May 5, 2008 -- The United Kingdom retains responsibility for 14 Overseas Territories, 11 of which are permanently populated and which choose to remain under British sovereignty rather than to become independent states. The Territories are a diverse group, including Bermuda, home to 65,000 people and a major financial centre, and St. Helena, one of the most isolated populated islands in the world and reliant on UK aid.

While the Territories are a UK-wide responsibility, the Foreign and Commonwealth Office ("the Department") is the lead Department for coordinating UK Government policy for the Territories. The Department for International Development (DFID) coordinates development assistance, focusing on the three Territories of Montserrat, St. Helena and Pitcairn.

Assessing and managing the diverse range of risks facing the Territories is challenging. The Department aims to strike a balance between maximising the autonomy given to Territories' democratically elected governments, and minimising risks to the UK. The UK has dealt with a wide variety of risks and liabilities in the past, including pension liabilities of an estimated £100 million in Gibraltar and emergency aid of over £250 million to Montserrat after a volcanic eruption on the island.

The Department is attempting to increase capacity for oversight of Territories' financial services industries. However, regulatory standards in most Territories are not yet up to those in the Crown Dependencies.1 Limited capacity also reduces the ability of Territories to investigate and prosecute money laundering. The Department has written to UK agencies, such as the Financial Services Authority, the Treasury and the Serious Organised Crime Agency, to emphasise the need for their involvement.

The Governor retains responsibility for managing risks such as crime and disasters, yet is dependent on funding being provided from Territory governments. In order to preserve relationships with local governments, Governors tend to rely on their influencing abilities and are reluctant to use more coercive measures to require funding.

Territories have seen improvements in disaster management, but this needs to accelerate as rising sea levels and global warming add to the existing risks from hurricanes and volcanoes. The Department's programme funds aimed at increasing Territory capacity to meet risks and encouraging sustainable development have been too thinly spread to be effective.

Standards of governance and financial reporting in the Territories are variable and can fall below standards acceptable in UK Local Government. Lax financial management can evade Departmental controls to protect the UK from risk, although there is stronger fiscal oversight of Territories receiving Development aid. The Department also represents the Territories' external interests. It is continuing diplomatic contacts with Argentina over a lack of air access through Argentinean airspace to the Falklands Islands, and over rights to fishing licences, an important income generator in the South Atlantic. The Department also maintains that legal costs it has incurred in contesting the right of the Chagos Islanders to return to their homeland of Diego Garcia in the British Indian Ocean Territory are justified.

On the basis of a report by the Comptroller and Auditor General, the Committee took evidence from the Department and the Department for International Development on the oversight of offshore financial services in the Territories; on the balance between UK and Territory funding and responsibilities; and on governance and management of the Territories external relations.