House of Commons - Foreign Affairs

Select Committee on Foreign Affairs Seventh Report

4 Contingent liabilities

296. The FCO's management of the risks to which Overseas Territories expose the UK was considered in detail in the Public Accounts Committee's and National Audit Office's reports. We therefore do not propose to consider the full range of contingent liabilities here. Instead we focus on a number of key issues on which we received significant amounts of evidence: regulation of offshore financial services; economic diversification and de-mining in the Falkland Islands; budgetary aid; crime and disaster management; illegal immigration; and regulation of civil aviation.

Regulation of offshore financial services

297. 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.[485]

298. 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".[486]

299. 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. We received mixed evidence about the quality of financial regulation in these Territories. The Leader of Government Business in the Cayman Islands told us 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.[487] During our 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. We 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.

300. The Premier of 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 us 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.[488]

301. BVI's Financial Services Commission itself argued:

[…] 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.[489]

The FCO provided some support for this view in its evidence to our inquiry:

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.[490]

302. Mike Hardy, a financial professional in Bermuda, told us that insufficient emphasis had been placed by regulators in Bermuda on the investigation of licensed companies, managers and executives with regard to suspicious activities. He pointed out that the Bermuda Monetary Authority (BMA) had not made one significant "official" Criminal Complaint (or Suspicious Activity Report) to the Police Fraud Unit in 25 years and argued:

[…] it appears that the BMA, whilst dealing with unsavoury situations by cooperating with overseas regulators and providing them with significant help where required to put criminals in jail in foreign jurisdictions, does not proactively investigate suspicious circumstances themselves […]

Mr Hardy called for proactive investigation of suspicious activities to be an object of the BMA, as well as a separate investigative branch to work closely with the police.[491] However, the National Audit Office's report pointed out that Bermuda's main financial product was corporate reinsurance which was lower risk and therefore less likely to generate suspicious activity reports.[492] During our visit to Bermuda we met the CEO of the Bermuda Monetary Authority who told us about the steps being taken by the Territory to improve anti-money-laundering standards.

303. Gibraltar's financial services industry is not large by international standards, but it provides a wide range of services, including banking, insurance, fund management, trusts and advisory business[493] and is increasing its share of this market.[494] 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. 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 us that in his experience in the past "the UK gave bad advice, things turned out wrong and they subsequently blamed us."[495]

304. The financial services industries of Anguilla, Montserrat and the Turks and Caicos Islands, for which the UK retains direct responsibility, remain small.[496] 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.[497] The Public Accounts Committee 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.[498]

305. We asked the leaders of these Territories for their assessments of standards of regulation of their financial sectors. The Chief Minister of Anguilla told us 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.[499] The Chief Minister of Montserrat told us 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.[500]

306. The Turks and Caicos Islands' financial sector is small by international standards, but significant, behind tourism, within its local economy.[501] The Premier of the Islands told us that a lot of it was "tied to the construction boom of condominiums and second homes, and the persons and trusts that use the jurisdiction for estate planning". He said 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.[502] However, during our inquiry we received allegations of investments into TCI from businessmen with links to criminality (see para 164, previous Chapter).

307. When we visited the Turks and Caicos Islands we met the Managing Director of the Financial Services Commission and the Chairman of the Board. They called for help with drafting regulations. Another issue they 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 the UK had failed to respond quickly when the Commission asked whether it could accept this offer.

308. 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 and provided assistance in drafting legislation to allow the Territories to retain and reinvest the confiscated proceed of crime, but argued that it was "improbable" that a single specialist was "sufficient to address the scale of the risk".[503]

309. We also received evidence from St Helena's Banking Supervisor, Alan Savery, who had a contract with DFID to draw up a financial services ordinance for the Island. He warned:

Although St Helena has banking legislation and a regulatory regime for banks it has at present no legislation relating to other financial services or money laundering. There have been indications that certain parties would like to take advantage of this situation and one website described St Helena as the "last unregulated financial centre in the world".

Mr Savery told us that he had been trying to introduce financial services legislation for almost three years but that delays had "largely been with the FCO and DFID". He explained:

One of the problems I have had with this work so far is persuading FCO/ DFID officials that as a very small community and economy St Helena does not need (and cannot afford) the type of regulatory regimes that are necessary in the developed world. In creating a regime for a country like St Helena it is extremely important to have a thorough understanding of the needs of the local economy and the manner in which business is done there. I think I have proved this point through the successful establishment of the bank and an appropriate level of regulation but am still fighting this battle in relation to financial services.

[…] the underlying problem arises from the fact that in dealing with technical issues such as financial services, they rely on experts in the subject who have no knowledge of the island and the desk officers who have knowledge of the island do not have sufficient technical knowledge to be able to put the expert advice into the proper context. This results in measures being proposed which are out of proportion to the problem being addressed.[504]

310. St Helena's Legislative Council told us that a draft Financial Services Bill and a Money Laundering Bill were published in December 2007 and argued that enacting such legislation was important both to protect St. Helenians from "falling victim to unscrupulous financial service providers" as the economy begins to develop in preparation for tourism and to ensure the Territory complied with its international obligations.[505]

311. We recommend that the FCO should encourage Bermuda, the British Virgin Islands, the Cayman Islands, and Gibraltar to continue to make progress in improving financial regulation, in particular in arrangements for investigating money laundering.

312. We are concerned by the National Audit Office's finding that the FCO has been complacent in managing the risk of money laundering in Anguilla, Montserrat and the Turks and Caicos Islands, particularly since these Territories are those for which the UK is directly responsible for regulation and therefore most exposed to financial liabilities. We agree with the Public Accounts Committee's recent recommendation that Governors of these Territories should use their reserve powers to bring in more external investigators or prosecutors to strengthen investigative capacity.

313. We also recommend that the FCO should continue to work with DFID to introduce a financial services regulatory regime in St Helena that is appropriate to its local economy and development.

Economic diversification in the Falkland Islands

314. According to economic data for 2006, the GDP of the Falkland Islands is £75 million and GDP per head £25,380. Up until now the Falklands have been highly dependent on fishing license revenue, but in the long term catches are expected to decline.[506] The National Audit Office's report found that the Falkland Islands government (FIG) had "shown commendable fiscal responsibility by building up its financial reserves to some £170 million by 2006", which would cushion the Falklands' finances for several years, but argued that it was important to diversify the Islands' economy, with tourism and oil exploration being the main opportunities.[507] We consider progress made on developing these industries below.

Tourism

315. The Ministry of Defence operates the only direct air service ("airbridge") from the UK to the Falkland Islands (via Ascension), with the only alternative a weekly commercial route via Madrid and Chile run by LAN Airlines (see following chapter for discussions of Argentina's obstruction to flights across its airspace). The National Audit Office's report identified the "perceived cost and unreliability" of the airbridge as a constraint in increasing tourism. It explained that cruise-ship visitors were projected to treble, but that spend per passenger was low compared to tourists arriving by air. It noted that Falkland agencies had called for more certain booking arrangements, more reliable flights and the ability to offer a business class service and recommended that FIG should commit to a set number of seats, in return for enhanced influence and guarantees regarding the service.[508]

316. In October 2007, the Ministry of Defence (MoD) agreed a new contract with the operator Omniair, which guaranteed up to 29 seats southbound and 39 seats northbound for FIG, and 20 commercial seats each way between the UK and Ascension Island, as well as up to 10 premium economy seats on each flight. The FCO is now liaising with the MoD, FIG and Ascension Island on negotiations for the future service, including seat costs, advance payment and booking mechanisms.[509] The Public Accounts Committee recommended that:

As the new operator contract is taken forward, costs, risks and rewards should be apportioned between the partners so that reliable public access to the Islands is provided, and the requirements of all parties (such as a set number of premium seats) are met.[510]

317. In its written evidence to our inquiry FIG told us that it had begun discussions with the MoD and the FCO, but that these had "been slow to yield results" and that "political confirmation of the UK national interest in a joint service" might be "required in due course." [511] In oral evidence Councillor Summers confirmed that the negotiations were at a sensitive stage and explained:

We have had meetings recently with the Ministry of Defence and the Foreign and Commonwealth Office about improvements to the air bridge and expansion possibilities for it. We are relatively content with those discussions, but they have not yet reached a conclusion and we do not yet have all the answers that we are looking for.[512]

318. Meg Munn told us that she had discussed the airbridge "at length" with the Falkland Island councillors during a recent visit to the Islands.[513] During our own visit we were told about possible options to replace the airbridge, including flights via Brazilian airspace if Brazil could be persuaded to permit this; or via St Helena if the new airport (see paras 333 to 342 below) was long enough for wide-bodied aircraft. Some Islanders also suggested that oil reserves (see following section below) might increase the possibility of a commercial airline being willing to operate a north-south service.

Oil exploration

319. Possible oil fields have been identified in the Falkland Islands, although further exploration is needed to test their commercial viability.[514] The FCO has already given permission to the Falklands to license certain areas of hydrocarbon development.[515] Rockhopper Exploration has now said it will shortly be ready to drill up to four wells in the North Falkland basin and could also participate in a further four wells planned by Desire Petroleum.[516]

320. One potential issue is who should benefit from hydrocarbon revenues. During our visit Councillors expressed concern that the then latest draft of the new Falklands Constitution (see para 20, Chapter 2) did not include a reference, found in the present Constitution, to the Governor's duty to consult the Legislative Council about decisions in respect of mineral rights. The Legislative Council explained that its position was that oil revenue taken by HM Treasury would be a propaganda gift to the Argentines, who would say it proved that Britain had an exploitative, colonial attitude to the Falklands. They argued that FIG should keep any oil revenue, but then offer voluntarily to reimburse the UK for the current cost of defending the Islands, and possibly also the capital cost of building Mount Pleasant Airport, with the option of providing further contributions to the UK Exchequer.

321. We asked Meg Munn and the then Director of the Overseas Directorate in the FCO, whether the fact that FIG had to seek permission from the UK before licensing hydrocarbon development mean that the UK owned the rights to hydrocarbons. Mr Turner replied:

No, the Falkland Islands own the resources about which we are talking. But the point is that we regard something as important as the development of hydrocarbons as having potential international implications so it is right that we have some sort of handle on it.[517]

We pressed this further and asked whether the UK would demand an income from any revenues. Meg Munn told us

That would be part of negotiations with the Falkland Islanders. They have not found any so we have not had that discussion.[518]

322. We recommend that the FCO works with the Falklands Islands government and the Ministry of Defence to ensure that the future air service allows the Islands to develop their tourism industry. We also recommend that in its response to this Report the FCO states clearly what, if any, it considers the UK's entitlement would be in respect of potential oil and gas revenue from the Falkland Islands and from other Overseas Territories.

De-mining in the Falkland Islands

323. The National Audit Office's report also highlighted the cost of clearing landmines laid by Argentine forces in the Falklands during the 1982 war as a significant contingent liability on the UK, which is obliged to carry out the clearance under the terms of the 1997 Ottawa Convention. There were about 25,000 landmines laid in the conflict and they affect about 13 square kilometres of land. The National Audit Office's report suggested that de-mining could cost many millions of pounds, but stated that a clearer estimate would not be possible until a trial phase has been completed.[519]

324. Under the terms of the Ottawa Convention the UK was required to destroy all mines in its jurisdiction by 2007, but it has not yet faced any international pressure to clear landmines in the Falklands. The Falkland Islands government (FIG) has expressed no wish to have these areas de-mined, instead emphasizing their value as wildlife conservation areas. In a recent press statement, it argued:

We are satisfied that all mined areas are safely fenced, and present no long term social or economic difficulties for the Falklands.

Whilst we would not obstruct any efforts HMG wished to make to fulfil its international obligations, FIG would have to pay close attention to the environmental implications of complete clearance […][520]

During our visit we were also told that there had been no deaths or injuries to civilians or tourists caused by landmines. The only injuries had been to armed forces personnel involved in mine clearance in the 1980s, after which a ministerial decision had been taken to halt this work. We were also informed that mines lying in peat or beach sand sometimes move adding to the risks of injuries.

325. FIG also argued that the UK Government would have to consider "the possible negative effect on UK public opinion of high levels of expenditure for little practical purpose" and said that it would prefer the money to be spent on removing landmines from needier parts of the world.[521] However, the National Audit Office's report pointed out that the Ottawa Convention does not allow for funds allocated for removal of mines in low risk areas to be "vired" to fund the removal of mines in higher risk areas, such as developing countries.[522]

326. Meg Munn told us that the UK was "aware" of its obligation under the Ottawa Convention, but that it was also "aware of the difficulties that there are" and the views of the Falkland Islanders. She said that the UK had carried out a feasibility study to see how practicable de-mining would be and that it now had:

to reflect on that matter and consider whether we should go ahead, what the time scales would be and other such issues. That is actively under consideration at the moment.[523]

327. As we were considering this Report, the Government announced that it had decided to submit a request for a ten year extension of the deadline to fulfil its obligation under the Ottawa Convention to clear mined areas in the Falkland Islands. This request will be considered by State Parties to the Convention in November 2008.[524]

328. We conclude that there are a number of issues to be considered, including cost, practicability, safety and environmental impact, before a decision can be taken on whether to carry out de-mining in the Falkland Islands. We therefore welcome the Government's announcement that it has sought an extension of the deadline to meet the UK's obligations under the Ottawa Convention. We recommend that the Government should discuss the results of its recent feasibility study with Falkland Islanders before coming to any decision about landmine clearance.

Budgetary aid

329. St Helena, Montserrat and Pitcairn are in receipt of budgetary aid from the UK. The National Audit Office's report commented that the majority of the UK aid programme to these Territories went on meeting their recurring budgetary deficits, leaving little to invest in new infrastructure or other development projects and therefore retarding their pace of growth. The report noted that DFID had agreed in principle to move away from an approach which minimised aid incentives for achieving savings, but that it still needed to work out a funding mechanism to ensure aid was based on need and not just availability of resources.[525]

330. St Helena's Legislative Council told us that in March 2007 it had reached an agreement with the UK which would allow it to retain and reallocate any budgetary savings in the recurrent budget made from efficiency measures and/or higher domestic revenues within its three-year framework.[526]

331. The National Audit Office also commented on the fact that the FCO and DFID each maintained separate teams, totalling some 60 staff, with responsibility for the Overseas Territories, when, in practice, the DFID team had limited involvement outside St Helena, Pitcairn and Montserrat.[527] It recommended that there should be additional pooling of resources at working level between FCO and DFID, with a further extension of joint working and use of mixed teams, deployed flexibly to meet needs across the Territories.[528]

332. In its submission to our inquiry BioDiplomacy argued there was "a tendency in Whitehall" for Overseas Territories issues "to be treated as a matter for the FCO as the 'lead Department'". It argued:

In fact the Department for International Development (DfID) has a major statutory responsibility for the territories under the International Development Act 2002. In budgetary terms, DfID is responsible for far more direct expenditure in the territories than the FCO.[529]

In this section we consider progress on DFID's aim that all Overseas Territories achieve self-sufficiency. We examine the air access project in St Helena, progress on rebuilding infrastructure in Montserrat following volcanic devastation and the situation in Pitcairn. We also consider the recent emergency assistance provided by the UK to Tristan da Cunha.

Air access project in St Helena

333. The current sole means of access to St Helena is by sea. RMS St Helena provides the main link to Ascension Island and is heavily subsidised by DFID. The Speaker of St Helena told us that St Helena's economic situation had now reached a "crisis". He pointed out that almost half the local the working population now worked offshore (often unaccompanied by their families) resulting in "adverse social consequences and a strain on the running of essential services", with personnel from other countries having to be imported to help run the medical and education services and for other key public sector posts. He blamed the UK for the economic situation arguing that it had reneged on an agreement not to increase shipping freight fares and other local charges, including delaying the completion of an electricity project which would have benefited the Island until full-cost recovery was agreed.[530] A recent visitor to St Helena also highlighted to us that some people on St Helena were "working for less than half the UK minimum wage, with sporadic pension provision and a relatively high cost of living".[531] Basil George, the present chairman of a Social Enterprise Company, also explained that a declining population was squeezing St Helena's tax base and that it was proving very difficult to recruit staff from overseas, with the Island again without a Chief Secretary.[532]

334. The UK Government has now decided to end its subsidy for the shipping service and to instead provide funding for the construction of an airport, with the aim of helping St Helena graduate from aid dependency within the next 25 years by attracting inward investment, more tourism and arresting the current population decline.[533] In May 2006 DFID issued an invitation to tender but later that year all three bidders pulled out. The National Audit Office reported that this was due to "concerns about their exposure to risk". In May 2007 a new invitation to tender was put out, with DFID agreeing to take on more of the risk and contribute towards design costs. Two bids were submitted to build the airport and related infrastructure by November 2007. Procurement of an air service provider will be carried out once construction of the airport begins.[534] The planned completion date has shifted from 2010 to 2012-13.[535]

335. We received very different views of the air access project in evidence to our inquiry. Hon Brian Isaac, Member of St Helena's Executive Council, told us that he was "very hopeful" that the airport would be built since it would benefit both the island and Britain by helping St Helena move towards being more self-sufficient.[536] In its written submission to our inquiry the Legislative Council told us that the project was

[…] probably the most important venture ever undertaken on the Island and […] the cornerstone of our dual desire to achieve financial independence and put an end to the problems of depopulation.

The Legislative Council explained that the airport formed a key element of St Helena's Sustainable Development Plan, published in November 2007, although St Helena also hoped to improve the productivity of its fishing and agriculture.[537]

336. However, a recent visitor to St Helena told us that she was "unconvinced" that the airport would benefit Islanders and argued that it would damage the Island's "unique character".[538] BioDiplomacy pointed out that no official cost estimates costs for construction and for maintenance of the service had yet been provided to the public in St Helena or the UK.[539] Andrew Bell suggested that the costs would be over £1 billion and argued that there would also need to be massive spending on infrastructure:

Building a conventional Airport for 3,900 people in the South Atlantic is the 21st Century version of the Great East Africa Groundnuts Scheme of the mid 20th Century.

[…] This isn't like extending Luton Airport; this is in the middle of the Equatorial South Atlantic.

Mr Bell recommended that instead the FCO should investigate whether the B609, an aircraft with a vertical take-off and landing capability, could be used, arguing that this aircraft would only require "minimal" facilities, could be built on the side of the Island never subject to reduced visibility, and would have "a pay-back aspect for Anglo-US relations".[540] It was also suggested to us that another option might have been to establish a faster boat service between St Helena and Ascension Island, and that this could have been discounted because of the FCO's decision not to grant permanent rights on Ascension Island (see paras 75 to 82, Chapter 2).

337. The NAO noted that the scale of this project was beyond St Helena's capacity and needed DFID leadership as well as other agencies' involvement. It also warned that the airport would not in itself be sufficient to bring St Helena out of aid dependency - supporting infrastructure would also need investment.[541] The St Helena Legislative Council told us that it recognised that capital investment in infrastructure needed "to be speeded up in order to allow for the completion of agreed projects in a shorter timeframe than would ordinarily be possible". It therefore called for "front-loading" by HMG of capital investment in certain infrastructure. However, it expressed nervousness over the "the utilisation of the phrase 'full cost recovery' especially in the light of the poorer members of our society".[542]

338. St Helena's Citizenship Commission also expressed concern that "basic needs for Islanders", such as housing, were being "neglected" because of the focus on the air service and told us that a new land disposal policy had increased the price of land "by some 2,000%" putting affordable housing "out of reach of the majority of Islanders earning a living on St Helena". It also stated that action had not been taken against foreign vessels poaching fish in the Island's territorial waters and recommended that an inquiry should be carried out into the question of staffing and conditions of service for essential services on St Helena.[543] Mr George also warned that these issues needed to be addressed before St Helena's economic transition. He called for affordable "family house plots" to be made available and for the UK to set up an inquiry into poaching, obtain relevant data obtained from fisheries organisations and satellite surveillance and then take a case against the companies and nations concerned to the appropriate international body.[544]

339. While he did not mention the airport, St Helena's Speaker said that he felt the Territory's future was being "threatened by HMG imposing conditions on the Island's development aid projects and reneging on signed agreements" through the increase in freight charges and passenger fares on the shipping service (see para 220, Chapter 3). He claimed that the UK had allowed St Helena's economy to contract between 1996 and 2000 by a real fall in aid[545] and recommended that St Helena's current economic position should "seriously be investigated".[546]

340. The RSPB also expressed "serious concern" about the potential environmental impact of the airport and called for an urgent strategic environmental assessment on the land development control plan to ensure "the cumulative impacts of development" were avoided.[547]

341. We asked the FCO about its cooperation with DFID on the air access project. It told us:

Given the significant levels of work and investment involved in the air access project, FCO and DFID officials are constantly in contact about this project. An FCO official is a member of the DFID Air Access Team and participates in the regular meetings between officials and the Access Team on St Helena. FCO and DFID have together supported the preparatory work on island in terms of legislative, administrative, organisational and other changes.

These formal contacts are supplemented by ad hoc discussions, exchanges and meetings at all levels, including PUS and Ministerial, and including by teleconference with the Governor and his staff.[548]

342. We conclude that the building of an airport and related infrastructure on St Helena could be a significant step towards self-sufficiency for the Territory. However, we are concerned about the potential capital and maintenance costs of the project and we recommend that in its response to this Report the Government provides us with figures to demonstrate that it has selected the most cost-effective option for bringing St Helena off dependency on aid. We also recommend that the Government encourages St Helena's government to include affordable housing in its Sustainable Development Programme and that it sets out in its response what action it has taken with regard to allegations of poaching in St Helena's territorial waters.

Montserrat

343. Since Montserrat's volcanic crisis in 1995/6 (see para 501, Part Two), the UK has provided the Territory with £250 million in development assistance, plus ongoing programme funding of £15 million per year.[549] In oral evidence the Chief Minister told us that Montserrat had once been "ahead of Anguilla and the British Virgin Islands" and running with a surplus, but was now "a struggling economy", reliant on budgetary aid for 70% of revenue.[550]

344. The National Audit Office's report estimated the ongoing aid liability to Montserrat to be £149 million over the next ten years, and even greater if volcanic activity became more serious. It found that progress on a sustained reduction in Montserrat's budget deficit had "met with more difficulties than expected" with tourist numbers down 30% from 2005 to 2006, despite the opening of a UK funded airport.[551]

345. We asked the Chief Minister of Montserrat whether Montserrat was receiving sufficient support for its recovery. He told us, "[a]lthough we have had a lot of help, a lot more is needed" and told us that he thought the UK "had finally" agreed with this assessment. He argued "basic items", namely "essential infrastructure", were still not in place. In particular he highlighted the need for a port, courthouse, hospital, library, and Parliament building.[552] He also told us that Montserrat had received "little or no" financial support for sporting facilities.[553]

346. The National Audit Office pointed out that Montserrat had received funding for some long term projects linked with the government of Montserrat's Sustainable Development Plan, including a pledge of £1.5 million for a Tourist Development Board.[554]

347. Mr Rhys Williams, a Montserrat resident, called for either DFID or the FCO to take responsibility for providing assistance to Montserrat:

[…] it is patently wrong to have two funding department cuts supplying monies to the island. It makes for bad governance. The FCO or DIFID should be wholly responsible, then there is no chance of the GOM playing one off against the other. At present both parties blame each other and nothing gets done.[555]

As with regards to St Helena, we asked the FCO to outline how it worked with DFID to provide budgetary aid to Montserrat. The FCO gave us the following examples:

[…] DfID funds the Government of Montserrat's day to day monitoring of the volcano, with the help of external expertise; this is supplemented by twice yearly visits, funded by the FCO, by an independent Scientific Advisory Committee which provides a strategic assessment of volcanic activity. Together, this provides the information necessary for the Governor to work with the territory government in assessing the risk level of volcanic activity

- as part of the Constitutional Review process underway in Montserrat, the UK constitutional team (led by the FCO) has ensured that any provisions negotiated in the new Constitution are consistent with Montserrat's sustainable development plan, which is supported by DFID assistance.

Officials from both Departments are in touch on a daily basis about the development programme. The Governor is exploring with DFID colleagues the feasibility of FCO and DFID co-locating in Montserrat. There are logistical challenges that will have to be addressed. But it is a clear indication of the two Departments' commitment to strengthening on-island operational collaboration.[556]

348. We recommend that the Government should focus funding on infrastructure in Montserrat on those areas that are most likely to assist the development of tourism on the island.

Pitcairn

349. Pitcairn has only 47 residents. At the time of Operation Unique (see paras 243 and 244 in Chapter 3 above) there were questions over whether a settlement on the Island could remain viable if six men were jailed.[557]

350. Mr Leslie Jaques, Pitcairn's Commissioner, told us that the impact on the small community of six of its members going to prison had perhaps been underestimated, but that since the trials, social workers and community police had been on the Island and there had been a lot more consultation and communication with the community. He added:

The healing process and the reconciliation process will take time. We are having to park that and work together for the common good. There are lots of small projects that are bringing the community on the island together. I am confident that, in the fullness of time, we will bring them back together again.[558]

351. Mr Jacques praised FCO and DFID staff for their work with the local community, saying that they had cooperated well with each other. He also told us that DFID had "been superb in terms of the infrastructure support" that it had provided.[559] However, Kari Boye Young, a Pitcairn resident who sent evidence to our inquiry, called for Pitcairn to "get the help it needs, not to be forever on Budgetary Aid, but made able to understand how to manage on our own, to make decisions for ourselves".[560]

352. The FCO told us that both it and DFID were "working closely to return Pitcairn to self-sustainability". It explained that FCO and DFID ministers had had discussions on future policy for Pitcairn and produced "an internal joint development strategy paper". It added that DFID and the Governor's office also worked jointly "on various aspects of the governance and economic development of Pitcairn", including work on a new "more frequent and regular" shipping route involving Auckland and French Polynesia, for which the Governor's office was negotiating with France.[561]

353. We recommend that the Government should ensure that Pitcairn residents are informed and consulted on proposals for the Island's economic development.

Tristan da Cunha

354. Tristan da Cunha is financially self-sufficient. However, that position is precarious, as Tristan da Cunha's Chief Islander described:

South Africa is the nearest landmass: 1500 miles distant, at least six days by ship. We have no airport or air service nor any prospect of one. All supplies and machinery must travel by ship from Cape Town. Our small harbour is our lifeline, too small for ocean going ships, so people and goods must transfer to small boats (or the helicopters of the SA Agulhas during her annual voyage to the meteorological station on Gough Island) to reach the island. There are but nine scheduled visits annually by fishing ships to Tristan. […] Ovenstones Agencies (Pty) […] has a contract to catch crayfish around Tristan and the uninhabited Nightingale, Inaccessible and Stoltenhoff islands nearby. This is our main source of revenue; the only other is the sale of Tristan postage stamps to collectors.[562]

The National Audit Office estimates the cost of Tristan da Cunha coming in to budgetary aid to be £1.75 million.[563]

355. Over the last twelve months the Government has had to provide emergency assistance in two different cases. In December 2007, following a viral outbreak which led to a potential shortage of asthma and flu drugs, the FCO had to deliver a contingency supply of drugs by a Royal Navy Royal Fleet Auxiliary. In February 2008 it sent Royal Engineers to undertake emergency work, funded by DFID, on the island's harbour. A previous temporary solution, which had been carried out because neither DFID nor Tristan da Cunha had been able to afford a full refurbishment, had made things worse and resulted in significant wave damage in 2004. The FCO told us that plans for further work were now "under review given the high quality of the Engineers' work".[564]

356. On 13 February 2008 a fire destroyed the Island's fish-processing factory (as well as the generators that provide the island's power). This was potentially a major problem as the proprietors, Ovenstones Agencies, are the Island's only employer, except for the government. However, it is hoped that a new factory will be ready for operation for the start of the 2009/10 fishing season, although there is a risk that this deadline will slip due to some logistical difficulties.[565]

357. In the last year DFID has provided Tristan da Cunha with funding of £60,000 for "off-island training activities and a review of options to diversify its economy and increase its revenue", as well as £107,000 from the Overseas Territories Environment Project budget (see para 287 above) for a number of small-scale development projects. DFID also provides a resident doctor, and a visiting dentist and optometrist under its health programme for St Helena.[566] DFID has also recently commissioned a review of "options for Tristan to diversify its economy and increase its revenue".[567]

358. In his evidence to our inquiry, the Chief Islander of Tristan da Cunha told us that Islanders sometimes felt "like the ugly duckling - neglected, out in the cold and having to fend for themselves". He called for more support from the UK in the following areas: teacher and management training; upgrading of hospital building and facilities; and a new supermarket building.[568]

359. In a later submission the Chief Islander also urged the FCO to take steps to enable Tristan lobster to be included in the UK's reciprocal trade agreements with China, describing this as a "golden opportunity" to give the Island greater self-sufficiency.[569] The Managing Director of Ovenstones Agencies supported this call in his evidence. He explained that Tristan lobster's current primary export markets, the United States and Japan, were "subject to cyclical fluctuations" in demand and price and that the Japanese market was also contracting. If opened up to Tristan lobster, he believed the Chinese market could account for up to 35% of sales within two years. He told us that Ovenstones had been raising this issue with the FCO since 2004 but had made "very little progress".[570]

360. We welcome the Government's swift provision of emergency assistance to Tristan da Cunha following harbour damage and an outbreak of illness on the Island. We recommend that the Government continues to provide funding for projects on Tristan da Cunha, focusing on projects that will promote greater self-sufficiency. We also recommend that the FCO makes representations to China to try to open UK-China trade agreements to the sale of Tristan lobster.

Crime and disaster management

361. During our inquiry concerns were raised from both Anguilla and the Turks and Caicos Islands about rising levels of crime. The Chief Minister of Anguilla drew our attention to "unprecedented" murders in the Territory, as well as stealing and larceny, and expressed concern about its potential impact on tourism:

It has been localised up to now, but the criminals will not stay in one spot. They will go where they think there is prey.[571]

He put in a strong plea for assistance:

We need some help to combat the criminal activity that is going on. We feel that if something is not done about it, and quickly, we could lose the industry by which we survive. […] We need some help to combat the criminals; otherwise, we may be back on the grant in aid again. We never want to subject ourselves to that again.[572]

362. In the Turks and Caicos Islands, Mr Alpha Gibbs told us that unsolved murders and missing persons continued to "escalate" in TCI without successful police investigation and prosecution.[573] John Redmond expressed "deep concern […] with regard to violent crime and the lack of police resources to deal with it".[574]

363. The Public Accounts Committee highlighted the fact that the FCO had acknowledged that policing standards fell short of its expectations, but noted that the FCO had only used external inspection by HM Inspectorate of Constabulary three times. It concluded:

Territory citizens should not have to accept less efficient use of police resources, nor less professional oversight than citizens in the UK. The Department should lay down the policing standards expected of the Territories, and test whether they are met on a more consistent basis.[575]

364. The Cayman Islands suffered a devastating hurricane in 2004[576] and, as we witnessed for ourselves during our visit, made an impressive recovery largely by its own efforts. A new disaster management agency, Hazard Management Cayman Islands (HMCI), was launched in January 2007. The Cayman Islands has also developed a multi-agency national Threat Assessment, which was championed by the Governor, and which the National Audit Office's report highlighted as a good practice example which could be shared with other Territories.[577] During our visit to the Cayman Islands we visited HMCI and were given a demonstration of some of the computer technology it was using for disaster management.

365. However, the Public Accounts Committee raised the fact that not all Territories had comprehensive disaster management strategies and called for the FCO, DFID and Territory governments to "draw up disaster management strategies where they do not exist, setting out the responsibilities of each party and the minimum requirements for the frequency of disaster plan tests".[578]

366. Governors have responsibility for managing the risk of crime and disasters, but funding is provided by Territory governments. In its recent report, the Public Accounts Committee argued that the FCO should be "more prepared to require money from Territory governments" for the police and disaster management and also to publicise where standards are not being met.[579] We support this recommendation.

Illegal immigration

367. Many of the submissions we received from the Turks and Caicos Islands (see Chapter 3 above) also raised concerns about levels of illegal immigration from Haiti, including concerns about conditions in TCI's detention centre which we have already discussed above.[580] Premier Misick told us that he estimated that "anything up to a quarter" of TCI's population was illegal[581] and that on average 400 or 500 illegal immigrants arrived every week.[582] He described illegal immigration as "one of the greatest threats to our survival, our economy" and told us that it cost TCI "millions and millions of dollars" to repatriate illegal immigrants.[583]

368. Mr Alpha Gibbs' estimate of numbers of illegal immigrants was fewer (about 400 monthly), but he also described illegal immigration as a "serious threat to the socio-economic structure and long-term stability" of TCI.[584]

369. Meg Munn told us that TCI's Immigration Department had provided the FCO with figures showing that 2,028 illegal migrants were detected and subsequently repatriated to Haiti in 2006 and that the numbers had decreased to 856 in 2007. She explained that the Immigration Department estimated that roughly the same number of illegal migrants entered the Territory, evaded detection, stayed illegally and found work. She suggested that the FCO did not believe these figures were entirely accurate, but said that TCI's government had provided assurances that they were correct. She also told us that she understood the annual cost of illegal immigration to TCI's government to be US$ 1 million.[585]

370. Meg Munn acknowledged that illegal immigration represented "a significant pressure on local resources".[586] However, TCI does not get any financial assistance from the UK for this.[587] TCI also meets the cost of providing health care and education to abandoned children of immigrants.[588]

371. TCI's Premier told us that TCI's immigration patrols were not working:

We are outnumbered already. We send 500 home and another 1,000 come. It is a revolving door.[589]

However, the UK does not provide any regular assistance with patrols of TCI's coastal waters.[590] Ben Roberts argued:

I would like someone to explain to me why you are unable to provide a few coastal patrols that would put an end to this in no time, especially considering that you have naval assets a stone's throw away in the British Virgin Islands.[591]

Mr Gibbs told us that he was "flabbergasted" as to why lessons learned from the UK on dealing with similar problems were not being "willingly and freely shared".[592]

372. We asked Meg Munn whether the UK Government was willing to provide any assistance, for example with patrols, radar or technical assistance. She replied:

The illegal immigration issue is complex […] As is the case with all immigration, it is not just a matter of what happens externally—patrol ships or whatever—but of labour markets and so on. The Government of the Turks and Caicos Islands need to be more active in relation to work permits and clamping down on illegal working. We have discussed with them what they need to do in order to reduce the pull factor. In relation to the external waters, again, that is a devolved matter for them. Therefore if they feel that they need more help on that, they would need to consider what they want to do. We could certainly assist with advice and technical assistance.[593]

In a subsequent follow-up note, she described a number of areas in which the UK government was working with the government of TCI to tackle illegal immigration:

support, through the Governor and other FCO officials, of an on-going programme to build co-operation between the TCI government and the government of Haiti, with plans to sign a formal Memorandum of Understanding on "the need to improve the interdiction of illegal migrants and other areas of mutual interest including promoting trade, closer political co-operation and the sharing of intelligence on smuggling drugs and firearms from Haiti";
the initiation by the Governor of the establishment of a tripartite group working on improving real time co-operation between law enforcement agencies between the US, the Bahamas and TCI;
a comprehensive review of the TCI Police Marine Branch commissioned by the Governor, which had found that significant increases in staff, equipment and training were required and had led to recruitment for the appointment of a new commander;
the provision of training for the Marine Branch for many years;
increased port visits to TCI of a Royal Navy frigate and Royal Fleet Auxiliary tanker and, at the request of the TCI Police Marine Branch, the exceptional provision of training from the ships' crews and use of helicopters to find illegal immigrants living in the bush;
a possible new HMG-funded Regional Training Co-ordinator in TCI, together with an inshore patrol boat; and
payment of £21 million towards the assessed costs of the United Nations Stabilisation Force in Haiti (MINUSTAH) in 2007/8.

The Minister also argued that new immigration legislation being introduced in TCI would "help to reduce the "pull" factor to TCI by more effectively implementing work permit regulations and clamping down on illegal working".[594]

373. Meg Munn told us that "although not a core defence responsibility" the presence of the Royal Navy frigate was "perceived to have provided a temporary, but effective, deterrent to the would-be people traffickers".[595]

374. We recognise that immigration policy is a matter devolved to the Turks and Caicos Islands (TCI), but we conclude that given the scale of illegal immigration of Haitians into the Territory the FCO should accept greater responsibility for tackling the issue. We recommend that the FCO should provide a regular Royal Navy presence in TCI's coastal waters to assist with patrols and that it should consider with the Haitian government what further measures could be taken by the Haitian and UK governments in cooperation with each other to prevent Haitians leaving by boat to enter TCI illegally.

Regulation of civil aviation

375. The Department for Transport set up Air Safety Support International (ASSI) in 2002 to try to restore safety standards in the Overseas Territories. The National Audit Office report pointed out that the ASSI was created on the understanding that it would have a finite life and that some Overseas Territories had since built up their own capability to regulate aviation safety, but others still relied on regulation free of charge by the UK. The report recommended that the Department for Transport should move to full cost recovery where it is regulating aviation safety on behalf of Overseas Territories within five years.[596] The Public Accounts Committee also recommended that "unless there are compelling reasons to the contrary, the UK should charge" for such services where Territories were able to pay,[597] noting that despite the British Virgin Islands' GDP per head outstripping the UK, the Territory received £600,000 of free services each year to regulate civil aviation.[598]

376. The ASSI is the designated regulator for some aspects of aviation in the Falkland Islands. In follow-up evidence to us, the Falkland Islands Legislative Council expressed concern about moving to full cost recovery for this service. It argued that the benefits received from the ASSI were "mixed", with visits "too infrequent", a "lack of understanding" of the local situation and the majority of resources and support directed at the Caribbean Overseas Territories. It concluded:

FIG [Falkland Islands Government] are concerned that ASSI are overstretched and underperforming, and that their future is not at all assured. All of this causes misunderstandings, friction, and significant ineffectiveness in the OT aviation industry. To have to pay for this level of service would not be welcome.[599]

377. We agree with the Public Accounts Committee that the UK Government should not fund aviation regulation in Territories that are able to pay for this service. However, we recommend that the FCO must ensure that it responds to Territory government criticisms of the designated regulator before moving to charging for the service.

485 Report by the Comptroller and Auditor General, Foreign and Commonwealth Office: Managing risk in the Overseas Territories, HC 4, 16 November 2007, p 7, and Public Accounts Committee, Seventeenth Report of Session 2007-08, Foreign and Commonwealth Office: Managing Risk in the Overseas Territories, HC 176, p 20 Back

486 Report by the Comptroller and Auditor General, Foreign and Commonwealth Office: Managing risk in the Overseas Territories, HC (2007-08) 4, p 5 Back

487 Q 27 Back

488 Q 27 Back

489 Ev 226 Back

490 Ev 144 Back

491 Ev 80 Back

492 Report by the Comptroller and Auditor General, Foreign and Commonwealth Office: Managing risk in the Overseas Territories, HC (2007-08) 4, p 23 Back

493 Report by the Comptroller and Auditor General, Foreign and Commonwealth Office: Managing risk in the Overseas Territories, HC (2007-08) 4, p 21 Back

494 Ev 144 Back

495 Q 202 Back

496 Report by the Comptroller and Auditor General, Foreign and Commonwealth Office: Managing risk in the Overseas Territories, HC (2007-08) 4, pp 20-21 Back