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Select Committee on Foreign Affairs Fourth Report

SPANISH ALLEGATIONS AGAINST GIBRALTAR

43. The use of lurid language by the Spanish authorities to vilify Gibraltar has a long pedigree. Our predecessors in 1981 traced back to 1908 descriptions of Gibraltar as a "source of contraband damaging to Spain's economy," and the argument that Gibraltarians were "parasitic" to 1948. They commented that, from 1948 onwards, "Spanish writers and broadcasters vied with each other in vituperating the Gibraltarians."[94] Unfortunately, the present Spanish Government has seen fit to rekindle this type of inflammatory description. Talk of parasitism and illegality has been common, and there have even been allegations by Señor Matutes of toleration of criminal activities by the Gibraltarian authorities, with suggestions of complicity in murder and kidnapping.[95] This sort of language has had an effect in Spain, where, for example, the normally sober El País contained an editorial on 12 February which spoke of the "growth of a parasitic economy, with illegal or irregular activities." Crude racist abuse against Gibraltarians was published in the Spanish magazine Cambio 16 that month. Another account which included allegations of drug trafficking, money laundering, organised crime, kidnapping and murder—as well as non-compliance with EU law—appeared in El Mundo, on 3 March 1999. This article was the subject of a letter of rebuttal sent to the paper by the British Ambassador to Madrid and published on 4 March.[96] Mr Caruana told us how this "crescendo of Spanish press opinion" could adversely affect cross-border relations.[97] Most worryingly for Gibraltar, the defamation of Gibraltar has an effect on the way it is regarded in countries like Germany and Italy especially among those who might otherwise wish to do business in Gibraltar. It also undoubtedly has some effect on popular opinion in the United Kingdom. We turn in the following paragraphs to the principal areas in which allegations have been made.

Parasitism

44. The allegations that Gibraltarians evade their EU responsibilities and engage in illegal activities at the expense of their Spanish neighbours is summed up in the long-standing Spanish description of Gibraltar as a parasite feeding off Spain.[98] Ms Quin repudiated this forcefully,[99] as do we. Such language is deeply offensive and has no part in modern Europe. In any case, as the Chief Minister told us during our visit to Gibraltar, it is absurd to regard Gibraltar, into which up to 4,000 Spanish workers commute daily, which takes 50% of its imports from Spain, and whose population spend massively in the Campo,[100] as parasitic.

Illegality

SMUGGLING

45. At the relatively trivial level, it is undoubtedly true that the low levels of tobacco and alcohol prices in Gibraltar will encourage individuals to attempt to evade duty on the exports of small quantities. The British Government acknowledged this, conceding that "there is still some tobacco smuggling from Gibraltar to Spain, often by jet-ski to La Linea or by individuals who cross the border with cartons of cigarettes strapped to their bodies."[101] Some residents of La Linea are reported to make a small livelihood out of crossing the border repeatedly with a carton or two of cigarettes.

46. Of a wholly different scale is the running of large quantities of tobacco from Gibraltar to Spain and of drugs, particularly hashish, from Morocco to Spain. The law enforcement authorities in Gibraltar acknowledged during our visit that the problems in these areas had been bad up to 1995/96, and the British Government spoke of "unacceptable levels in the mid-1990s."[102] This was the era of the so-called "Winston boys" who were based in Gibraltar, and who used fast speed-boats in the waters between Spain and Morocco. Under pressure from the British Government, the Gibraltarian Government in 1995 introduced legislation banning the importation of semi-rigid inflatable vessels into Gibraltar, and there have been a series of measures since to clamp down on smuggling.[103] The British Government told us that these measures "have effectively eliminated the activities of Gibraltar-based fast boats and rigid inflatables."[104]

47. The Spanish Government has in the past expressed scepticism that the controls on the fast boats are operating effectively.[105] A dossier of further allegations was handed by the Spanish Prime Minister's office to No.10 Downing Street earlier this year. Mr Caruana was trenchant in his criticism of this letter which he regarded as "riddled with inaccuracies and in no way support[ing] the Spanish allegations."[106] He told us that the British Government had replied in this vein. At the time of their Memorandum to us, the FCO said that they were "investigating the allegations and will reply."[107] Ms Quin told us that "vast bulk" of the Spanish allegations were "completely unjustified," but that there were "one or two areas where we are looking at further details."[108] The Prime Minister has undertaken that the allegations will be considered "very carefully."[109]

48. Responsibility for dealing with crime in Gibraltar rests ultimately with the British Government, and Madrid's criticism is thus a criticism of the British authorities. As one Gibraltarian witness put it, "any attack levelled at Gibraltar based on accusations of criminal activity is an attack on Great Britain."[110] We believe that it is right that any Spanish allegations should be treated seriously and investigated properly. The RGP told us that some Gibraltarians remained involved in the smuggling of Moroccan hashish, and it is as likely that there will be criminal elements in Gibraltar as in any other town of 27,000. However, Madrid could itself do a lot more to help deal with smuggling into Spain: we understand from the RGP that co-operation at a local level across the border—both with the Policia Nacional and the Guardia Civil—was good, with about 300 requests for mutual assistance logged each month. Further evidence of this was given to us by the Gibraltar Government.[111] However, Madrid has frustrated the agreement of any formal co-operation programmes. Madrid cannot complain that the law is not enforced in Gibraltar if it refuses to recognise the law enforcement authorities or to work with them. It will be particularly absurd for Madrid to put any obstacle in the way of Gibraltar forming part of the Schengen system (a matter we discuss in paragraph 78) if it wishes to prevent cross-border smuggling.

49. The British Government also has a responsibility to ensure that the RGP have the resources to do their job. We were told that the police did not have the vessels they needed to patrol properly. They were hoping for joint funding from the United Kingdom and Gibraltar Governments for a new £400,000 fast patrol boat. Ideally, it would need two of these vessels to be able to mount 24-hour patrols. We note that joint funding of one vessel is being discussed between the British and Gibraltar Governments,[112] and Mr Caruana told us that the FCO had offered to contribute.[113] We recommend that the two Governments should ensure that funding is made available for at least one fast patrol boat for the RGP.

50. As well as local cross-border co-operation, we were also told by the British Government that the United Kingdom law enforcement authorities had achieved a high degree of co-operation with Spain, and that some of the Gibraltar-related drug seizures by the Spanish police were made with the involvement of the British authorities.[114] We understand that organisations such as HM Customs and Excise and the National Criminal Intelligence Service already work with the Gibraltarian services. The Commissioner of the RGP previously served with the Greater Manchester Police at Assistant Chief Constable rank, and this should help foster relations between the British and Gibraltarian police forces. Spain must be left in no doubt that the criminal law in Gibraltar is as strict, and as strictly and effectively enforced, as it is any other part of United Kingdom territory.

FINANCIAL IMPROPRIETY

51. Very serious allegations are also made by Spain that Gibraltar is a centre for financial impropriety, and in particular for money laundering. There may have been problems in the past, as the Barlow Clowes affair revealed, but Gibraltar has since done a great deal to raise standards. Supervision of financial services in Gibraltar is the responsibility of the Financial Services Commission, whose Commissioner is a former senior Bank of England official, appointed by the Governor with the approval of the Foreign Secretary. This Commission, as well as supervising the banking, insurance and investment industries, has particular responsibility to watch out for dishonesty or malpractice.[115] More specifically, the British Government told us that the Gibraltarian legislation which deals with money-laundering is now up to EU and United Kingdom standards and that a Financial Intelligence Unit to receive disclosures about suspicious transactions had been established. Gibraltar has also signed up to the recommendations of the Financial Action Task Force (FATF), an intergovernmental body established by the G7, and has agreed to undergo the mutual evaluation process of the Overseas Group of Banking Supervisors—a group affiliated to FATF.[116] The Gibraltar Government drew our attention to a US State Department Assessment which refers to "the commitment of Gibraltar to adhere to international anti-money laundering standards," and asserted that anti-money laundering legislation is "properly enforced."[117]

52. As in the case of smuggling, we would expect any Spanish allegations of money laundering to be passed to the British authorities, and to be investigated thoroughly. We were pleased to note that the FCO has "repeatedly asked Spain to provide... any evidence they have, in a form that can be used, of such activities."[118] Once again, however, Spain displays inconsistency in its approach to money-laundering. While it attacks Gibraltar for allegedly allowing the practice to take place, it has simultaneously obstructed the application by the Gibraltar Financial Intelligence Unit to join the international group of Financial Intelligence Units, known as the Egmont Group.[119] We note again that it is ultimately the responsibility of the Foreign Secretary to ensure that money laundering can no more flourish in Gibraltar than in the United Kingdom. Any criticism by Spain is therefore a direct criticism of Her Majesty's Government.

Tax evasion

53. Another part of the Spanish accusations against Gibraltar is that the territory is used for tax evasion. The development of financial services has been one of the principal responses in Gibraltar to the run-down of its garrison status. High rates of direct taxation for residents have been coupled with tax advantages for non-residents. The use of taxation policies to attract outside investors is a strategy which has been offered by many other "offshore" tax havens, such as the Channel Isles, Isle of Man and some Overseas Territories other than Gibraltar, including the British Virgin Islands and Cayman Islands. Ireland and Luxembourg have also adopted low taxation policies to attract foreign investors. Low taxation policies, and the flow of funds from one country or territory to another, may be irritating for the country or territory from which the flow comes, but this does not mean that the policies of the low taxation territory of themselves result in tax evasion. As the FCO put it to us, "it is for Spain to consider her own tax laws, and to substantiate allegations of illegal activity in the region."[120] However, the British Government also said that it was "willing to work with Spain to the fullest extent possible in combatting illegal activity."[121] Again, the onus must be on Spain to demonstrate what illegality is occurring, and to amend her own tax laws, as appropriate, in respect of her own citizens.

54. The Government of Gibraltar argued that Spain's attacks against its financial services industry were "unobjective and politically motivated." It pointed out that Spain was no more adversely affected by Gibraltar (which, in any case, was EU-compliant) than it was by other tax havens; that Spain did not complain about other offshore financial services centres, and was indeed attempting to set up one of its own in the Canary Islands; and that Spain has offered Gibraltar the opportunity to keep its finance centre if Spain's sovereignty proposals were accepted.[122] Spain's case is thus not one of principle.

55. There is, however, one area in which Gibraltar is not in compliance with EU law. That is in the transposition into Gibraltarian law of the 4th and 7th Company Law Directives. The two directives deal with company transparency, and it is only when they become law in Gibraltar that Gibraltarian company law will be in line with EU standards.[123] The earlier of the directives dates back to 1978, and it is legitimate for other EU countries to criticise the great delay in its transposition into Gibraltarian law. The British Government also attaches "particular importance" to the implementation of the two directives.[124] The Government of Gibraltar told us that they envisaged transposition of the directives "within the next few months," though they pointed out that the directives would not require the disclosure of the ultimate beneficial owner of shares, which could still be held in nominee accounts.[125] We appreciate the difficulties which the 4th and 7th Company Law Directives may cause for the private client sector in Gibraltar—both the Chamber of Commerce and the Minister for Trade and Industry predicted that business would transfer to jurisdictions like the British Virgin Islands or the Isle of Man where the directives would not have effect. However, to counter Spanish allegations effectively, Gibraltar must be able to demonstrate that there is no area in which it is dragging its feet. We recommend that the Foreign and Commonwealth Office continue to press for the early adoption of legislation in Gibraltar to bring into effect the Fourth and Seventh EC Company Law Directives.

56. There are other problems over the horizon for Gibraltar's low tax regime. These are the EU Tax Code of Conduct and the OECD Harmful Tax Competition initiative.[126] The policy behind these two initiatives has wide ramifications, and is not a matter for this Committee. However, any move to harmonise tax rates or to lessen the advantages of tax havens will have particularly adverse consequences for Gibraltar, as the Chamber of Commerce and Gibraltarian Government made clear to us.[127] The British Government has declined to exclude Gibraltar from the proposals, and any EU legislation will therefore apply in Gibraltar. However, the Gibraltar Government has said that it "will not implement or comply with" any voluntary code, as the OECD Code will be. It has undertaken, however, "in a manner and in a timescale compatible with the economic interests of Gibraltar [to] move to repositioning our finance centre so in the medium to long term it will, in fact, not offend the Tax Code."[128] We heard some allegations in Gibraltar that the Treasury was not as sensitive to Gibraltar's needs as were the FCO. We were, however, assured that "UK officials maintain an ongoing dialogue with officials of the Gibraltar Government" on EU-tax related measures, and that they took their responsibilities in this area seriously.[129] The Chancellor of the Exchequer has undertaken not to act in a way on tax harmonisation which is contrary to the United Kingdom's interest, and we believe that the Treasury should be aware that Gibraltar's interests are part of those national interests. We note, however, that the Gibraltar Government intends to comply with any EU legislation in this field where its commercial interests are very much at stake. It is important for it to do so to avoid further Spanish complaints of non-compliance with tax legislation.

57. We conclude that the series of allegations which Spain makes against Gibraltar appear almost wholly to be without substance. In many cases, it is not just the Government of Gibraltar but the British Government as well which is traduced. It is deeply regrettable that allegations are made that cannot be sustained by a basis in fact. If concrete evidence of wrong-doing were produced, the British Government should act promptly to deal with the problem. But so long as allegations are unsubstantiated, the British Government should continue to rebut them promptly and decisively.[130]

94 HC 166, Session 1980-81, para. 17. Back

95 Report of television broadcast of 1 March on Antena 3. Back

96 Translation of the article and of the rebuttal appear as Appendices 33 and 34 to the Minutes of Evidence (Ev. pp. 112-114 ). Back

97 Q154. Back

98 The use of the term "parasite" was traced back to 1939 by our predecessor Committee (para. 17, HC 166, Session 1980-81). The term is still in frequent use, as the Committee was told during its visit to Gibraltar, and as, for example, the description of "una economía parasitaria" in an editorial in El País on 12 February 1999 demonstrates. Back

99 Q36. Back

100 The Campo de Gibraltar is the area of Spain which forms the economic hinterland of the Rock. Back

101 Ev. p. 8, para. 69. Back

102 Ev. p. 8, para. 68. Back

103 Ibid. Back

104 Ev. p. 8, para. 69. Back

105 See, for example, letter from Señor Alberto Aza, the Spanish Ambassador in London, The Times, 19 April 1996. Back