modern relationship with the Overseas Territories based on partnership and responsible self-government, our preference is that the Overseas Territories should enact the necessary reforms themselves. But in the absence of local action, legislation could be imposed on the Caribbean territories by Orders in Council.

Judicial corporal punishment 4.4 Judicial corporal punishment remains on the statute books of the British Virgin Islands and Bermuda. It was abolished in Montserrat in 1991 and in Anguilla and the Turks and Caicos Islands in 1998. In the Cayman Islands abolition was begun in 1995 and completed in 1998. There is a belief in those territories which retain it that it provides a deterrent, particularly against hooliganism and juvenile crime. But in recent years, it has only been handed down as a sentence in the British Virgin Islands, the last time in 1996.

Homosexuality 4.5 We believe that all of the Overseas Territories should enact legislation similar to the UK Sexual Offences Act 1967, which legalised homosexual acts between consenting adults in private. None of the Caribbean Overseas Territories has brought its legislation into line with the Act, though prosecutions in recent years have been rare. In some of the Caribbean communities there is particularly strong opposition to homosexuality, based upon firmly held religious beliefs.

Capital punishment 4.6 In 1991 the UK abolished capital punishment for murder in the Caribbean Dependent Territories by Order in Council. Subsequently the UK has abolished capital punishment for treason and piracy in domestic legislation.

The only Overseas Territory which has retained the death penalty for murder is Bermuda, though the last time it was carried out there was in 1977 (twice).

Since then, of a small number of death sentences handed down for premeditated murder, only one was not reduced on appeal to a lesser conviction not carrying the death penalty; and that case was subsequently commuted to life imprisonment.

4.7 We have raised our concerns with the Government of Bermuda about the continuing existence of capital punishment for murder. We hope that the Bermuda legislature will take early steps towards removing this punishment from the statute book. Bermuda's degree of constitutional autonomy prevents us from imposing the abolition of the death penalty there by Order in Council.

But if local action is not taken, we will consider whether to impose abolition by means of an Act of Parliament.

4.8 We also expect all Overseas Territories to remove capital punishment for treason and piracy from their statute books.

ENCOURAGING GOOD GOVERNMENT FINANCE 5.1 We see several reforms as essential to improving standards in this key area of government activity: financial services; auditing; borrowing; tax issues.

Financial services Development and regulation 5.2 The international financial services industry has grown dramatically in recent decades. A significant number of the Overseas Territories, especially those in the Caribbean but also Bermuda and Gibraltar, have developed successful offshore financial sectors, and so diversified their economies. In some, the earnings from this sector now contribute significantly to government revenue and to GDP.

5.3 The success of the Overseas Territories has been built upon by their reputation for sound administration, effective legal systems, political stability and public order, and their association with the UK. These provide reassurance to would-be investors and business partners. It is essential for the future of the sector that this reputation for honest administration and probity be preserved and enhanced.

5.4 The development of sizeable financial sectors brings risks of abuse. There have already been a number of problems. Where these have surfaced, they have been dealt with, and steps taken to strengthen the systems to prevent any recurrence. The process of building suitable defences against abuse is dynamic. As markets develop and techniques for laundering money, fraud, tax evasion and regulatory abuse evolve, so financial regulatory systems must improve, be updated, and be responsive to ever tighter international standards.

5.5 The Caribbean Overseas Territories in particular are a potential target for money launderers because of their offshore financial business, their proximity to major drug producing and consuming countries and, in some cases, their inadequate standard of regulation and strict confidentiality rules. They are also at risk from attempted fraud. In some cases, the small size of their public sectors makes it difficult to provide adequate regulation, particularly if the offshore sector has grown more rapidly than regulatory capacity.

International financial crime and regulatory abuse arising in the Overseas Territories is mainly targeted at other countries.

5.6 In the wake of problems in the banking sector in Montserrat in 1989, and the BCCI banking scandal in 1991, the regulation of financial sectors has been tightened. Regulators with relevant overseas experience have been recruited, and more comprehensive financial legislation introduced. Revised banking guidelines have been issued which restrict the granting of offshore licences to branches or subsidiaries of international banks which are supervised in their home country. Provisions have been made to allow improved cooperation with overseas regulators and law enforcement agencies; and modern all crimes money laundering legislation has been enacted or will be adopted shortly in the Caribbean Overseas Territories, Bermuda and Gibraltar. The focus should now be on using these powers effectively.

5.7 None the less, as the May 1997 National Audit Office Report on Contingent Liabilities in the Dependent Territories noted, overall progress in the Caribbean Overseas Territories in introducing regulatory legislation has been slow. Many Overseas Territories do not yet fully meet internationally acceptable standards.

Failure to tighten regulation could affect the stability of and confidence in financial markets and expose the UK to international criticism and to potential contingent liabilities. Furthermore, it could undermine our ability to combat financial fraud, money laundering, terrorist funding and tax evasion, and undermine the effectiveness of financial sanctions. It could also undermine the UK's ability to press for higher standards of global financial regulation, and to encourage greater regulatory cooperation.

5.8 Any participants in the international financial services industry must meet the corresponding international standards of good practice. The globalisation of international finance means that the whole system has to be protected. It is in all our interests to ensure that the Overseas Territories are not the subjects of complaints and that they have proper regulatory regimes in place. In the long run, it is the quality jurisdictions that will prosper best. There must be no weak links which can help to undermine the international financial system.

5.9 Gibraltar is required to implement all European Community Directives related to financial regulation. Gibraltar has made a commitment not just to implement the necessary measures to the minimum standard required within the European Union (EU), but also to match UK standards of financial regulation.

Gibraltar's standards of financial regulation are assessed formally and rigorously by the UK Government on a regular basis. This should ensure that Gibraltar will match the regulatory requirements set out in this White Paper.

5.10 Action is necessary in all Overseas Territories with financial centres or ambitions to develop such a sector, to improve standards. Overseas Territory governments must speed up the work they have in hand so that all measures are in place by the end of 1999. We shall be asking Governors to provide regular progress reports. We shall conduct an in-depth independent review by regulatory experts in 1999 to assess progress made in implementing these measures and make recommendations on how to deal with issues outstanding and to what timetable. This is essential to ensure both adequate regulation and that the same conditions apply in all Overseas Territories.

5.11 The key components of the regulatory package (see Appendix Two) we wish to see in place by the end of 1999 are: legislation for the effective regulation of the offshore sector which fully meets accepted international standards; n comprehensive measures to combat money laundering, which extend to all financial institutions, and the introduction of legislation to improve regulation of company formation agents and managers; powers to ensure that, whatever the secrecy laws, regulators and law enforcement in those Overseas Territories with financial sectors can cooperate properly with their overseas counterparts, including on investigation and enforcement matters; licensing and regulatory regimes for all financial activity that creates conditions for fair competition between the Overseas Territories; the establishment of independent regulatory authorities meeting accepted international standards.

5.12 In most Overseas Territories the offshore finance sector is the responsibility of the Governor. We have considered whether there would be an advantage in having uniformity of powers. We have decided that this is not essential. Where authority has been devolved, it is the responsibility of those concerned to ensure that the jurisdiction achieves the highest standards. We will monitor all Overseas Territories concerned and indicate what standards are expected. If, when the implementation of the check-list is monitored, some territories are found to have been inactive and to be behind, we will consider seriously whether to use our powers to ensure that the required standards are met.

Auditing and financial accountability 5.13 The existence of proper financial procedures and controls, including the availability of timely audited accounts of public sector activities, is necessary for the proper administration of public expenditure. The Overseas Territories' past record with both the standard and timeliness of draft and audited accounts has been mixed.

5.14 We will give high priority to ensuring that Overseas Territories have in place sound procedures for administering government finances, with adequate internal audits. Overseas Territories will be required to produce timely, independently audited annual accounts for all public sector activities to UK standards, with full identification of contingent financial liabilities. The accounts should be subject to scrutiny by the territory's legislature, and where appropriate by a fully functioning Public Accounts Committee. In some Overseas Territories, accounting and auditing legislation will need to be updated to underpin this process. We stand ready to give expert advice and assistance to help the Overseas Territories bring their audit and statistical systems up to the required standard.

Financial control -- borrowing 5.15 Borrowing is a legitimate tool of government policy but must be used prudently. We therefore intend to agree strengthened procedures and guidelines with Overseas Territory governments.

This will ensure borrowing is properly used, within sensible prudent limits and will assist Overseas Territory governments to obtain the greatest economic benefit from their borrowing and to borrow on the best terms. Many of the guidelines will be based on existing practice and will cover all means of raising finance.

5.16 In general, borrowing should only be considered for discrete capital investment projects. It should be restricted to investments which have a calculable and reasonably certain financial and economic rate of return. All investment projects, however financed, should be appraised by suitably qualified professionals against technical, economic, financial, social and (where appropriate) environmental criteria. Concessional sources of funding should be sought first and, in principle, projects with social objectives and low financial returns should be financed from recurrent budget surpluses.

5.17 In considering particular projects due attention should be given to the impact of new commitments on overall levels of borrowing, and to the territory's debt management record. While a rigid framework should not be applied, each territory wishing to borrow will be required to agree with us an overall level of borrowing, and in the case of some territories approval will be required for individual loans. Borrowing in excess of agreed limits would only be approved in exceptional circumstances, or if the economic situation had changed substantially since the limit was set.

5.18 Overseas Territory governments take on contingent liabilities themselves when they guarantee loans to other organisations, and these should be given only when the risk of default has been properly evaluated. Our approval for such guarantees will be required case-by-case.

5.19 We will provide neither explicit nor implicit guarantees for commercial borrowing by Overseas Territory governments. When negotiating borrowing arrangements Overseas Territory governments should not say or do anything which is likely to be interpreted as suggesting anything to the contrary.

Tax issues 5.20 There is growing international concern about the economic side-effects of harmful tax competition between states. Work on this has recently been undertaken by the Organisation for Economic Cooperation and Development (OECD) and the EU, and endorsed strongly by the G7. Given the international mobility of capital, both organisations concluded it was hard to tackle this issue on a purely regional basis. A global approach was needed, as for tax evasion, fraud and money laundering.

5.21 The Government supports the initiatives taken by the EU, OECD and G7.

Promoting economic stability and fairness, as well as improving the integrity and security of financial markets, are high priorities. Irrespective of size, all jurisdictions are potential beneficiaries from a healthier world economy.

They have a responsibility to ensure that their regulatory regimes are effective, transparent and offer adequate accessibility for the legitimate investigation of criminal activity, including tax fraud and evasion.

5.22 These initiatives have implications for some Overseas Territories. It is important, therefore, that Overseas Territory governments cooperate with them.

We will continue to consult closely with Overseas Territory governments over the initiatives, and ensure that international discussions of harmful tax competition take account of their interests. We stand ready to offer advice and expertise to the Overseas Territories in connection with these initiatives.

5.23 In the EU Code of Conduct for business taxation agreed on 1 December 1997, member states committed themselves not to introduce harmful tax measures and to re-examine laws and practices with a view to eliminating existing harmful measures. Member states with associated or dependent territories are committed, within the framework of the constitutional arrangements, to ensuring the principles of the Code are adopted in those territories.

5.24 The EU is also considering a draft directive which would require member states to operate a withholding tax on cross-border income from savings by individuals, or to provide information on savings income to other member states. It is proposed that member states should commit themselves within the framework of their constitutional arrangements to ensure equivalent measures are applied in dependent or associated territories.

5.25 Following the publication of a report by the OECD on 28 April 1998 on harmful tax competition, a Forum on Harmful Tax Practices has been established to consider how the OECD report's recommendations can be implemented. The Forum invited a number of jurisdictions, including some Overseas Territories, to provide details of their tax regimes. The Forum, through dialogue with the jurisdictions concerned, will assess whether their tax regimes match the OECD criteria for defining a tax haven. Those jurisdictions which meet the OECD criteria will be included on an OECD list of tax havens. The list will guide OECD members' efforts to persuade tax haven jurisdictions to modify their fiscal regimes and increase their international cooperation on fiscal matters.

5.26 In a recent communique m, the G7 urged the OECD to give particular attention to the development of a comprehensive programme to improve the availability of information to tax authorities to curb international tax evasion and avoidance through tax havens and preferential regimes. It also encouraged action to ensure that suspicious transaction reporting requirements apply to tax offences and for money laundering authorities to pass information to tax authorities in support of the investigation of tax related crimes in ways which would allow it to be shared internationally. The G7 also committed itself to further these objectives in all territories for which it has international responsibilities.

5.27 Work in this area is at an early stage. There are still issues, including some of definition, to be resolved. Overseas Territory governments need, and are entitled to, clear guidance as to which aspects of their offshore financial industries are likely to continue to be able to flourish, and which may be subject to change. We will work closely with them as the initiatives unfold. These initiatives will require greater international cooperation through, for example, the exchange of information on tax matters and improved transparency. A study of the possible economic impact of the initiatives on some of the Overseas Territories will be undertaken to help us determine the best way forward. Our interest is to ensure that offshore financial industries in the Overseas Territories flourish, and do so on the basis of compliance with standards and practices consistent with internationally agreed norms.

ENCOURAGING GOOD GOVERNMENT COMBATING DRUG TRAFFICKING AND DRUGS-RELATED CRIME 6.1 Drug trafficking and drugs-related crime are a serious threat to stability in the Caribbean: our Overseas Territories in the region are targeted by drug traffickers as potential trans-shipment points. This type of crime knows no boundaries. We are pleased therefore to support the territories in the Caribbean as they collaborate in regional efforts to counter the drugs trade.

Amongst our other Overseas Territories the only significant problem had been drug trafficking using fast boats based in Gibraltar: but local legislation in 1995 and 1996, including banning such boats, has solved the problem.

6.2 Drug trafficking affects the Caribbean region as a whole, not just our Overseas Territories. The geography of the region makes it particularly vulnerable to trafficking and the associated problems of crime and violence, corruption and economic distortions. The UN International Drugs Control Programme (UNDCP) estimates that some 400 tonnes of cocaine transit through the Caribbean each year. Most of the cocaine transiting our Overseas Territories is believed to be destined for the US.

6.3 Each of our Caribbean Overseas Territories has taken steps to tackle drugs issues including both domestic narcotics consumption and the threat from drug trafficking and money laundering. They have also made arrangements to ensure that their anti-drugs strategies are coordinated properly.

Typical is the Turks and Caicos Islands where a National Drugs Coordinator has been appointed and a National Drugs Committee coordinates the efforts of all the agencies involved in tackling trafficking and money laundering. In the Cayman Islands a National Drugs Council contributes to the working up of policies, while a Joint Police and Customs Drugs Task Force leads the enforcement action. 6.4 A regionwide Plan of Action was launched at a UNDCP meeting in Barbados in May 1996. The EU's substantial contribution to this five year-programme has become known as the EU Caribbean Drugs Initiative - worth some 25 million. The initiative is designed to help Caribbean governments, including the Overseas Territories, address the problems of drugs trade through improved regional cooperation and greater capacity to tackle all aspects of the control of drugs.

We have played a leading role in the initiative and will continue to work to ensure that our territories are fully involved. Programmes under the initiative, many part-funded by the UK or with British experts participating in them, include maritime cooperation, judicial training, countering money-laundering, law enforcement training, chemical precursor control and demand reduction.

6.5 We also provide considerable bilateral assistance to the Caribbean for counter-drugs work from which the Caribbean Overseas Territories directly benefit: The Royal Navy's West Indies Guard-ship (WIGS), supported by a fleet auxiliary vessel, conducts counter-drugs patrols. Joint operations involving ourselves, the Overseas Territories and the United States have enjoyed recent successes: in February 1998 cocaine worth at least US$200 million was seized by the Turks and Caicos Islands marine police.

There is a network of Drugs Liaison Officers in the Caribbean and neighbouring countries. These officers have conducted many successful operations with the law enforcement authorities in the region. n We are considering ways of developing the British Military Advisory and Training Team in the Eastern Caribbean into an even more effective counter-drugs asset.

The Caribbean Customs Law Enforcement Council, which is partly funded by the UK, operates a regional training and information system.

We are helping the Association of Caribbean Commissioners of Police to establish a regional secretariat.

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