UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 56-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE THE JUSTICE COMMITTEE

 

 

CROWN DEPENDENCIES

 

 

Tuesday 15 December 2009

PROFESSOR ALASTAIR SUTTON

Evidence heard in Public Questions 1 - 44

 

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Justice Committee

on Tuesday 15 December 2009

Members present

Sir Alan Beith, in the Chair

Mr Douglas Hogg

Alun Michael

Julie Morgan

Mr Andrew Tyrie

Dr Alan Whitehead

________________

Witness: Professor Alastair Sutton, White & Case, gave evidence.

Q1 Chairman: Professor Sutton, welcome. You have an impressive list of university chairs dotted about the world, but we have got you in front of us today because we think you can help us with some of the background to the inquiry we are just beginning on the Crown Dependencies, though I understand that you have an interest which you want to declare before we invite you to give evidence.

Professor Sutton: Yes, indeed. First of all, thank you for much for inviting me today. It is a subject which I find interesting politically, legally and institutionally, and it gets more interesting, I think, by the day with international development. I was with the European Commission for 20 years. When I left to practise law, one of my first clients was the States of Jersey, and they were followed later by the States of Guernsey and the Isle of Man. I should make it quite clear, these are not my only clients - I am a partner in the firm of White & Case - but they are a significant part of my work. If I may continue for one minute on that theme, I would say that I think the reason why I was asked to help them back in 1989 had to do with my previous job, which was as a Member of Cabinet for Lord Cockfield when he came to Brussels in 1985 when Jacques Delors launched the single market, quite successfully really. It led to their seeking advice in Brussels. That was the point.

Q2 Chairman: Do we understand that you still have a contractual relationship, because the islands are your clients in respect of their European interests?

Professor Sutton: I do not have a contractual relationship with them. They are clients of White & Case and I am the partner in White & Case responsible for their work in Brussels.

Q3 Chairman: Thank you. The Ministry of Justice has said, and indeed Jack Straw has said as much in evidence directly to us, that the Crown has ultimate responsibility for "good government" of the Crown Dependencies. Do you know what the legal basis is for this responsibility and what does it mean?

Professor Sutton: The legal basis must reside in UK constitutional law. Unlike many Member States of the EU, our constitution is not wholly written. Many of our constitutional concepts are judge-made, many of them, I think, reside in practice, convention. The borderline between convention and constitutional law is sometimes difficult to draw. Sometimes, I think, judicial clarification is needed to establish where the dividing line comes between convention and law and I think the concept of good government, or good governance, is one such concept; it is an abstract concept. If you were to ask me, "Be more specific, Professor Sutton, and tell me what you think it means", I think it probably means, not merely effective, efficient government, or governance, as that term is very often used these days at all levels, but in the case of the Crown Dependencies what it has come to mean is that the intervention by the United Kingdom should only be where good governance ceases to exist, and that would be where there is really a breakdown in the system of law and order, or civil governance, to the point where outside intervention becomes necessary.

Q4 Chairman: There would have to be rioting in the streets, do you think, before good governance would be activated?

Professor Sutton: When I have thought about this concept I have come about it, in a sense, from the other end, because I think anything more unlikely than rioting in the streets is hard to imagine in Jersey, Guernsey and the Isle of Man. I am not going to make comparisons with other jurisdictions, but it is absolutely clear that the Crown Dependencies over the last ten years or more have been subjected to independent objective external scrutiny, amongst others, by the OECD, by the IMF and, more recently, in the Foot Report - all those reports, by the way, are this year, but they date back to the Ebsworth Report in 1998 - and, consistently, they have been found to be well governed in the sense that they are well regulated (that is up to international norms in terms of financial regulation), they are transparent (in the sense that their procedures, their practices are open to international scrutiny) and they are co-operative (in the sense that they co-operate with other jurisdictions for exchange of information).

Q5 Chairman: But that is not really the point, is it? Whether or not they are well governed is not the question we are looking at. It is what would constitute an absence of good governance or a failing in good governance that would appear to trigger what the Secretary of State thinks he has a power to do?

Professor Sutton: I think in one previous hearing - I think it was in the other place, as you say - it was mentioned that this was a hypothetical and wholly unrealistic prospect. I think that is a comment with which I would agree. If you ask me to imagine a situation other than rioting the streets, as you put it, you could imagine in this day and age a collapse of the economy such that the moral responsibility - I do not know about the legal responsibility - of the UK to intervene to bail out one of the Crown Dependencies could arise. Say the economic governance of one of the islands was such that it was irresponsible, it was reckless, it was unduly risky and led to a collapse of the economy. Of course, that has not been the case. That is not the case, I think, in any of the Crown Dependencies. They are, in a sense, almost paragons of virtue in terms of economic management. They do not receive outside subsidies, they finance their own education, their health, their schools, their transport systems, and so on, and even in this crisis they have managed to balance the budget very well and emerged quite strongly from the crisis. So I think that hypothesis has to be put to one side for the moment as well. More than that, you asked me a legal question to begin with, and my view is that under constitutional law the concept of good governance has never been judicially defined. The circumstances under which their autonomy would be limited by UK intervention has never been defined, therefore it does remain hypothetical, and that is as far as I would be prepared to go.

Q6 Alun Michael: Can I approach it from a slightly different point of view? I think you have described almost the principles of subsidiarity in terms of only interfering when it is necessary to interfere, but what mechanisms are there in place for the UK Government to identify if there is an issue where governance in a Crown Dependency is not good enough?

Professor Sutton: I think one of the words which has come to my mind whilst preparing for today is "co-operation", and we can perhaps come back to this. I think the status of the Crown Dependencies is unusual, if not unique, in international relations and in constitutional relations as well and there is a problem, there is a tension between, on the one side, the constitutional autonomy or self-governance of the islands and, on the other side, the responsibility of the United Kingdom under public international law for the international relations of those islands, and that presents a tension.

Q7 Alun Michael: I understand that, but that is to look at it again in legal terms. I was trying to move away from the legal terms. For instance, there is a responsibility of the UK Government when it comes to institutions within the UK on the mainland. The relationship with local government, central government, can interfere at any point, but it is a rather different point to a responsibility to interfere on how Government satisfies itself on the quality of governance at a local authority level. It is more in that sort of way. Unlike the situation in Cardiff, for instance, or Southampton, or whatever, there are Members of Parliament who may raise issues with ministers, and so on, so there are mechanisms, but how does any issue get drawn to the attention of the UK Government? How does the UK Government satisfy itself that there is not an issue of governance on which it ought to put its nose in?

Professor Sutton: I do not want to give you another legal reply, but in a sense one answer to your question would be that this is not a devolved situation. This not Scotland, Wales, or Northern Ireland, this is not a local council. The problem, or the issue, or the fact, or the legal situation is that they are autonomous and self-governing. Under UK constitutional law and practice, it is only when it comes to international affairs or defence that the UK can, as it were, intervene. Let us leave aside for a moment good governance.

Q8 Alun Michael: Hang on a minute, because I am only interested in the good governance one at moment. What I am concerned with is not the legal position, because I respect the situation that you have described, it is how does the UK Government know whether or not the governance is good enough? I accept what you say that 99 times out of 100 there is not going to be a problem, but how would they know if there was a problem?

Professor Sutton: The mechanism for co-operation between the United Kingdom and the three Crown Dependencies is through the Ministry of Justice. If you were asking that question about a third country, I would say we must ask the Foreign Office and they must ask their mission in the country in question. But you are not, you are asking about a British Crown Dependency, and the situation is anomalous in the sense that there is no official means for the UK to inform itself. However, there are channels of communication, clearly, which are used every day for the every day running of these islands in co-operation with the UK, as the three Crown Dependencies have made clear in their three submissions to you.

Q9 Alun Michael: Yes, but when issues have arisen, for instance there were issues with the Isle of Man over the problems with Kaupthing Bank which we looked at a few months ago, one of the questions we had to ask was how is the Department for Justice and the ministers in that Department following through their responsibility to the Crown Dependency? It is a similar sort of question here. Is anybody looking at the issues of governance? Is there a mechanism whereby the citizens of one of the Crown Dependencies could, for instance, raise with the UK Government: "Look there is a failure of governance here, somebody ought to do something about it"?

Professor Sutton: I think the answer to your question is probably, no - no officially that is - because of the situation which has existed historically for such a long time. If I may continue to develop that thought at the moment, of course, I was going to say that when there is an international overspill, or threat of it---

Q10 Chairman: Shall we leave the international situation to one side for the moment, because we will come back to it.

Professor Sutton: Yes. I was going to ask, Chairman, whether it is possible to leave the international dimension to one side. The point I was going to make to Alun Michael was this. In the modern world that is precisely the problem, I think, with the kind of ministers, that the areas for which their self-governance and autonomy has existed over decades, if not centuries, has today become inextricably linked with international affairs. Take taxation: there is nothing closer to national sovereignty than taxation here in this country and so it is in Jersey, Guernsey and the Isle of Man, yet tax has become a matter of international concern. In my lifetime, since I was teaching at University College 35 years ago, the area of domestic concern under international law was immense. Today it is very, very narrow. Almost any issue which arises in any jurisdiction has a potential overspill: elections in Sark; the Human Rights Convention. Does it apply? Yes, it does. Have they respected their obligations? That is a matter of concern to the UK because the UK is responsible for the international relations of Guernsey and Sark.

Alun Michael: So how does the UK Government, how does the Department for Justice, satisfy itself in that regard?

Q11 Chairman: There is one mechanism you have not mentioned actually which relates to legislation. If legislation is proposed in any of the territories, then the Ministry of Justice is informed of the legislation and before Royal Assent is given advice is taken from relevant UK departments as to whether there are any issues in this legislation, and not all of the issues I am aware of that have been brought to bear in considering Royal Assent have been international in character.

Professor Sutton: With respect, when that question was raised just now, when I talked about the daily co-operation between the Ministry of Justice and the islands, I meant in respect of legislation and issues which, whilst not perhaps subject to legislation at the moment, might become so. I think the Ministry of Justice made that clear in their testimony here as well. As we speak, so to speak, there are contacts going on between all three jurisdictions quite separately and Patrick Bourke and Rose Ashley within the Ministry of Justice. Of course, focusing on legislation which has to pass through the Royal Assent process here - it is a slightly different process for the Isle of Man - that involves issues which arise sometimes with great publicity in, say, Jersey or Guernsey and the Isle of Man. There is a channel of communication. I do not think it is defined, I do not think it is formal, but there is clearly a mechanism whereby the Minister of Justice can pick up the phone, call the Chief Executive of Jersey, Guernsey or the Isle of Man and say, "Could we discuss this? What is going on? How is that working. Let us talk about it."

Q12 Alun Michael: So it is not terribly transparent then.

Professor Sutton: No, I do not think it is transparent, but may I just say, in historical perspective, if you look back 30 years or 35 years, the islands' relationship with the EEC at the time was limited to free trade and horticultural products - early season potatoes and spring flowers - and the world has slightly changed. It has changed very quickly actually. In my view, the relationship between the Crown Dependencies and Europe and the world and the UK has changed with increasing rapidity and intensity over the last ten years. If you go back to 2004, that was a watershed in their relations with Europe because of the Tax on Savings Directive, the tax package, the code of conduct, and so on. That was when they first, I think, realised that they had to stand up and be counted in Europe because the European Union turned to the islands and said, "We want to have agreements with you." Their first reaction was to resist. The UK then, I think, exercised a degree of pressure on them to negotiate with the EU. Since then they have been actually leading the way in the conclusion of tax agreements with the European Union. There is no doubt that the last six years have seen quite an amazing change in their economic situation and their relations with the world as a result of that, and that is going to continue, I think. One of the pieces of advice which I am giving at the moment to the islands is that they must constructively engage with Europe. Why is that? It is because their economies depend on financial services to a very large extent and, in terms of financial services, they need market access in Europe. To have market access, as you know from the measures currently in the pipeline, they are going to need to be recognised by Europe as having equivalent standards of regulation and supervision. The question for me and for them - intellectually for me, practically for them - is how do they meet that challenge under the current constitutional situation. It is not obvious.

Q13 Alun Michael: Can I ask one other thing then, because quite a lot of it is, seemingly, not obvious. I am sure you are reflecting reality. If the Department for Justice identifies a lack of good government through the process of opaque osmosis that you have described, what can it do about it? There is a limit, is there not, because of the independence of those dependencies, and yet there is a responsibility on the sort of thing that you have just described for the UK to make sure that those things happen. What can the Department for Justice do without over-stepping the mark?

Professor Sutton: It can give its views, it can advise, it can warn, but I think it cannot intervene in an executive, judicial or legislative sense.

Q14 Julie Morgan: On the same theme, I think it is quite difficult to get to grips with what can be done. What if the Government fails to address governance problems in the Crown Dependencies? What mechanism is there to address that? Say something is going on that should be addressed and the UK Government fails to do it, is there any consequence to that?

Professor Sutton: Obviously there could be political consequences; obviously there could be economic consequences; obviously there could be social consequences. I do not want always to come back to the legal situation, but the law is important, I think, and the legal situation which has been put in place over a long time by the United Kingdom and endorsed publicly by the United Kingdom Government repeatedly, leaves, I was going to say ultimately, to a very great extent responsibility for governance to the islands. It is not, for example, a question of the UK Government substituting its view for the elected authorities of Jersey or Guernsey or the Isle of Man in how the place should be run any more than it would be in Scotland or Wales in matters which are subject to devolved authority. In Scotland, Wales and Northern Island we have statutes. We do not have a statute in the case of the Channel Islands or the Isle of Man. Perhaps there should be. Suggestions have been made that we would benefit from having the relationship more clearly defined. The framework for international identity is the first attempt that I am aware of for a very long time to try to set down in writing some of those concepts. I am not trying to avoid answering your question, it is just that if we leave aside the extreme situation of a breakdown in civil law, and so on, and we are dealing with issues falling short of that - I have already mentioned the possibility of economic collapse where the United Kingdom would obviously have a major interest in intervening to try to resolve such a situation - for the rest that is what the governments are elected in those places to do, to run the place as best they can. It may not be satisfactory, and I can see from the Chairman's face that it may not be satisfactory, but it is the way it is, I think.

Q15 Chairman: I was just reflecting. Have you considered the Turks and Caicos possibility where the Government forms the view that the administration is corrupt and has to take action for that reason? I am not making a comparison as to what is happening in the two places, I am just saying that in those circumstances the UK Government intervened for a different reason from any that you have advanced in relation to the Channel Islands.

Professor Sutton: Absolutely. I did not want to mention that specific case, obviously, but if such a situation arose in one of the Crown Dependencies where, on the basis of reasonable evidence and so on, there was evidence of corruption and bad government in that sense, that would be a new situation which would have to be considered. I think that is absolutely clear.

Q16 Julie Morgan: To go on to the international situation and international treaties, the UK is responsible for seeing that the Crown Dependencies comply to those treaties.

Professor Sutton: Yes.

Q17 Julie Morgan: What sorts of mechanisms are in place to monitor whether they are complying to international treaties, for example?

Professor Sutton: The mechanisms, I think, are for the most part international mechanisms. In other words, the approval which has been given to Jersey, Guernsey and the Isle of Man for their financial regulation, their co-operative approach and their transparent legislation is international. That is, the OECD, in April this year, put Jersey, Guernsey and the Isle of Man on their white list, they put three Member States of the EU on a grey list. So that was international approbation, international recognition of conformity with internationally accepted standards. That was mentioned also, of course, in the Foot Report. The IMF has reviewed Jersey and the Isle of Man this year. They are going to do Guernsey, I think, next year or in the future. The same result has been given: conformity with international standards. If you are asking what mechanisms are in place in this country, then I think that is clearly in the hands of the Ministry of Justice and the Foreign Office - of course, the Ministry of Justice acting as a conduit or a channel between the islands and the different ministries here. I am not aware, over 20 years, of their compliance with international treaties that have been extended to them by the UK being put in question. The issue is rather the other way round. It is the extent to which the United Kingdom has put in place mechanisms to assist the islands and also to discharge its obligation, not to promote necessarily but to protect and defend the interests of the islands internationally because, as the Kilbrandon Report noted in, I think, 1972 or 1973, this is a two-way street: their rights and obligations going both ways. What I notice is that it is quite difficult for the United Kingdom (and I am choosing my words carefully) to assist these small jurisdictions with small administrations. They lack resources; the UK lacks resources; we all lack resources in this crisis. Nonetheless, these islands have no missions or delegations or offices.

Chairman: We are going to come back to the Brussels point. I am going to stop you there, because it is a little later down our agenda this afternoon. I am going to turn to Dr Whitehead, but I promise to return to it.

Q18 Dr Whitehead: A further possibly brain squeezing aspect of constitutional arrangements. If we draw a distinction between the question of good governance, as in a government is not carrying out its own constitution very well, as opposed to the idea that the constitution itself may lack what might be regarded as the wherewithal for good government, and then one looks at the issue of the fact that the three Crown Dependencies are constitutionally autonomous - that is, they are responsible for writing their own laws and hanging those laws into the framework of their own constitutions - they presumably, therefore, could, subject to Royal Assent I believe, produce laws which would make constitutional changes to their own system of government. Already you have in Jersey and Guernsey, for example, the multiple role of the bailiffs as arguably a very substantial lack of separation of powers within their constitutional arrangements. How might those considerations be considered in terms of good government, which is how the relationship of the UK to Crown Dependencies has been defined? If the constitutions of those dependencies were, for example, changed to the extent that it might appear that good government was thereby not possible, who would be competent to make an assessment of those systems?

Professor Sutton: I think the answer is that, in the first place, these three Crown Dependencies do not have written constitutions any more than we do, so their legislation is, you can call it, constitutional or ordinary statutory legislation. It is legislation. All legislation has to be submitted to the process under the Privy Council for Royal Assent through Ministry of Justice. So there is a process there which very often, I think, throws up difficulties and questions are raised either by the Ministry of Justice or by other departments. In the case which you specifically mention, I imagine it might be the Ministry of Justice which would say, "Just a minute. If you make that change, for example bringing together two functions where they should be separated under a normal separation of powers regime, there could be a problem here with the European Convention on Human Rights, let us look at that again", and that could, at the end of the day, delay Royal Assent until such time as it was resolved to mutual satisfaction. I would say that if a constitutional objection was raised to that by one of the Crown Dependencies the answer in the United Kingdom would be to say no. As previous experience has shown, this is a matter which is no longer domestic; this is a matter which falls under the European Convention on Human Rights, therefore we legitimately raise questions, or constitutionally raise questions, over that. So that would be how that would be dealt with, I think.

Q19 Dr Whitehead: Does that purely relate to what might be the case, say, of human rights in Europe, for example? Would there be circumstances, or could there be circumstances under which it might be considered in the UK that, for example, the lack of separation of powers within the role of the bailiffs would not itself be regarded constitutionally as good governance and, therefore, the UK, in a sense, almost operating as a sort of Supreme Court, determining what is constitutional and what is not, might be able to say, "We do not think constitutionally that is good government, therefore you ought to amend your own statutes to bring you into line with what we, the UK, think is good government. For example in terms of a proper separation of powers within the process of government"?

Professor Sutton: I think that the United Kingdom could take such a position. I think that it would inevitably have to base that view on an instrument like the Convention on Human Rights, and, of course, at the end of the day there would be the possibility for judicial review by the Supreme Court, either as such or as the Privy Council, and to take a binding view on that which would bind not only the United Kingdom but also the Crown Dependencies because the Supreme Court or the Privy Council is the ultimate Court of Appeal. So the answer to your question is, yes, the UK position is clear. How far it could go would depend on the specific issue, I think, but, clearly, provided there is that right of judicial resolution of the matter, there is no problem. That is where any gaps, in the absence of a written constitution, can be closed, which is by the judiciary.

Q20 Dr Whitehead: So you might have the curious position of a state which does not have a written constitution, effectively, in principle declaring unconstitutional the constitutions of a Crown Dependency that also does not have a written constitution.

Professor Sutton: I think, again, the word "unconstitutional" can be substituted or you can substitute the word "illegal" for "unconstitutional". It is just a question of is this or that lawful or not lawful. Constitutional is merely a higher form of law than regular laws.

Q21 Mr Hogg: Can I make an observation? Professor, firstly may I apologise for the fact that I have not heard all your evidence. My observation is this, and I would like your comment on it. When I first came into Parliament we were a very centralised state and, therefore, the kind of questioning, for example, that you have had from Dr Alan Whitehead represents the view that would have been conventionally held, say, 20 or 30 years ago. But now we have the devolved model in the United Kingdom where we do accept that other people go their own way, for example in Scotland and Wales and, indeed, in Northern Ireland. It seems to me that, subject to some overarching considerations, we should really be saying that the nature of the constitution within the islands is very much a matter for them and not so much a matter for us. We may have an overarching responsibility when they go seriously wrong, but, leaving that aside, the consequences of devolution, of which the islands are a part, the Crown Dependencies are part in a sense, means that it is a matter for them and we should be fairly relaxed about it. I would like your comments.

Professor Sutton: I agree with your conclusion, but not with the way you get there.

Q22 Mr Hogg: I am happy with one part of your answer, Professor!

Professor Sutton: Living, as I do, most of my life in Belgium, I am rather familiar with devolution and federal government and regions and the difficulties which can arise. Similarly with Germany, Spain and so on. It is a common issue these days. Our problems are special, if not unique in my view, because of the absence of a written constitution. Where I would take issue with you is the issue, or the problem, or the fact with the Crown Dependencies is that it is not devolution. Constitutionally their situation has been the way it is for centuries.

Q23 Mr Hogg: I am not sure what difference of principle that makes. It is a fact. I concede the fact, but what is the difference of principle?

Professor Sutton: It is a very interesting question, I think. It reminds me a little bit of the US Constitution and what is devolved to the states, where does residual sovereignty lie.

Q24 Mr Hogg: Sure.

Professor Sutton: It is clear, in my view, that with Scotland and Wales, Acts passed by the Westminster Parliament---

Q25 Mr Hogg: Evolve downwards, yes.

Professor Sutton: ---yes, evolve downwards, and can be changed or repealed. Ultimately sovereignty resides in Parliament, in Westminster.

Q26 Chairman: In quite brutal form.

Professor Sutton: Yes.

Q27 Chairman: The Constitution of Northern Ireland and the Stormont Government and Parliament was abolished in one day by the UK Parliament. Is there any way in which the UK Parliament could do that in respect of Guernsey or Jersey or the Isle of Man by passing an Act saying the existing constitutional arrangements are at an end and, for example, imposing direct rule. Is it constitutionally possible to do that?

Professor Sutton: No.

Q28 Mr Hogg: What about the Royal Prerogative in this context?

Professor Sutton: Politically, militarily, yes, but unless the condition of a breakdown of good government, which I define as a very narrow concept, is fulfilled, the seizure of power, so to speak, in that way, would be unlawful. The separate question is where would such a seizure be challenged? For example, there is no compulsory jurisdiction under the United Nations in terms of self-determination that I am aware of. Which international forum would Jersey, Guernsey or the Isle of Man go to is a separate question, but if you ask the question in that sort of black and white way, I think the answer would have to be that that seizure of power would at least overturn 800 years of consistent constitutional practice, convention and, I would say, law.

Q29 Mr Hogg: Does not the overarching authority of the Crown from which the autonomous situation of fact arises retain to the Crown some form of power of intervention which, if push comes to a shove, could be called in to aid?

Professor Sutton: I think that is right up to a point in the sense of the concept of good government. If the United Kingdom held that good government had ceased to exist the intervention would be through the Royal Prerogative, but I think the answer to your question is that the scope of the Royal Prerogative over the centuries has diminished extraordinarily and now it is a question of parliamentary sovereignty, not the sovereignty of the Crown as such. I think the answer has to be seen against that background.

Q30 Chairman: Can I turn to the issue you raised earlier, which is the international personality of the territories? Let us start simply. Legally it is the case, is it not, that the islands do not have an international personality?

Professor Sutton: That is correct.

Q31 Chairman: They do not have members of the United Nations. They do not have diplomatic representation of their own.

Professor Sutton: That is correct. International personality, whether it is a state or an entity like the European Union, has to be recognised by the international community. One can remember historical examples in the case of the UK with Rhodesia, UDI, and so on. If, for example, Jersey were to become independent and join the United Nations, I think international recognition is almost concomitant with membership of the UN, so without international recognition, no international personality. What is happening, I think, at the moment (and this rather typically British in a sense) is that the international identity, not personality, of Jersey, Guernsey and Isle of Man is developing in a pragmatic and de facto way, but the fact that every international negotiation which they have formally (and I will come back to the informal later, but the formal international negotiations for tax information, exchange agreements, agreements with Member States of the EU on tax on savings, and so on) is always done under the authority of a letter of entrustment given by the United Kingdom which says to Belgium, or to Australia, or to the United States, "We hereby authorise Jersey, Guernsey and the Isle of Man to conclude this international agreement in this sphere", which is set out in the letter from, I think, the Secretary of State for the Ministry of Justice actually, but it makes it very clear which are the countries with whom the Crown Dependencies may negotiate and what are the subjects which may be covered. That is almost like the instrument that you have as a diplomat, which is full powers, which you have to show to your negotiating opposite party to show that you have been authorised by the sovereign, by the international person which is recognised, the UK, to do those negotiations. So every agreement which has been concluded so far by Jersey, Guernsey and the Isle of Man has been done under the delegated authority of the United Kingdom.

Q32 Chairman: Then, in reality, it becomes more complicated. We looked at the situation when, as Mr Michael mentioned, the Kaupthing Bank failed and the British Government was representing its own interests and the interests of UK depositors in UK based banks, but at the same time it had a responsibility to represent the Isle of Man's interests in respect of Kaupthing (Isle of Man) and those people, wherever they were resident, including the UK, who had deposits in it. These two interests were quite clearly materially different, and the action to freeze assets in London would not have taken place in the way that it did had the British Government been acting in the Isle of Man's interests, and the negotiations with Iceland involved somewhat different considerations in respect of the two. How do you think this problem is resolved in practice or should be resolved in practice?

Professor Sutton: It is very difficult, but not without precedent. My first job in the European Commission in 1973 was to negotiate a textiles agreement with Hong Kong. I remember asking my Director General how it was that we were at the EEC were negotiating with a Crown colony of the UK. He, being German, expressed some incredulity at my question and said, "But Hong Kong is fifth biggest economy in the world. We have never even thought about it." Then later, when we were in Geneva, the Director General of the GATT called upon the UK speaking on behalf of Hong Kong to take the floor, and colleagues from Hong Kong sitting in the UK delegation then spoke. This is to answer your question. It is possible legally and, indeed, it is not only possible, it is actually the UK's obligation. In 1994 a judgment of the European Court of Justice - this was on the ratification of the WTO agreement when the United Kingdom was arguing for the right to sign the agreements alongside the EEC - whether or not there is exclusive competence in the EC on WTO matters, a country like the United Kingdom, which has dependent and associated territories, effectively wears two, or three, or four, or ten hats. That may be very inconvenient, it may be very difficult, it may be politically unacceptable or difficult to swallow, but it is a fact. In the Hong Kong case, please remember that Hong Kong's interest was in exporting textiles and clothing; our interest was in restricting imports of textiles. You could not have had a more diametrically opposed economic interest. I would argue that that was a more conflictual situation than the issue of taxation. At the moment the islands are very jealously guarding their own right to set their own taxes, rates and structures, and you may say that to expect the United Kingdom to defend that in Brussels is very difficult but, I am sorry, if you accept the international responsibility of the United Kingdom for the islands, it is their duty to somehow find a way to do that. In Iceland it was doubly difficult because Guernsey, the Isle of Man and Jersey are not in the European Economic Area, so the legal situation of those islands and the banks registered there, the subsidiaries of Kaupthing and Landsbanki, was different from that in the UK. Can you imagine the Foreign Office and the Treasury getting their heads around that and going to Iceland and negotiating, as it were, on one day for the UK depositors and on the next day for Guernsey and the Isle of Man. It is very difficult, but that is the situation. Is there an alternative? Yes, there is, you mandate or you authorise or you empower the Isle of Man to do the negotiations themselves, and, in my view, that is the way of the future. There is a condition, in my view, also.

Q33 Mr Hogg: If you do that, of course, you deprive yourself of a lever that you currently have over the islands because, taking on Sir Alan's point, if one actually declined to negotiate in respect of some transactions, that is actually a lever which you can either use for a particular purpose or, indeed, for general leverage. If we accede to your suggestion of giving a general mandate, you are actually throwing away a lever which we have over the islands which otherwise we do not have much of.

Professor Sutton: In bald terms that is right. My suggestion was going to be that for the future the way of the future is more intensive co-operation. There have to be mechanisms put in place, and it probably implies greater resources in Guernsey or Jersey and the Isle of Man and in London. There have to be co-operation mechanisms. At the moment, I think the co-operation is not intensive enough, and that perhaps goes back to the Chairman's question and the fact that I have been pressed several times on what would happen if such and such happened. I think there already is, probably more than any of us realise, on a daily basis a very intensive exchange of views and communications on all sorts of matters, not just legislation, with the islands, but in terms of international negotiations, obviously if the United Kingdom is going to entrust Jersey to negotiate mutual recognition agreements on financial services with the EU, there should be a very close system of co-operation or an official from the Treasury should be instructed to be part of the Jersey delegation or the Isle of Man delegation. This is perfectly possible and I do not think it would meet resistance in the islands as far as I know.

Q34 Dr Whitehead: Looking through the other end of the telescope, there may be circumstances under which the Crown Dependencies themselves may consider that the UK Government is not honouring its constitutional obligation to represent those Crown Dependencies internationally. Are there any ways, either in practice or in theory, that those Crown Dependencies, if they consider that, might enhance, as you say, their international identity?

Professor Sutton: We have discussed the fact that international personality and sovereignty and full international identity lies in the formally recognised sovereign, which is the United Kingdom. So the answer to your question is, yes, it can happen, but it must happen by discussion with the United Kingdom and by authorisation of the United Kingdom. Take, for example, the establishment of offices, delegations, missions, call them what you will, in Brussels, or Washington, or any other capital, the OECD, Paris, there is a very important question which would have to be answered. How would those offices in Brussels work with the UK Permanent Representation? If you look at the case of Scotland, Wales and Northern Ireland, there is an extremely excellent co-operative relationship between the devolved administrations, the Scottish Executive's Office in Brussels, and UKREP, and there is a mutual assistance pact or a system which is mutually beneficial despite their constitutionally different status. I see no reason why that could not operate for Jersey, Guernsey and the Isle of Man. I think it is quite difficult in the modern world to expect a department of the Treasury or the former DTI or any domestic government department to allocate resources to understanding and defending internationally a jurisdiction for which they have no formal responsibility. I think that is very difficult. The way forward in that is to empower and to authorise the jurisdictions to run their own show but in full co-operation, given that ultimately international responsibility does reside with the United Kingdom unless and until they obtain full independence. So that is the way forward: closer co-operation, exchanges of views, exchanges of information, throughout the process, whether it is the daily business of doing work with the European institutions or whether it is negotiating formal agreements. The point here is that when the Channel Islands and the Isle of Man decided on their current relationship with the EU we lived in a different world, as we said earlier on. Now it is quite clear that Protocol 3 has, I do not say outlived its usefulness, but the economic relationship of the Crown Dependencies with the rest of the world today is not covered by Protocol 3. Therefore, they have discovered for a number of years now that many decisions taken in international organisations like the EU, in transport, in financial services, in environmental protection, climate change, maritime environment, all these legally are not directly applicable in the Crown Dependencies but certainly are of enormous political importance in an indirect manner. Therefore, they have to be plugged into the system, and the only way they can do it is through their own initiative, their own offices. Take the case of Gibraltar. It is a contrast, of course. Gibraltar is rather in the EU; the Channel Islands and the Isle of Man are rather out, to put it in a very crude way. The United Kingdom actively takes responsibility for Gibraltar. Why is that? It is because the concept of international responsibility of the UK is very much to the fore in the case of Gibraltar. If Gibraltar does not implement a Telecommunications Directive or the Banking Directive, the United Kingdom will receive a letter of infringement under Article 226 from the Commission.

Q35 Mr Hogg: And from Spain.

Professor Sutton: And there is the Spanish dimension as well, of course. The Crown Dependencies are not in that situation. If you look back at the last 35 years, I think there have been three cases before the Court of Justice involving the Crown Dependencies, and then really in quite marginal issues. They simply have not been an issue in the EU. As I say, until the last ten years the EU has not been an issue for them, but it really is now because of the legislation being passed in financial services and their need not only to conform to it but actually to maintain market access and secure recognition. So it is in their interests, and I would submit it is in the UK's interest, to assist them in that process of meeting international standards, gaining international recognition, being prosperous, being politically stable. That, I would have thought, is in the interests of everybody.

Q36 Mr Tyrie: Large fiscal regimes - Germany, France, Britain - on the whole, do not like dependencies, which they see as a source of tax leakage, even if officials are busy advising them that the overall net effect is probably positive because of the attraction of inward investment. Let us suppose, whether rational or not, that a putative British Government were to take a set of decisions which would lead, shall we say, Jersey and Guernsey, for the sake of argument, to conclude that they were better off being wholly independent. What cards do Jersey and Guernsey have to play in order to secure that independence? Would they negotiate with another large country for some kind of protection? What legal basis would they have for trying to find such protection, or would they file for independence with the United Nations, if there are such proceedings available to them?

Professor Sutton: I think that within the United Nations there are probably many precedents for---

Q37 Mr Hogg: The Security Council will say no, I can tell you that now.

Professor Sutton: There are many precedents for small jurisdictions being members of the United Nations. I do not express a view on whether Jersey, Guernsey and the Isle of Man would, as it were, qualify for membership of the United Nations, I can just think of a number of island jurisdictions which are smaller and less economically viable than them. If they were to seek independence and if, by a proper democratic means, they were to exercise that right of self-determination, I have heard it said by the United Kingdom officials that the United Kingdom would not stand in their way. To answer your question directly, the only analogy which I can think of is the analogy (and it may not be one which we want to go into in too great detail) between Switzerland and Liechtenstein. Liechtenstein has 35,000 inhabitants. It is an independent sovereign state, a member of the United Nations, a member of the WTO, which incidentally the three Crown Dependencies are not even by affiliation with the UK - that is another issue - and Switzerland looks after Liechtenstein's interests around the world in places where Liechtenstein does not have diplomatic missions. Liechtenstein has eight diplomatic missions including a very effective one in Brussels. I am not passing judgment on Liechtenstein's recent history and its difficulties with Germany on tax evasion and tax avoidance, and so on. All I would say there is that the track record of the three Crown Dependencies is completely different. If you speak to the European Commission about model jurisdictions with which they negotiate, whether sovereign or not, they will tell you, and so will the French Government following the recent agreements of tax information exchange agreements, that these are model jurisdictions. They have signed Article 26 OECD agreements. Not only that, but they enforce them. They respond to requests for information. You cannot ask for more than that. By the way, you did not say these words, but I am going to use them. Words such as "tax haven" and "off-shore jurisdiction" are terms of art; they are not terms of law. One needs to be very careful saying that a jurisdiction does not comply with standards, and so on, and it, therefore, is a tax haven. What are we actually talking about? One has to be very clear. Are we talking about tax rates, are we talking about tax structures, are we talking about money laundering activities and the failure to control them, and so on? On all these grounds, of course, the three Crown Dependencies have been found to be exemplary. That is a rather longer answer to your question. I do not think they would need necessarily to have a kind of larger jurisdiction that would take care of them.

Q38 Mr Tyrie: Although Liechtenstein does, in practice, have Switzerland.

Professor Sutton: Yes, it is not defined, but de facto they have a working arrangement.

Q39 Mr Tyrie: Monaco has France, and so on.

Professor Sutton: Yet Monaco is nominally a sovereign state, as is San Marino, as is Andorra, and it is interesting that in the tax field these third countries - Switzerland, Monaco, Andorra, San Marino and Liechtenstein - have bilateral agreements with the EU, as does Jersey, Guernsey and the Isle of Man, and, of course, the ones which apply, which work best, are the ones with the British Crown Dependencies.

Q40 Mr Tyrie: What I am inviting you to do, Professor, is to look beyond the strict legal position that seems to me, the more I look at it, to be elastic and to provide a precedent for almost anything if one looks hard enough, and if there was not a precedent I am sure some reason would be found for creating one, but to look at the tectonic plates of power that operate here to discover where, under pressure, this relationship is likely to go and then to look back, using Alan Whitehead's phrase, through the other end of the telescope to establish where it might be sensible to take the legal structure because it is the politics that will determine what legal structure is sustainable in the long-run. I hesitate to summarise what you have said, but it sounds to me as if you are saying that the mutual interest for arrangements something like the ones that currently pertain are so strong that they are unlikely fundamentally to be altered and that, therefore, the task of finding the correct legal structure is secondary and readily achievable.

Professor Sutton: I think that the attitude which exists to a very large extent in each of three jurisdictions would be that the present structure is fundamentally sound. I think I understand in all three jurisdictions, which I have visited now for 20-odd years, there is a terrific loyalty to the United Kingdom and to the Queen, and that link is very strong. What is wrong with the relationship at the moment is not something that cannot be put right, though, as I have said earlier, there are differences in law and policy which flow from the autonomy of those jurisdictions which would pose difficulties, hurdles and obstacles, and which require political will to be overcome, but the present system, if it is improved, can be made to work. I think probably - this is my personal view - all three jurisdictions would prefer that to happen than to have formal sovereignty or formal independence, precisely for the reasons which I think underlie your question, that in Europe, for example, there is a problem, there is an issue, with how to deal with a multiplicity of small jurisdictions in an enlarging European Union. We see that with the Western Balkans. There would be no ready willingness at this moment to enter into negotiations with a number of further small jurisdictions for many reasons, not only because of their viability, their size, voting, members of the European Parliament, and so on, but also for the precedent value which that would have for certain other Member States who may not welcome that. So that is probably not a realistic issue in the short-term. The realistic approach is for both sides to recognise the strength of the current situation and put some effort into actually developing it and making it work.

Q41 Chairman: There is one last point I would like to put to you, which is to clarify the situation in respect of Alderney and Sark. I know we could spend rest of the day on Alderney and Sark, but it has been said to us that there is a federal relationship between Guernsey, Alderney and Sark. I do not notice any federal institutions which would describe such a relationship. How would you characterise it?

Professor Sutton: I have to say on this point that I do not hold myself out as a constitutional lawyer under Guernsey law. My only observation would be that that the relationship between Alderney, Sark and Guernsey complicates the international dimension of the relationship between Guernsey and Europe, or Guernsey and the United Nations, or Guernsey and the European Convention on Human Rights, for example.

Q42 Chairman: I am thinking of a sovereign constitution, for example.

Professor Sutton: Yes. I am afraid I find it difficult to go into details on the constitutional relationship because I simply am not familiar with the details of it. I am the European law adviser to the islands. I am not trying to avoid the question, I just think it is a legacy of history with which the UK is replete, not least in the country in which I had my education, which is Scotland, which is fascinating as well in terms of the divisions between internal and external relations. The situation in Guernsey, I think, works well enough in practice and there have not been any insuperable problems caused by it, though it is certainly difficult to explain it to outsiders.

Q43 Dr Whitehead: Notwithstanding what you have said, which of course is absolutely accepted, about your position - you are not a constitutional expert on the relationship between Guernsey, Sark and Alderney - would it be possible to characterise to some extent their relationship almost as you described, or it has been described, as the relationship between the UK and the Crown Dependencies? That is, they have independent jurisdictions, they make their own laws and yet they are apparently within a form of federation with Guernsey but that presumably Guernsey could not interfere in their law making processes in roughly the way that you have described the UK as not able to interfere with the law making process of the Crown Dependencies, but, nevertheless, having an influence over their overall outcomes?

Professor Sutton: To be honest, the answer is I do not know. I know that the States of Deliberation in Guernsey have certain legislative powers for Sark and Alderney. I am not quite sure where the dividing line comes to tell the truth. I think the analogy you are trying to draw probably breaks down on the point which we spent some time on an hour ago, which is the legal autonomy of Jersey, Guernsey and the Isle of Man. For the United Kingdom, the United Kingdom itself has said repeatedly, "We cannot legislate for the islands without their consent", and then somewhere tucked in the footnote it talks about good government, but that is broadly the principle. They legislate for themselves and, by the way, international conventions are extended with their consent following consultation. I would hesitate to really compare the Sark and Alderney situation with that.

Q44 Chairman: Professor Sutton, thank you very much indeed. Thank you also for, I believe, your willingness to give us a revised version of the article you wrote on Jersey's changing constitutional relationship with Europe, an updated version of that.

Professor Sutton: Chairman, I will give you an updated version exactly because so much has happened in the last four years and I think that was published in January 2005. So, yes, an update is timely certainly.

Chairman: Thank you very much indeed. You have been very helpful.