Prepare to bail out OFCs says Foot report draft

Concerns that the British government may have to bail out its Crown Dependencies and Overseas Territories were muted in early draft versions of a report on offshore financial service centres, the Guardian newspaper reported on Monday.

The final report is expected to be published next month in response to the UK Chancellor of the Exchequer’s request for an independent review of the long-term opportunities and challenges facing the UK’s offshore financial centres.

The Guardian claims that unnamed senior Treasury officials stated the report recommends, in light of the financial and economic crisis, the UK should prepare for the financial failure of one or several of the financial service centres, potentially costing the Treasury tens to hundreds of millions.

The Guardian mentioned specifically the budget deficits in Jersey and in the Cayman Islands in the context of the report, saying the Cayman Islands was so cash-strapped it may not be able to pay its own civil servants.

The report could spark renewed demands by the Foreign and Commonwealth Office for the Cayman Islands to introduce direct taxation.

The UK government had previously turned down Cayman requests to borrow an additional CI$372 million to cover current budget shortfalls, unless it is presented with a clear strategy to turn around Cayman’s public finances.

In anticipation of the report’s findings, Parliamentary Under Secretary of State Chris Bryant wrote to the Cayman government in August, urging it to consider among others the ‘possible outcomes of … Michael Foot’s report on offshore financial centres’ and arguing that ‘it would be unwise to … presume that the Cayman Islands’ prosperity could rely on an offshore tax haven status’.

Government Leader of Business McKeeva Bush is meeting with Foreign Office officials in London today [Thursday]. He will discuss the Cayman Islands government’s medium-term plans to balance the budget in order to receive permission to raise additional debt.

However, Mr Bush has until now resisted British suggestions Cayman should widen its tax base by introducing payroll or property taxes. Instead he advocated public financing initiatives for large infrastructure expenditure projects, which have doubled Cayman’s government debt over the last three years.

The government also proposed to raise certain customs duties, licence fees, and indirect taxes and measures to cut expenditure by CI$89 million in the current budget year.

According to the Guardian’s unnamed sources, the author of the OFC report Michael Foot, a former inspector of banks and trust companies with the central bank in the Bahamas, is concerned over the accuracy of some of the Territories’ economic analysis and modelling and their strong reliance on tourism, which like the financial services sector has been hit hard by the economic crisis.

It is expected that the report will address British concerns over the long-term sustainability of the Overseas Territories’ economic model and competitiveness and identify contingent liabilities that may arise for the UK tax payer.

Vince Cable, the Liberal Democrat Treasury spokesman is quoted by the Guardian 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.

“It would be extraordinary to bail out these tax havens, especially as additional money that went to them would come out of aid budgets to the detriment of poorer countries that have managed themselves properly,” Mr. Cable added.

Statements from Foreign Office officials explained that overseas were responsible for their own finances and the Treasury maintained that it was not in ‘the business of bailing out tax havens,’ the Guardian report said.