Examination of Witnesses (Questions 1
- 19)
MONDAY 15 DECEMBER 1997
SIR JOHN
KERR, KCMG, MR
PETER WESTMACOTT,
LVO, MR JOHN
KERBY, and MR
LEE BEAUMONT
MR JAMIE
MORTIMER
Chairman
1. Welcome, Sir John. It is a little different
from our last meeting, I think. Today we are going to be looking
at the question of contingent liabilities in the Dependent Territories.
Perhaps we could start, for the benefit of the Committee, by your
introducing your colleagues?
(Sir John Kerr) Thank you very much, Chairman.
I cannot say it is a great pleasure to be doing business with
you again. It is, of course, a pleasure but I used to sit on the
cross- benches as a Treasury witness and, therefore, it was not
with unalloyed joy that I heard that one of my first tasks on
coming home was to appear before your Committee. I am accompanied
today by Peter Westmacott on my left, who is Director of Americas
in the Foreign Office; on his left by John Kerby, who is the Director
for Eastern Europe and the Western Hemisphere in the Department
for International Development, and on my right by Lee Beaumont,
who is Head of Airport Security in the Transport Security Division
of the Department of the Environment, Transport and the Regions.
2. Thank you, Sir John. Let us go straight
into the questions. In paragraph 2 of the Comptroller and Auditor
General's Report it says that you have extensive responsibilities
for the Dependent Territories but limited power. Do you have sufficient
power and influence to manage the risk that the United Kingdom
may have to pay out should the Dependent Territories be unable
to meet their liabilities?
(Sir John Kerr) Thank you, Chairman. It is a difficult
balance. I cannot pretend that everything is excellent, wholly
under control, predictable, predicted and covered. Anybody who
reads this excellent report would know that is not the case. What
we have is a range of powers which vary with particular Dependent
Territories. We perhaps have fewest powers with Bermuda, which
has existed with broadly its present constitutional arrangement
with us since the beginning of the 17th century. We have very
considerable powers clearly in relation to those of the Dependent
Territories whose incomes comes virtually exclusively from the
United Kingdom taxpayer. I think of a Pitcairn or a St Helena.
We could have more power than we do in relation to some of those
in the middle. There is clearly a spectrum, with total independence
at one end, when we would have no power but which none of them
now seek. Gibraltar, as you will recall, used to. Mr Bossano used
to talk about it as a possibility but it is not currently being
sought. Bermuda did think about it but the referendum in 1995
went against independence. We would then have no liability in
the event of independence. At the other end of the spectrum one
could have total integration, where it is clear that we would
have total liability but also a much greater ability to control
risk and reduce liability. I think it is clear that this Government
and the previous Government are not willing to push countries
to independence if they do not want it, but I suspect that this
Government, and I know the last Government, did not think that
it would be right to go backwards and take back more power which
had been given to what are small democratic governments. So one
has a slightly uneasy situation where, because we do not have
total power, I cannot assure you that all risks have been properly
weighed and are properly covered. I do not think in all cases
we have got it 100 per cent. right but it is partly a matter of
power. I think it is one of the reasons why the present Government
is conducting a review of the Dependent Territories, to look again
at where on that spectrum one should be, but I think it is unlikely
that we shall be moving to re-integration. Only with a completely
integrated set-up would we have total power.
3. Some on the Committee may want to come
back on individual cases. It is clear from figure 7 in the Report
that in some territories the accounts and audit legislation are
out-of-date, accounts are running several years late and Public
Accounts Committees meet only intermittently. Given your responsibility
for the Territories' financial management, what are you doing
about these shortcomings?
(Sir John Kerr) Chairman, I agree the position
in figure 7 is a very depressing picture. The situation as of
today is slightly better than that picture, which was correct
when this Report went to press. All but the Virgin Islands in
the Caribbean are now producing audited government accounts. In
the Virgin Islands the backlog is being cleared. The position
is that the 1994 accounts are now complete and audited, the 1995
accounts are complete but not yet audited, the 1996 accounts are
now six months overdue. We are leaning very hard on those responsible
to try to ensure that the 1997 accounts come out on time. In Anguilla
the 1996 accounts are still being audited, with the NAO, in fact.
What are we doing to try to improve this? First, pressure, second,
encouragement of internal audit units, which now exist in the
Caymans and the BVI. Our new institutional development and financial
management adviser in Bridgetown has it as one of his principal
tasks to try to prescribe standards and advise the governors of
the Dependent Territories and their auditors general and their
accountants general, and monitor their performance. We will press
very hard. We are grateful in this context for the help, sometimes
the direct help, we have had from the NAO on DfID funding. The
NAO have this year conducted the audit of the Anguilla 1995 and
1996 accounts. DfID is, of course, funding some technical assistance
jobs in this area. For example, the auditor general of the TCI
is recruited and financed by DfID. So I agree the picture is not
good but it is a picture that we are trying very hard to improve.
4. Turning to something rather more specific
now, drug trafficking: drug trafficking and consumption are major
problems-paragraph 3.3 is probably the most relevant here-especially
in the Caribbean, and there are a number of weaknesses in the
Territories' anti-drugs work: for example, surveillance planes
are not put to full use and intelligence could be better exploited.
When will these efforts be more effective?
(Sir John Kerr) Chairman, first, I think it is
absolutely right to look very hard at this area. Some 30 per cent.
of the cocaine that comes to the United Kingdom comes through
the Caribbean. The United Nations maintain that 400 tonnes of
cocaine a year come through the Caribbean as a whole, of which
about 50 per cent. is headed for Europe. When we arrested the
"Limerick" off the Cuban coast in October 1996 it had
7 tonnes of cocaine on board. The United Nations number is an
all-Caribbean number, but the Americans used to tell me that about
250 tonnes of cocaine a year came through the Central/Eastern
Caribbean, 40 per cent. of the total flow from Latin America going
north towards continental North America or the United Kingdom.
So there is a huge problem. What we are doing is five things basically.
First, approximately two-thirds of the good governance fund aid
which goes to the Dependent Territories from Foreign Office funds,
that is about £7 million out of £11 million in the last
four years, is going for drugs activity-police and customs training,
including against money laundering, and, of course, the purchase
of five police launches. Second, we have had the military advisory
training team since 1994, who are now able to train all anti-drugs
agencies in the area, not just the military ones. Operating out
of Bridgetown, working very closely with the Americans, they cost
us, the British taxpayer, about £1½; million a year.
Third, we and the French have inspired the EU initiative described
in the paper. You will remember, Chairman, this got going at the
Florence European Council in the summer of 1996, with 35 million
ecu from Community funds (which is being spent not just in the
Dependent Territories but the expenditure will help the Dependent
Territories). They will now be establishing a project management
office and a Royal Navy commander will be there alongside his
Dutch, French, American and Caribbean colleagues in Bridgetown.
Fourthly, there is the Dependent Territories Regional Crime Information
Centre, which I visited in Miami, which started this summer and
which I personally think is an extremely good thing and so does
the United States Administration. We are providing through Miami
and through the generosity of the British taxpayer a system of
secure communication between law enforcement, anti- drugs authorities,
in the Dependent Territories and the United Kingdom in our Miami
office and the FBI in their Miami office, also linking into the
American services in Key West and to the American Coastguard in
Puerto Rico. The unit in Miami is quite small. It is paid for
by the Foreign Office and basically it is one police and one customs
and excise officer, plus support staff. I think it is an extremely
good idea. I think the exchange of information, secure on the
equipment which we have provided, is going to be very helpful.
The Americans think so, too, which perhaps is more important.
Lastly, there is the direct activity of the British Armed Forces.
We have the West Indies guardship, which has as one of its principal
tasks action against drug- runners. The Ministry of Defence calculate
that the cost of having it there for its drugs function, which
is only a proportion of the cost of having it there, is about
£0.8 million a year. Its remit is all-Caribbean. I do not
maintain that this is simply for Dependent Territories, but it
is extremely successful. In 1996 one Royal Navy frigate, HMS BRAVE,
in a single seizure netted £150 million-worth of cocaine,
4½ tonnes of cocaine. Also in 1996 HMS ARGYLL had two seizures,
four arrests out of 17 boardings, 323 kilos, £10 million-worth
of drugs seized. Negotiating with the Americans on the ship-rider
agreements which are referred to here, by which we shall be able
to go on each other's craft and US law enforcement officials will
be on ours or on Dependent Territories' ships, that is a complicated
operation but I am told it is going well. We already had an MOU
(Memorandum of Understanding) being negotiated updating the arrangements
for the American personnel to go on our guardship and the Royal
Fleet Auxiliaries which accompany the guardship. I have high hopes
that that will be put on a multilateral basis, the United States,
the United Kingdom, all the Caribbean Dependent Territories and
Bermuda, by early 1998 and that will be a considerable advance.
I would also say that those concerned with some of the programmes
described here, and described in some cases as not going too well,
are a little more optimistic in their briefing of me than the
NAO is in its account of these programmes. The planes that have
limited night-flying capability provided for the Turks and Caicos
and the BVI have now, in fact, been equipped with night-vision
equipment. Their running costs are high. We do not provide aid
for their running costs, but I think it is the case that the Dependent
Territories governments realise that all this activity is strongly
in their interests because their own ability to attract perhaps
particularly American tourists will be affected if they are overrun
by the drug-runners. There is no doubt that, for example, northern
Jamaica, Montego Bay, where tourism is down by 50 per cent. as
a result of lots of stories in the American press about the drugs
environment, and the law in Jamaica, has lessons for the Dependent
Territories, lessons that I believe they are learning. I think
the effort against drugs, which is costing the British taxpayer
now over £5 million a year, totting up the five items I have
mentioned, plus our share of the 35 mecu from the European Community
budget, is impressive. We are taking it seriously and I think
it is clear that they are taking it seriously too.
5. Thank you, Sir John. Others may want
to pick up again on some of the detail. Can we keep it moderately
brief? I know it is a complex subject. Offshore financial services
are a major source of business and government revenue in several
of the Dependent Territories. Figure 8 gives the relevant figure
here. At the same time there is a risk of money laundering and
non-compliance with international standards, yet there is a lack
in some Territories of legislation embracing all crimes. Paragraph
3.10 refers. What is being done to plug this and other legislative
gaps in this area?
(Sir John Kerr) Perhaps in view of your remark,
I had better just answer just the specific question about all-crimes
legislation. It is extremely important that the legislation which
outlaws money laundering in respect of drugs money should also
be applied to criminal money obtained by any kind of crime. In
the Caymans that is now the case; in BVI subsequent to this report
that is now the case; in the Turks and Caicos it should be the
case by the first week of next year; in Anguilla it should be
the case by the last week of this year; in Bermuda it is the case,
though the law is, in our view, defective, and will need adjustment;
in Montserrat I cannot tell you what the position is. I think
the volcano has prevented the Montserrat authorities doing what
they planned to do by the end of this year, but if you look ahead
two months, we should have all crimes, anti-money laundering legislation
in all the Caribbean Dependent Territories except Montserrat,
and I hope Montserrat will catch up, and in Bermuda. It is the
case in Gibraltar already.
6. The Caymans used to have a fiscal exemption
clause, did it not? That is removed, is it?
(Sir John Kerr) No, the battle over the fiscal
exemption clause is not absolutely complete. The Caymans have
on their statute book a law which is defective. They have had
it for a year, 14 months. We want to change it.
7. One of the concerns of the Dependent
Territories is that they perhaps see slightly dirty money as being
a competitive advantage for them, shall we say, in financial markets
and something you need to deal with obviously, and that is being
dealt with, is it?
(Sir John Kerr) It is being dealt with. Some people
may see that. I hope they are the minority. I think the majority
can see that if a Territory acquires a reputation of having been
penetrated by criminality, that in the long term is not in its
interests. The Caymans have signed up, as have all these Dependent
Territories, and 26 Caribbean countries in all, to the Caribbean
Financial Action Task Force, which is the spin-off from the G7
money laundering task force, and the Caymans were, in fact, the
first country to ask to be examined by their peers. This system
works on peer pressure; they examine each other, and the Caymans
were so examined, I understand, in 1995; Bermuda and the TCI will
be examined in the first half of next year. I think it is clear
that in the Caymans they do feel that it would be dangerous for
the future of the Caymans as a financial centre-it is, of course,
a very big centre, as the table you drew to our attention in figure
8 shows- if it was thought to be a haunt of crime. The Governor
of the Caymans told us today that he would make sure that the
fiscal exemption would disappear from the Caymans all-crimes law
by March of next year.
8. On the rather more operational aspect
of this, it is taking some time to get Gibraltar's Financial Services
Commission up to strength. What are the dangers for the United
Kingdom if the Commission's work is not up to scratch?
(Sir John Kerr) I think the position of Gibraltar
has improved considerably with the action that was taken in 1995/96
against the drugs/ tobacco runners. I think there is no doubt
that that has made a considerable difference. I think it is also
the case that in Gibraltar the accounts systems, audit systems,
are now again, partly thanks to help from the NAO, looking a lot
better than they did. There are problems in Gibraltar but I do
not think that problem is any more top of the list, Chairman.
9. We may come back to that later but let
us deal with another specific here. There is a contingent liability
of the United Kingdom towards Hong Kong pensioners if the value
of the Hong Kong dollar falls by 35 per cent. against sterling.
Would this liability be triggered if the Hong Kong dollar were
no longer tied to the US dollar?
(Sir John Kerr) I wonder if I can deal with this
particular question a little later in the afternoon.
10. Yes, we will come back to that and you
can think about your answer. Lastly, before I open matters up
to the rest of the Committee, the Montserrat volcano which you
mentioned is an all-too-real example of what a natural disaster
can do to a Dependent Territory. What is being done to make contingency
plans for those events that are reasonably foreseeable?
(Sir John Kerr) Disaster preparedness?
11. Yes, and how you insure, whether you
self-insure or not, for example?
(Sir John Kerr) Paragraph 2.19 of the NAO's report
rightly draws attention to earthquake, hurricane, all the ills
to which the Dependent Territories are exposed, particularly in
the Caribbean. Montserrat is an all-too vivid example, I agree.
We should have more disaster preparedness done. I think it is
clear that more disaster preparedness and prevention is being
done. It is set out in the DfID White Paper, Secretary of State
Short's White Paper, that disaster preparedness and prevention
is an integral part of our development co-operation programmes.
And some progress has been made, particularly in the Caribbean
where it is most relevant. Paragraph 2.20 of the NAO report is
a little out-of-date now. The TCI now has a National Disasters
Committee chaired by the Governor. It has tested an oil spill
plan. BVI has an Office of Disaster Preparedness with a comprehensive
disaster plan and specific contingency plans on oil spill and
air crash disasters. The Caymans have contingency plans which
are regularly updated, and Anguilla, where the concern is, of
course, hurricanes, has contingency plans, and is developing some
new forms of co-operation with its Dutch and French neighbours
in St Martin. Moreover, there is a Disaster Preparedness Committee
which we hope will result in new legislation in Anguilla and the
other Caribbean Dependent Territories in the first quarter of
1998. We are pressing them to look at preparedness, to learn from
each other's practices and consider mitigation measures. All of
them except the Caymans are members of the Caribbean Disaster
Emergency Relief Agency, all of them are members of a Pan-American
parallel organisation. DfID does a great deal of funding of health
authorities' preparations for disasters, and up in Bermuda, where
hurricanes cannot be excluded, there is an extremely good system
of insurance against hurricane risk, with good risk management
studies (October 1996) now being implemented, risk managers appointed,
regular exercising of oil spill response. We press them all, Mr
Chairman, and it is an area where I think this report will be
particularly helpful.
Chairman: I may ask you for a note
at the end, Sir John, if we do not cover it in detail during the
course of this hearing. Phil Hope?
Mr Hope
12. Can we start by looking at the section
around governance on page 17. Importance is placed in the report
on country policy plans being produced and yet I note that the
British Virgin Islands and the Cayman Islands do not appear to
have yet produced them. Can we be sure that they will produce
them and negotiate them and that, therefore, we will have a better
position to influence the developments and cover the United Kingdom
taxpayers' resources?
(Sir John Kerr) Yes, Mr Hope, I think we will
get documents out of them. Country policy plans, of course, are
most attractive to the Dependent Territories that are aid-funded
because it is clear that it is a condition for our aid and it
is seen as a proper development plan and we and they discuss how
development should proceed and the implication is that there will
be United Kingdom money. In the case of the Caymans and the BVI,
where their per capita wealth is higher than ours and there is
no United Kingdom capital aid or budgetary aid being considered,
the incentive to them is not quite so great, which is why I think
they are behind in the pack. We have country policy plans with
Anguilla, Montserrat, TCI and St Helena, all those who need money.
It has been more difficult to get the Caymans and the BVI interested.
However, both governments have now agreed to the preparation of
strategic policy documents. The one for BVI is being drawn up
on the basis of an outline prepared by a British ex- governor
of Anguilla. I have seen him and talked to him about what he is
doing and it seems to be thought that his ideas will be acceptable
in the BVI when he gets into the second stage of negotiation with
them in January. In the Caymans it is the other way round. They
have agreed that they will draft the text and put it to us. I
do not know how it will turnout but we have agreed with them the
terms of reference for a consultant to advise them on its preparation.
So while we are some way short of getting proper strategic documents
for the Caymans and BVI, a process is in hand which should get
us there.
13. Can I turn to Gibraltar, on page 30,
where paragraph 4.8 talks about an on-going exercise in Gibraltar
to rationalise the complex network of government companies. Do
you feel there is now satisfactory financial control and accountability
in Gibraltar?
(Sir John Kerr) It is certainly a great deal better
than it was.
14. Is it sufficient?
(Sir John Kerr) I think that the situation is
very different from the situation across the Atlantic. Gibraltar,
under Article 227 of the Treaty, is part of the European Union.
Gibraltar is, therefore, required by European law to satisfy rather
high European standards. The difficulties with Gibraltar are,
therefore, about performance against the standards that were set
for the United Kingdom, for France, for Germany, and which in
some cases in a small market like Gibraltar seem onerous to the
Gibraltarians. It is slightly different from the situation in
the Dependent Territories, where European Union law does not apply,
and we are seeking to establish higher standards coming up from
a very low base. So yes, I cannot say there are no problems in
Gibraltar. There are still problems but it is a little hard to
equate Gibraltar with some of the other Dependent Territories
we are talking about because the base is pretty high.
15. The European Union Directive mentioned
in Appendix 3 at paragraph 7 on page 56 describes the commitment
to clear the backlog of outstanding Directives by the end of 1995
as being unrealistic. Has it now been achieved at the back end
of 1997?
(Sir John Kerr) It is a moving target, of course.
The numbers change because they have passed a whole lot more Directives.
Where we stand now on European legislation in Gibraltar is that
of the 1994 package, 40 out of the 50 Directives in the first
package have been implemented, 43 out of 96 in the second package.
Of those outstanding, all are at various stages of drafting, I
am assured. I am not quite sure what that means.
16. The answer is no?
(Sir John Kerr) The answer is no, correct.
17. So is it another unrealistic deadline
and what is the realistic deadline by which these Directives may
well be achieved?
(Sir John Kerr) Under European Community law the
Directives should be implemented by the implementation date laid
down by the Council. We are dealing here with a backlog, a considerable
backlog.
18. As we were then?
(Sir John Kerr) As we were then. 154 Directives
have been implemented since 1994; another 101 are being drafted.
That leaves about 26 requiring action in Gibraltar. The backlog
is much reduced. We are not there yet. Yes, the deadline you mention
has been missed.
19. Are you able to give us another deadline?
(Sir John Kerr) The deadlines are deadlines that
we invent with Gibraltar. They are not deadlines laid down by
the European Union.
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