Examination of Witnesses (Questions 80
- 99)
MONDAY 15 DECEMBER 1997
SIR JOHN
KERR, KCMG, MR
PETER WESTMACOTT,
LVO, MR JOHN
KERBY, and MR
LEE BEAUMONT
MR JAMIE
MORTIMER
80. Well, I was going to conclude at that point because
I think we have reached an impasse on this particular matter,
unless you can clear it up at a stroke.
(Mr Westmacott) I can try, Mr Page, very briefly.
Some of these populations are very small. What has happened is
that a couple of high-profile individual cases have gone wrong
where people have been acquitted when frankly they should not
have been because of either jury intimidation or corruption or
bribery or something else going wrong. Because one or two cases
in very small communities have received enormous publicity and
can affect perceptions of the administration of justice, these
governments have felt it was necessary to look to alternative
methods of administering justice. It does not mean to say that
there have been lots of them. They have been of a small number,
but some of them have been quite high-profile.
Mr Love
81. Sir John, the backdrop to this Report
that we have before us today is, and I quote the Chairman from
earlier on, that the Foreign Office has extensive responsibilities,
but little power, and it goes on to say that this is especially
the case where the Territories are not particularly dependent
on UK aid. I would like to look at two areas of the Report. The
first is financial services and I would refer you to page 33,
figure 8. It is clear that a number of the Dependent Territories
are very dependent on financial services for their income. You
mentioned earlier on that there has been, and indeed the Report
mentions it, a huge increase of development in financial services
in a number of the Dependent Territories and I wondered if you
would care to comment on whether regulation is keeping up with
the development of those services.
(Sir John Kerr) It is very important that it should.
We believe that these governments agree with that in principle.
We believe that in practice they need constant encouragement and
nagging which we would do by stick and carrot. The carrot is providing
regulators, and currently we have provided three for Anguilla,
two for the Turks, one for the Virgin Islands, financed by us,
financed by you. But that in itself is not a complete answer because
the outside expert comes and goes and what matters is to secure
ownership of the technique by the local regulator. We would argue
that enforcement needs to be improved, that the need is not simply
for a statute book which is right in respect, for example, of
"all crimes" and money laundering legislation, and a
regulation system which is effective and tough, but we also believe
that we need to see successful enforcement action, and there is
more of that. In the last three years, Anguilla, BVI and the TCI
have all shown a scale of enforcement effort that you would not
have seen 20 years ago. Four years ago there were 55 offshore
banks operating in Anguilla and the regulator has closed them
down and so there are now three offshore banks operating in Anguilla.
Offshore insurance companies in the BVI are now down to about
180 through the effective insurance regulation, whereas there
were a thousand of them four years ago, and the same effort has
been made in the TCI, though I do not have the numbers in my head.
In Montserrat of course we acted quite firmly, and they acted
quite firmly when the 1990 revelations about the Montserrat banking
sector came out and instead of having 350 banks in Montserrat,
the regulators approved only five, the number before the recent
volcano eruption, and it has gone back up to 18, but that is quite
tough enforcement.
82. I think that may be the case compared
with 20 years ago, but I think that what we are looking at here
is a very large development over the last ten years and I think
what this Committee would like to have some confidence in is that
the regulation that we have now is appropriate to the level of
development. However, let me take you on to figure 9 on the following
page, page 34, where we are looking at the resources that each
of the Territories puts into this. Looking particularly at professional
resources with the top four who are the main beneficiaries of
this development, do you believe that that is an adequate level
of supervisory professional resource to look after what is a very,
very complex and well-developed set of financial services provided
in these islands?
(Sir John Kerr) Could I say diplomatically, Mr
Love, that I think that is an extremely good question and I would
not wish to assert that all was for the best in a panglossian
way. If you look back at figure 8 on the previous page, there
are some quite striking numbers there. The BVI gets 47 per cent
of its revenue from the financial services sector, but it spends
3 per cent of its revenue on the regulation of that sector, so
that is quite an interesting number. I think your question is
one which will go on being addressed. I do not know what is the
right level, but it seems to me that there is prima facie evidence
that more needs to be done, even though, as I say, I think that
in legislation, regulation and enforcement there have been considerable
improvements.
83. You mentioned earlier, and I took the
quote down, that it is very much in the interests of these countries
to be properly supervised. Can I ask you, and I do this in relation
to, I think it was, the Caribbean Financial Action Task Force
which I believe, as you mentioned earlier, is a self-regulatory
body, do you have confidence that that body acts independently
and considering that there is a community of interest among quite
a number of the Dependent Territories, do you think that body
acts and have you confidence that that body acts independently
on behalf of the consumer to ensure that regulation and supervision
is adequately handled in each of these Territories?
(Sir John Kerr) Absolutely sure, yes, absolutely
sure. My reason is because the United States is a member of it.
84. Sorry, I did not realise that.
(Sir John Kerr) That sounds harsh to the Governments
in question and of course I defend my Caribbean Dependent Territory
Governments as well, but it is a reassurance to know that the
United States are there.
85. We all realise that this is a very technically
complex area, offshore financial services, and I think it was
mentioned earlier about the changes that are being made here in
Britain in relation to that complexity and there has certainly
been a lot of comment and discussion over the last few weeks about
whether and how the legal system in this country can cope with
that complexity. Do you have confidence that the legal systems
in the Dependent Territories have the expertise to be able to
cope in this area?
(Sir John Kerr) I do not have total confidence,
no. I think if I had total confidence, then we would not still
be supplying on technical assistance terms people to help. I believe
that it is very important that the BVI and the Caymans should
pass the legislation they have in draft which will require improved
record-keeping in due diligence on company formation. I think
that is very important. I think it is very important that all
the Dependent Territories should sign up to legislation on gateways,
legislation which will improve access for regulators in other
jurisdictions, like regulators in London or in Paris or in New
York, to obtain access to records on financial institutions operating
in the Dependent Territory in question. I think that really does
matter. I think that encouraging them to go on believing that
it is in their interests to be seen as (a) clean, and (b) sound
is very important and I think they do see that as being in their
interests. I think there ought to be a continual role for Her
Majesty's Government here to nag them, suggesting further ways
in which they might go further to meet their interests.
86. You in fact do that and right at the
top of page 34 you mention that the Foreign Office sent revised
guidelines after some dispute in relation to international business
companies, but it says that there was a twelve-month deadline
for implementation. Can you tell us how successful that has been
and whether it has been implemented?
(Sir John Kerr) No, I believe it has not been
implemented and that is why I mentioned it. I think it would be
very helpful if the Committee, if it agrees with the NAO and us,
would encourage us to keep pressing hard on this.
87. Can I move on to financial accountability
and take you to page 30 of the Report at paragraph 4.6, and I
quote, it is the last four lines: "His report identified
a number of areas of concern, such as widespread laxity in adopting
financial procedures and a failure, at senior level", et
cetera, et cetera, "'with due respect for the law and legislature'".
That was in a report commissioned for the Foreign Office in 1993.
Has your view changed since then?
(Sir John Kerr) I think it is clear that administration
and audit can be further improved. That is why we have made the
appointment since last February of the new full-time financial
management adviser operating out of Bridgetown. We also have a
financial services adviser also operating out of Bridgetown. There
is a serious effort to encourage higher standards and I described
before how on audit work there has been a serious effort to make
them catch up with audit which has shown some results.
88. I have one final question on budgetary
control and I take you back to page 29, the first sentence at
paragraph 4.4, and it is in relation to the information held by
the Foreign Office regarding budgetary control in the Dependent
Territories. I wondered if you would comment on how effective
you believe Foreign Office monitoring of that budgetary control
now is?
(Sir John Kerr) I think it is now extremely effective.
Whether that is totally coincidental, I do not know, but I think
it is now extremely effective. I am in a position to give you
exact numbers of the borrowing of each of the Dependent Territories
and its relation to their GDP and its relation to their exports
which I do not know if my predecessor could have done at the drop
of a hat but for the NAO Report, but I think there is a serious
monitoring of borrowing and a requirement for it.
89. Noting again that you have great responsibilities,
but not perhaps as many powers, do you have powers where you feel
that alarm bells should be ringing in relation to budgetary control
to intervene and help restrain?
(Sir John Kerr) Yes, we do have a certain amount
of power. It varies slightly from Dependent Territory to Dependent
Territory. In the case of Bermuda, we have least power, but perhaps
the system is most advanced. In relation to the Caribbean countries
where we are the aid donor, we have very considerable power clearly.
The problem, if there were one, would exist principally in the
BVI and the Caymans, although in fact because they are rich, they
do not actually do a great deal of borrowing. In the case of BVI,
they have $31 million borrowing now, compared to an enormous GDP
of $500 million, they have a strategic policy plan in construction
and it will include a borrowing strategy at our insistence and
they will be talking to us about it in the New Year. In the case
of the Caymans where the GDP is even bigger, their borrowing is
about $80 million at the moment. Again they are drawing up a strategic
policy plan which will include something about borrowing, and
they really need to agree that with us because if the word got
about in the financial community that we were unhappy about BVI
or the Caymans' borrowing, then that could make their borrowing
more difficult to do. The numbers at present are not something
to worry about, but we do, I agree, need to monitor that. I think,
to be absolutely fair to my predecessors on monitoring, if there
is a defect in this bit of the Report, it is that it does not
look at Bridgetown. The Regional Secretariat in Bridgetown and
the Development Division know a great deal about borrowing and
my brief for today on that subject was written there. If you go
to go the Governor of BVI and you go to the department in the
Foreign Office, you perhaps miss the third leg of the triangle
where most of the expertise would lie.
Mr Williams
90. Could I just follow on a similar track,
but first of all could you explain to me, on page 45, what was
the background to the situation in 1996 when the elected Members
of the Turks and Caicos Government sent a petition to the UK Government
requesting the removal of the Governor?
(Sir John Kerr) Do you mind if I pass this to
Mr Westmacott?
91. No, of course not. We just want the
answer. We do not mind who gives it.
(Mr Westmacott) The answer is fairly simple. The
new Governor went out there with a pretty clear brief to limit
some of the things that were going wrong, not exactly to crack
the whip, but at least to exert the powers with which he was endowed
as Governor of those islands on behalf of HMG. He carried out
his instructions. That was not terribly popular with some of the
locals and there were a number of things which happened where
the slightly firmer governance, if you like, did not go down very
well. To be honest, I think there may have been one or two bits
of personal tension here and there, but it resulted, not for the
first time, I have to say, in our Dependent Territories in the
Caribbean in a small group of people on the island-quite influential
people-saying, "We will not put up with this. Let's get rid
of the guy. Please, can we have a Governor who is more to our
liking?"
92. What were the things that were going
wrong which he was supposed to be putting right?
(Mr Westmacott) Well, it was quality of governance,
I think one might say in the broadest sense, as well as the administration
of justice.
93. Never mind the broadest sense; tell
us the more precise sense.
(Mr Westmacott) I cannot give you a lot of the
detail because the reports that came to us-and this was inevitably,
like the rest of it, before my time in the office-but the reports
that came through then were much more to do with the general and
personalities and, "We don't want this Governor telling us
how to run our affairs". But there were specific cases which
went wrong and there were some legal cases where local people
thought that the Governor was instrumental in bringing court cases
against, shall we say, their pals when they would have preferred
court cases not to be brought. If you need more details, I would
have to write to you about that.
94. Does it happen so often that you get
a petition to get rid of a Governor that you do not remember the
details when it does happen?
(Mr Westmacott) No. The petition was not about
any particular thing; it was just a general complaint against
the Governor himself. Here we are, I have got a note. The immediate
cause was comments attributed to the Governor in an offshore finance
publication, but, as I say, this was a pretext and this was something
which had built up. There were comments in an offshore finance
publication which people on the island thought were, shall we
say, offensive to some of the people who were there, but it was
a pretext for a broader problem of the perception of the way he
was doing his job which people did not like.
95. You started off by saying that he went
there with the specific remit to put things right.
(Mr Westmacott) Yes, he did.
96. We still do not know really what he
was trying to put right. To save time, it is getting very late,
let us have a full note on that aspect please. [2]Then,
if you look at the previous page, appendix 1, following on the
point that several of my colleagues have raised, several of these
islands are a focal point of tax evasion and, equally importantly,
they are the focal point of consumer rip-offs, particularly in
the insurance sector. Now, as far as tax evasion is concerned,
do you have many representations in the DTI or consistent representations
from them to try to bring these islands into line?
(Sir John Kerr) The fact that the Caymans is a
well-known tax haven, no, I do not think there are representations.
I am aware of no representations from the DTI suggesting that
we should require the--
97. But what about the Treasury? Are they
worried about tax evasion?
(Sir John Kerr) I am not using the term "tax
evasion". That would be a crime. The fact that they have
very low taxes in the Cayman Islands is--
98. Well, tax avoidance then. Do you get
representations on them as a centre of tax avoidance from the
Treasury or the DTI?
(Sir John Kerr) My point, Mr Williams, is no,
I am not aware that we are under heavy pressure.
99. Really? Are you not worried about it
in the Treasury at all?
(Mr Mortimer) This is mainly an Inland Revenue
matter, but I think I am right in saying that there has been some
discussion within the European Community of proposals by Monti,
which are about competitive--
2 Note: Memorandum not reported (PAC99). Back
|
