MercoPress. South Atlantic News Agency

Britain could be forced to bail out offshore tax havens

The Guardian claims Cayman Islands (capital of hedge fund industry) could be top of the list

Britain could be forced to bail out one or more of its offshore tax havens at huge cost, according to early drafts of a Treasury report, because the economic crisis has wrecked their finances, according to The Guardian from London.

The newspaper said that offshore expert Michael Foot will next month set out a number of options to government ministers in the report as anxiety grows within Whitehall over the health of Britain’s overseas territories and crown dependencies.

It was the collapse of Barlow Clowes in 1988 tied in with the Spanish pensions’ issue that prompted a select committee of the Commons to commission to National Audit Office to investigate contingent liabilities arising because of responsibilities for offshore centres and territories whether from financial or even natural disasters.

Now The Guardian claims that senior insiders say early drafts of Foot’s report suggest that the government may need to make provisions for the financial failure of British tax havens. Experts suggest the failure of a major tax haven could potentially cost the UK tens, if not hundreds, of millions of pounds.

The problem has been accentuated by the recent move in which the UK suspended the constitution of Turks and Caicos but sought to keep as much of the local government functioning as possible.

UK Government officials apparently confirmed that they are aware that some British overseas territories are facing serious problems which could get worse. However there is nothing to suggest that Gibraltar is one of them although that possibility was mooted if Gibraltar had been defeated in the EU tax case that sought to deprive Gibraltar of its fiscal independence. Spain is challenging that decision from Luxembourg that endorsed the existing situation.

But The Guardian claims that Whitehall insiders warn that some territories faced with economic deterioration could become failed states and be dragged into the illegal drugs trade. Two weeks ago, The Guardian revealed that the Cayman Islands, the capital of the world’s hedge fund industry and the fifth biggest banking centre, was so cash-strapped it may not be able to pay its own civil servants.

The Caribbean tax haven was forced to ask the Foreign Office permission to borrow £278m to repair huge deficits. The Foreign Office refused, advising the island’s authorities to impose property or payroll taxes. Talks are ongoing over a £30m emergency loan package.

The Guardian adds that any suggestion that Britain will have to rescue offshore financial centres would be extremely controversial as tax havens drain the UK economy of an estimated £25bn annually through their role in aggressive tax avoidance and evasion.

Vince Cable, the Liberal Democrat Treasury spokesman is quoted as saying: “Britain obviously has some responsibility towards this small number of territories and that’s clearly right, but we can’t get into an open-ended bailout that would reward financial mismanagement.

Meanwhile The Guardian adds that there are also suggestions that an ongoing government review of online gambling sites, many of which are based in the Isle of Man and Gibraltar, may seek to impose more stringent regulation of them, which could threaten their offshore futures.