BACKGROUND

  1. Gibraltar is a United Kingdom Overseas Territory, with a population of just over 27,000. British title to the Rock of Gibraltar is based on Article X of the Treaty of Utrecht of 1713. The UK maintains that this carries with it a belt of territorial sea and claims a limit of three miles to the east and south and up to the median line (less than three miles) in the Bay of Gibraltar to the west. British title to the southern part of the isthmus connecting the Rock to Spain (on which the airport is built) is based on continuous possession over a long period.

  2. Under the Treaty of Utrecht, the Spanish Government have right of "first refusal" should Britain ever decide to relinquish sovereignty over Gibraltar: HMG has made a commitment enshrined in the preamble to the 1969 Constitution that they "will never enter into arrangements under which the people of Gibraltar would pass under the sovereignty of another state against their freely and democratically expressed wishes". Successive Spanish Governments have accepted British legal title to sovereignty over the Rock, but have increasingly argued that it is an anachronism. They have not accepted British title to the isthmus; nor do they recognise that Gibraltar has territorial waters and airspace.

  3. Particularly since World War II, the people of Gibraltar have developed a strong sense of identity. Self-determination has become a demand supported by all political parties in the territory. Her Majesty's Government policy is clear and long-standing. Her Majesty's Government support the right or principle of self-determination, but it must be exercised in accordance with the other principles or rights in the UN Charter as well as other treaty obligations. In Gibraltar's case, this includes the Treaty of Utrecht.

GOVERNMENT AND CONSTITUTION

  4. Gibraltar has a very considerable measure of devolved government. The Gibraltar Constitution Order 1969 formalised the devolution to local Ministers of responsibility for a wide range of "defined domestic matters". The Governor, the personal representative of HM The Queen, has direct responsibility for all matters not specifically allocated to local Ministers: principally defence, external affairs, internal security (including the Royal Gibraltar Police) and financial stability. The current Governor is the Rt Hon Sir Richard Luce DL.

  5. General elections take place every four years, most recently on 16 May 1996. The territory is organised as a single constituency. All British subjects over the age of 18 and resident in Gibraltar for at least six months prior to registration are entitled to vote. At present, there are four political parties. Each party can present, and each elector vote for, up to eight candidates. The 15 candidates with most votes become members of Gibraltar's parliament, the Assembly, and the Governor asks the leader of the party with most elected candidates to form a government. In theory, a minority government is possible. In practice, the tendency is for all parties to present the maximum eight candidates, electors to "block vote", and the Government/Opposition split to be 8/7. In addition to the elected members, the Assembly includes a Speaker (chosen by the House) and two ex-officio members (the Financial and Development Secretary and the Attorney General).

  6. The current Chief Minister of Gibraltar is The Honourable Peter Caruana QC. The party he leads, the Gibraltar Social Democrats (GSD), have an absolute majority in the House of Assembly. The other seats are mainly held by the Gibraltar Socialist Labour Party (GSLP), led by the Leader of the Opposition, The Honourable Joe Bossano, although one opposition seat is now held by The Honourable Dr Joseph Garcia, Leader of the Liberal Party, following an electoral agreement between his party and the GSLP in a by-election held in February 1999. Mr Bassano was Chief Minister from 1988 until the 1996 elections.

  7. The Government of Gibraltar are interested in exploring the possibility of affecting various changes to Gibraltar's Constitution. At Gibraltar's request, the FCO held exploratory technical discussions on constitutional reform with the Government of Gibraltar's representatives in Autumn 1998. We have not so far received a formal proposal for constitutional change from the Government of Gibraltar, which we understand is considering its position in the light of the technical talks. HMG have made clear they are willing to listen to any ideas that are realistic and compatible with international obligations, which include the Treaty of Utrecht.

GIBRALTAR'S STATUS IN THE EU

  8. As a European territory for whose external relations the UK is responsible, Gibraltar is within the European Union as part of UK membership by virtue of Article 227(4) of the Treaty of Rome. However, Spain considers that because the Treaty of Utrecht did not confer title to the isthmus, that part of Gibraltar is covered by Article 227(1) of the Treaty of Rome as part of metropolitan Spain. This is the basis for its objection to the application of EC aviation measures to Gibraltar's airport which is built on the isthmus (discussed further below).

  9. British Dependent Territories citizens from Gibraltar are defined as British nationals for EU purposes, thus giving them the right of free movement within the EU. Gibraltar has exemptions from Community policy in four areas: the Common Agriculture and Fisheries Policies, the Common Customs tariff, the free movement of goods (but not services) and the levying of VAT. There are no proposals to change these exemptions. Although Her Majesty's Government as an internal matter have delegated to the Government of Gibraltar responsibility for giving effect to EC legislation in the territory, the UK as responsible Member State is answerable before the European Court of Justice for the implementation and enforcement of EC obligations in Gibraltar.

  10. Gibraltarians do not have the vote in elections to the European Parliament. Her Majesty's Government have made clear that, as a result of the recent European Court of Human Rights ruling in the Matthews case, they will seek amendment of the 1976 EC Act on Direct Elections during the current negotiations in Brussels establishing Common Principles for EP elections. However, amending the Act requires the unanimous agreement of all Member States.

ECONOMY

  11. In the past the economy of Gibraltar was highly dependent on MoD employment. In recent years it has undergone major structural change from a public to a private sector economy. Gibraltar is keen to secure its economic future by diversifying through increased tourism, the provision of financial services (already responsible for 20 per cent of GDP) and maritime services (especially ship conversion and fuel-bunkering), and through the development of niche sectors such as telecommunications which require little land but offer high added value.

  12. In February 1997, the Government of Gibraltar announced a package of measures to boost tourism, including grants and soft loans for hotels and the opening of a catering college. The Government of Gibraltar doubled the tourism sector's allocation in the May 1997 budget. A new cruise liner terminal opened in October 1997.

  13. Her Majesty's Government have secured some 18 million ecu (about £15 million) of EU Structural Funds for Gibraltar over the period 1993-99. These funds are being used to encourage the development of new businesses (especially small and medium sized enterprises), to develop tourism, to improve infrastructure and for training programmes.

FINANCIAL SERVICES

  14. With the run-down of Ministry of Defence facilities in Gibraltar, tourism and financial services are increasingly the key growth sectors of the local economy. Her Majesty's Government and the Government of Gibraltar have sought to promote Gibraltar as a financial services centre, building on the assets of accessible institutions, educated workforce, a UK-style legal system, easy access to the EU market and regulation to UK standards. We have built up the Gibraltar Financial Services Commission (FSC) as a regulatory body for the main areas of financial services activity in Gibraltar: insurance, banking, investment services, and trust and company formation management services.

  15. The FSC is a statutory body corporate established by the Financial Services Commission Ordinance 1989. It consists of the Commissioner, as Chairman, and seven other persons, four with relevant experience in the United Kingdom and three with relevant experience in Gibraltar. The Commissioner is appointed by the Governor, acting with the approval of the Foreign Secretary. The current Commissioner is a former senior Bank of England official, with experience in financial regulation in Bermuda. He is supported by a staff of 17, including key personnel who have formerly worked in UK and Irish government departments or regulatory bodies.

  16. The functions of the FSC are to keep under review the operation of Gibraltar legislation and the effectiveness of supervision of financial services; to monitor the extent to which Gibraltar legislation and supervision complies with EU obligations and supervisory standards governing the financial services in the United Kingdom; to protect the public against financial loss arising out of dishonesty, incompetence or malpractice; and to advise the Government of Gibraltar and Her Majesty's Government on matters concerning financial services.

  17. The Commissioner, who is also the Commissioner of Banking and the Commissioner of Insurance, is the Chief Executive Officer of the Commission and is charged with the responsibility of supervising institutions carrying on finance business in or from within Gibraltar. He is required to ensure that such supervision complies with any applicable obligation Gibraltar has as part of the European Union and to establish supervisory standards which match those required by legislation and supervisory practice governing the provision of financial services within the United Kingdom.

  18. The FSC meets virtually all of the expectations of a Commission identified in the Edwards review of financial regulation in the Crown Dependencies, eg, over appointments to the Commission and the absence of a marketing role. The FSC is largely funded by fees charged to licence holders, although there is currently a shortfall which is made up by subsidy from the Government of Gibraltar.

  19. In June 1997, the DTI concluded that legislation and supervisory procedures in the Gibraltar insurance sector met UK norms. The then FCO Minister of State Mr Doug Henderson MP accordingly wrote to the FSC to give permission to "passport" Gibraltar-based insurance firms to operate in the UK and elsewhere in the EEA. The procedure is for the FSC to send a formal notification to insurance regulators in the countries in which a Gibraltar-based firm wishes to do business, and the company may then proceed to do so.

  20. However, several EU partners have queried the status of the FSC, while Spain has sought to lobby against acceptance of notifications by the FSC. The effectiveness of the FSC as a regulator has not been called into question. The reluctance of some Member States to deal direct with the FSC has been based either on the argument that, as the UK is responsible for the external affairs of Gibraltar, so all contact with Gibraltarian institutions must take place via London, or alternatively on a straightforward preference for dealing with only one competent authority in each Member State. The possibility has been mooted of communicating with those insurance regulators that refuse to deal direct via a London "post box".

  21. A review of FSC banking supervision in February 1998 confirmed that this met UK standards. Gibraltar has since transposed and implemented nearly all the relevant legislation, the only outstanding item being the establishment of the Deposit Guarantee Scheme. Once this is in place, HM Treasury will be in a position to consider secondary legislation in the UK to authorise the FSC to "passport" Gibraltar-based banks to sell banking services elsewhere in the EU.

UK/SPAIN DISPUTE

  22. It has long been Spanish policy that Gibraltar should be returned to Spain. Up to the end of the 18th century, Spain laid military siege to Gibraltar on a number of occasions. Since then, Spain has pursued its claim by more peaceful means. Spain has argued at the UN, and in other fora, that the decolonisation of Gibraltar is not a matter of self-determination of peoples but of the restoration of Spain's territorial integrity. The UK does not accept this.

  23. During the 1960s, Spain also sought to put pressure on the UK and Gibraltar by imposing restrictions on communications between Spain and the Rock. Spain reacted to the introduction of the 1969 Gibraltar Constitution, which it does not recognise, by closing the Gibraltar-Spain frontier. The frontier was eventually reopened to pedestrians in 1982 but was not fully reopened until 1985, in advance of Spain's entry into the European Community on 1 January 1986. Some Spanish restrictions remain in force (eg, on maritime traffic and aviation).

  24. Bilateral relations between the UK and Spain have improved significantly following the transition to democracy after the death of General Franco in November 1975. But the Gibraltar issue has remained a point of difficulty. In April 1980, after preparatory meetings in 1977 and 1978, the British and Spanish Foreign Ministers issued a statement in Lisbon. Spain reaffirmed its position on the re-establishment of territorial integrity. Britain underlined its commitment to honour the freely and democratically expressed wishes of the people of Gibraltar as set out in the preamble to the Gibraltar Constitution.

  25. Both sides expressed the intention "to resolve, in a spirit of friendship, the Gibraltar problem" and agreed "to start negotiations aimed at overcoming all the differences between them on Gibraltar". Some discussion of the practicalities of implementation took place during 1980-82, but the process was interrupted by internal and external factors on both sides.

  26. In November 1984, and against the background of negotiations for Spanish membership of the EC, British and Spanish Foreign Ministers meeting in Brussels issued a joint Communiqué on the way in which the two governments would apply the Lisbon Declaration. In addition to equality and reciprocity of rights and free movement of persons, vehicles and goods, the Communiqué provided for the establishment of a negotiating process aimed at overcoming all the differences between the two governments over Gibraltar and at promoting co-operation on a mutually beneficial basis on economic, cultural, touristic, aviation, military and environmental matters. Both sides accepted that the issues of sovereignty would be discussed in that process, which has become known as the Brussels Process. The British Government reiterated their commitment to honour the wishes of the people of Gibraltar as set out in the preamble of the 1969 Constitution.

  27. There have been more than 50 Ministerial and official meetings under the Brussels Process. The Spanish Government tabled "Proposals on Issues of Sovereignty" [the Moran proposals] in 1985. These were formally rejected by the British Foreign Secretary at a Brussels Process meeting in March 1993. In December 1997, the present Spanish Foreign Minster tabled proposals for temporary joint sovereignty over Gibraltar for an unspecified period before sovereignty would revert to Spain [the Matutes proposals]. The Foreign Secretary agreed to examine the proposals, but as the record of the meeting makes clear, reiterated the 1969 commitment. HMG have said that they will reply at the next Brussels Process meeting.

  28. The Spanish Government have not formally published the Matutes proposals. HMG have not yet responded to the document the Spanish Government handed over. The outline of the proposals has appeared in the media.

  29. The Government of Gibraltar have called upon Britain to reject the Matutes proposals. A petition organised by the Self Determination for Gibraltar Group (SDGG), signed by over 12,000 Gibraltarians and calling for the rejection of the proposals, was delivered to No.10 Downing Street in December 1998. The Minister of State at the FCO replied to the petition on 4 February 1999, saying that HMG would respond to the Matutes proposals in the Brussels Process.

AIRPORT JOINT DECLARATION

  30. In 1987 UK and Spain agreed a joint declaration on Gibraltar Airport which provided for joint use of the airport. The joint declaration stated that the arrangements would come into operation when (local) legislation on customs and immigration in the Gibraltar terminal had come into force, i.e., the arrangement depended on acceptance by the Gibraltarians.

  31. Successive Gibraltar Governments have refused to pass the necessary legislation. Despite the joint declaration being expressly without prejudice to differences on sovereignty over the isthmus, they have been concerned that the joint declaration ceded ground on sovereignty by allowing direct passenger access between the aircraft and the Spanish terminal. HMG have made clear that they cannot implement the joint declaration against Gibraltar's will.

  32. We continue to attach importance to an agreement on joint use and development of Gibraltar airport. There would be major benefits for Gibraltar's financial services and tourism sectors. Spain has frequently insisted on the implementation of the 1987 joint declaration, which in certain respects has now been superseded by subsequent EU legislation. We would like all parties to look afresh at the issue in the hope of finding a way forward which is acceptable to all sides. But the difficulties should not be underestimated.

RECENT PROBLEMS AND HER MAJESTY'S GOVERNMENT HANDLING

  33. Spain continues to press her sovereignty claim. This has been accompanied by a number of measures seemingly designed to put pressure on HM Government and the Government and people of Gibraltar. (Recent problems, and measures taken or apparently considered by Spain, are set out below.) We have consistently told the Spanish Government that such measures are counter-productive.

  34. Her Majesty's Government have raised the recent border delays and the threats of other Spanish measures on several occasions. These have included telephone calls and personal contact between the Prime Minister and Sr Aznar. The Foreign Secretary protested to his Spanish counterpart about the border delays and restrictions in a telephone call on 11 February and at a meeting on 21 February in Luxembourg. He also made it clear that a ban on Gibraltar driving licence holders or civilian overflights would be unjustifiable and unacceptable. The British Ambassador in Madrid has raised the issue several times with the Spanish authorities, including Sr Aznar. The UK Permanent Representative to the European Union has also written both to the President of the European Commission and to his Chef de Cabinet about Spanish actions.

FISHING

  35. Gibraltar has no commercial fishing industry and is not part of the EU Common Fisheries Policy. Spanish fishermen have traditionally fished in British waters around Gibraltar. In 1991 local legislation (the Nature Protection Ordinance) banned all fishing by net or rake on environmental grounds.

  36. Between 1991 and 1997, limited fishing on traditional lines was nevertheless tolerated. The number of boats was small. They avoided provocative and publicly sensitive locations and kept away from the harbour. In particular, boats kept out of the area close to the port known as Admiralty waters. Fishing boats moved on when asked to do so by the Royal Gibraltar Police (RGP). There were a few arrests when fishermen overstepped the limits of police toleration, but in general everyone on the spot coexisted comfortably.

  37. From January last year, there were incidents in which Spanish boats entered British waters around Gibraltar to fish in increasing numbers. Friction between the RGP and local Spanish fishermen peaked in March. There were further incidents in August and early October. The situation became very strained.

  38. The Foreign Secretary met the Spanish Foreign Minister, Sr Matutes, in Luxembourg on 5 October. They confirmed an understanding reached earlier between Britain and Spanish officials on the basis for a return to the situation that had prevailed between 1991 and 1997. A central point for us in this understanding was that the authority of Gibraltar's law enforcement agencies should be respected.

  39. However, there were difficulties in making this understanding work at the local level. There were further incidents in early November and early December in which Spanish fishing boats fished late at night close to residential areas and the harbour. On 27 January, the Spanish trawler Pirana, with 14 crew, was arrested for fishing in British waters. The fishermen appeared in court later in the day and pleaded not guilty. They were released on bail. Their boat was released but her nets were retained as evidence. The fishermen are due to appear again in court on 17 March.

  40. In response to the arrest of the Pirana and following a further night of confrontation with the RGP, fishermen and their sympathisers blocked the Gibraltar/Spain border on 29 and 30 January. This caused considerable inconvenience to local residents, Spaniards working in Gibraltar and tourists. The Embassy in Madrid protested to the Spanish Ministry of Foreign Affairs over the failure to keep the border crossing open.

  41. After this incident, the Chief Minister of Gibraltar held meetings with the fishermen's representatives. On 3 February they announced an agreement which recognised the validity of the Nature Protection Ordinance and the authority of the police and which tolerated fishing under certain conditions and in specified areas. The agreement has so far worked well, and relations between the fishermen and the RGP have improved greatly.

  42. The Spanish Government have refused to recognise the local agreement, asserting that the Chief Minister has no right to enter into such arrangements. They have seen the agreement not in terms of building locally on the 5 October understanding, as we have done, but as a rejection of it. From 4 February, in an explicit response to the agreement, the Spanish authorities orchestrated delays at the border. At times over the next fortnight these reached six hours.

THE BORDER

  43. Spain is entitled to check vehicles and people leaving Gibraltar (a Customs check because Gibraltar is outside the Community Customs Territory, and a light passport check to determine whether travellers are EU/EEA nationals or third country nationals who may be required to pass through immigration control). Such checks should be proportionate. Over the years, however, periodic and excessive delays at the border have appeared deliberately designed to put economic and psychological pressure on Gibraltar.

  44. In the first two weeks of February, delays for vehicles averaged three to four hours and sometimes reached six hours. Since 16 February, delays have come down to between one and two hours, but vary substantially and unpredictably. But even though overall delay times have dropped since mid-February, the volume of traffic attempting to cross the border has fallen sharply. We are also concerned at the discrimination of length of delays which drops when Spanish workers are crossing the border at the start and end of their working day.

  45. We have complained to the Spanish Government several time since February about the delays, stressing that they are excessive and unjustifiable as well as counter-productive. We have also pressed the European Commission on the need to remind Spain of her EU obligations for free movement of people. We believe that Spain must honour her assurances that she does not question the right of Gibraltarians to freedom of movement within the EU.

  46. Spanish workers employed in Gibraltar, and local Spanish fishermen, have protested to Madrid about the border delays. A number of local meetings have been held recently between representatives of Gibraltar and Spanish workers in la Linea to voice their common concerns.

THE EUROPEAN UNION DIMENSION

  47. Spain is increasingly creating problems over Gibraltar-related issues in the EU. This policy includes refusing to accept the designation of separate Gibraltar competent authorities in EC legislation; complaining about Gibraltar's record in implementing EU Directives; and insisting that Gibraltar should be suspended from all single market measures in the aviation field, following Gibraltar's refusal to accept the joint UK/Spain declaration of 1987 (always conditional on Gibraltar's agreement) on Gibraltar airport.

  48. In the past a backlog of untransposed EC legislation built up in Gibraltar. This was identified in 1994 and significant progress has been made to clear it, despite the strain that this placed on Gibraltar's small public administration. The Government of Gibraltar are aware of the need to continue accelerated implementation of EC legislation and is publicly committed to meeting its obligations. Her Majesty's Government have underlined the importance it attaches to Gibraltar fulfilling this undertaking.

  49. There is still a number of directives which were identified in 1994 which have not yet been transposed by Gibraltar. Most of them are the subject of infractions proceeding. These include the 4th and 7th Company Law Directives, to which Her Majesty's Government attaches particular importance to Gibraltar's implementation, both to bring Gibraltar's legislation into line with EU standards (see paragraph 64), and to avoid the risk of further Commission action against the UK. Gibraltar does, of course, have other EC legislation to implement but much of this is recent and will still be in the process of implementation in most Member States.

  50. Spain complained to the Commission in January at the failure of the Commission to take action against the UK over the non-implementation of EC legislation in Gibraltar. Spain's list of directives, which appeared in the Spanish press, was based on out-of-date information and contained many already transposed measures. Only four directives on the Spanish list are outstanding (the 4th and 7th Company Law Directives).

  51. HMG have adopted a case-by-case approach to Gibraltar-related problems raised by Spain in the EU. On occasion, and after consultation with the Government of Gibraltar, we have agreed Gibraltar's exclusion or suspension from specific items of EU legislation. But we have refused to accept Spanish demands for the automatic exclusion of Gibraltar from EU aviation legislation. We also deplore attempts to exclude Gibraltar from aviation safety and environmental measures. We have made clear that Spain's actions in the EU risk denying Gibraltar its Treaty rights as well as blocking important EU business.

PASSPORTS

  52. Spanish officials have raised queries in the past about the format of the EU common format passports issued in Gibraltar. These passports are issued in Gibraltar to British citizens and British Dependent Territory Citizens (Gibraltar), and have "Gibraltar" on their front cover. The Spanish claim that these passports are in breach of the 1980 intergovernmental resolution on the EC Common Format Passports. Our position is that these passports conform, and the holders of these passports have the right of free movement throughout the EU.

DRIVING LICENCES

  53. Under the 1969 Constitution, traffic questions are a Defined Domestic Matter, to be handled by the Government of Gibraltar. Gibraltar has its own Licensing Authority, which issues EU-format UK (Gibraltar) driving licences under the Second Driving Licence Directive. Old-format "GBZ" licences issued before the Directive came into force in Gibraltar (January 1997), and accepted by Spain when the border was re-opened in 1985, also remain valid.

  54. On 10 February, the Spanish Foreign Minister was reported to have told the Spanish Parliament Foreign Affairs Committee that his Ministry was considering refusing to accept the validity of Gibraltar-issued driving licences. This measure has not been implemented. HMG have reminded the Spanish Government that Gibraltar-issued driving licences should be recognised under EU law. HMG have also drawn the issue to the attention of the European Commission.

  55. Spanish concerns appear to focus on the designation "UK (Gibraltar)" on EU format driving licences and the fact that some Spaniards not resident in Gibraltar have been able to obtain Gibraltar driving licences.

  56. On the first point, HMG views the "UK (Gibraltar)" format as valid. The licence contains the distinguishing sign of the UK as Member State as required by the Second Driving Licence Directive. If this is disputed, it is a matter for the European Commission to take up, and not for another Member State to take unilateral action against individual motorists which would interfere with their right of free movement in the EU.

  57. On the question of Gibraltar-issued licences in the hands of non-residents, it is the case that Gibraltar did not impose a residence requirement for the issue of driving licences before the Second Driving Licence Directive came into force, and some Spaniards (and nationals of other Member States) were able to obtain Gibraltar licences. Since January 1997, the residency requirements for the issue of driving licences in Gibraltar have been the same as for elsewhere in the EU. It seems that after January 1997 a number of non-Gibraltarians made false declarations of residence and received licences on that basis. Since then, Her Majesty's Government has successfully pressed the Gibraltar authorities to tighten up their procedures to prevent this.

CIVIL OVERFLIGHTS

  58. On 10 February, the Spanish Foreign Minister was also reported to have told the Foreign Affairs Committee of the Spanish Parliament that, if the Chief Minister of Gibraltar tried to conclude an agreement on the use of Gibraltar airport with Spanish local authorities, an overflight ban would be imposed on civil air flights over Spain bound to or from Gibraltar. On 1 March, the Spanish Labour Minister, Sr Pimentel, was reported as saying in a public speech in Madrid that he could impose an overflight ban in response to the harm Gibraltar was doing to Spanish workers by failing to implement EU legislation.

  59. Under Article 1 of the 1944 International Air Services Transit Agreement to which both Spain and the UK are party, aircraft of other Contracting Parties performing scheduled air services are granted the privilege of overflight. A right of overflight is accorded to aircraft performing non-scheduled (charter) services under Article 5 of the 1944 Convention on International Civil Aviation to which both Spain and the UK are also party. We have made clear that it would be extraordinary and unprecedented for an EU Member State to impose an overflight ban on the civil aircraft of an EU partner.

ECONOMIC MEASURES

  60. There have also been reports in the Spanish and Gibraltar media of Spain drawing up a list of measures (described as "Plan B") which it could impose to disrupt Gibraltar's economy. We have made clear to Spain that threats of economic measures against Gibraltar in the absence of progress towards a settlement of the sovereignty dispute, or in response to political attitudes in Gibraltar, are unjustified.

  61. Spain has also regularly expressed concern about the use of financial services and companies in Gibraltar for alleged (Spanish) tax evasion and money-laundering. We are ready to examine individual allegations. Claims of a huge tax loss to Spain of £6.25 billion have appeared in the Spanish press. We have seen no justification for this figure.

MONEY LAUNDERING

  62. We are determined to ensure that attempts to launder money through Gibraltar are combated effectively and thoroughly. We have repeatedly asked Spain to provide us with any evidence they have, in a form that can be used, of such activities.

  63. Money laundering legislation on an all-crimes basis, to UK and EU standards, was introduced in Gibraltar in 1996. A special unit, the Gibraltar Financial Intelligence Unit (GFIU), has been established to receive disclosures under the new legislation. The Government of Gibraltar have signed up to the recommendations of the Financial Action Task Force (FATF), the main intergovernmental body set up by the G7. The Government of Gibraltar have agreed to undergo the mutual evaluation process within the Overseas Group of Banking Supervisors (OGBS), of which it is a member. The OGBS is affiliated to the FATF. The GFIU have applied to join the Egmont Group, an international group of Financial Intelligence Units. Their application is being opposed by the Spanish.

COMPANIES

  64. As regards the companies established in Gibraltar, all the 25,000 active companies are registered with Companies House (Gibraltar), and have to submit annual returns giving information relating to shareholders, directors and other related information. All companies have to keep books of accounts and appoint auditors. Of the 25,000 active companies only about 8,100 qualify for the beneficial tax rates. When Gibraltar transpose the 4th and 7th Company Law Directives (which relate to company transparency), their legislation will be in line with EU standards.

TAX EVASION

  65. The investment services and tax advantages for non-residents that are offered in Gibraltar are similar to those offered by other competing finance centres. One of the main Spanish complaints is that companies established in Gibraltar are not sufficiently transparent, and are the main repository of funds taken out of Spain to evade taxes. Their complaint dates back to the large number of companies which were established by Spaniards in Gibraltar to buy land in Spain, reducing their tax liabilities. These companies became dormant or defunct when Spain changed its tax laws to close this loophole.

  66. The Spaniards still complain however about the loss to their exchequer from alleged tax evasion using Gibraltar companies. It is for Spain to consider her own tax laws, and to substantiate allegations of illegal activity in the region. We are willing to work with Spain to the fullest extent possible in combating illegal activity.

  67. The EU is currently looking at the various tax regimes throughout the EU as part of the EU Tax Code of Conduct. The OECD are also looking at various jurisdictions under their Harmful Tax Competition initiative. Gibraltar is one of these. The report will not be published until the end of the year. The Government of Gibraltar have set up a working group under the Deputy Chief Minister to consider changes to Gibraltar's tax structure.

DRUG AND TOBACCO SMUGGLING

  68. Drug smuggling from Morocco to Spain, using fast boats based in Gibraltar, and tobacco smuggling directly to Spain reached unacceptable levels in the mid-1990s. The Government of Gibraltar (GoG), with the full encouragement of Her Majesty's Government, took a number of measures to crack down on this illegal trade:

—  On 6 July 1995 the Government of Gibraltar introduced legislation prohibiting the importation of semi-rigid inflatable vessels into Gibraltar. On the same day regulations were introduced imposing new controls on the mooring of all types of small vessels. The Government of Gibraltar will shortly present new legislation outlawing all remaining fast boats capable of more than 30 knots.

—  In April 1996 further measures were taken under the Imports and Exports Ordinance making it an offence for any person to use a vessel in circumstances which, if they did not occur in Gibraltar, would have constituted an offence had they occurred in Gibraltar. These measures became primary law on 14 October 1996.

—  Since May 1996 the Royal Gibraltar Police and Customs have deployed additional resources to monitor and curtail launch movements in Gibraltar waters.

—  On 26 July 1996 the Government of Gibraltar introduced measures applying a quota system to the distribution of US brands of cigarettes within the domestic market. This prevented large supplies from reaching the fast launches.

—  The Gibraltar Co-ordinating Centre for Criminal Intelligence and Drugs (GCID) was established in November 1996. It is headed by an Inspector from the Royal Gibraltar Police, with an officer seconded from HM Customs and Excise as his deputy. It co-ordinates intelligence about both financial crime and drugs concerning Gibraltar. It also has an important role to assist in the international drugs effort.

—  In October 1997 new legislation was introduced imposing strict controls on the supply, distribution and transportation of tobacco within Gibraltar.

  69. Taken together, all of these measures have effectively eliminated the activities of Gibraltar-based fast boats and rigid inflatables. This is widely acknowledged, and Gibraltar's international reputation has improved. 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.

  70. The Spanish Government have recently given us a paper alleging that smuggling still continues using yachts based in Gibraltar or owned by Gibraltar companies. We are investigating these allegations and will reply. It should be noted that some of the seizures by the Spanish authorities were made as the result of joint investigations with UK law enforcement agencies, who in turn had assistance from the Royal Gibraltar Police and GCID.

JUDICIAL CO-OPERATION

  71. The level of co-operation between the law enforcement agencies of Spain and the UK is very good. There is also a high level of co-operation between the UK and Gibraltar agencies. Judicial co-operation between Spain and Gibraltar is severely hampered by the Spanish refusal formally to recognise any of the institutions set up under the 1969 Gibraltar Constitution. This includes the Supreme Court and the Attorney-General.

  72. Gibraltar is a separate legal jurisdiction from those of metropolitan UK. Spain's refusal to recognise this fact causes complications over the transmission of letters of request in criminal matters and in civil and commercial matters. Spain refuses to address letters of request to the competent judicial authorities in Gibraltar.

  73. Spain also cause difficulties in this area in the EU context. For example they have refused to allow the extension of the European Convention on Extradition to Gibraltar and have objected to the extension by the UK to Gibraltar of the Brussels and Lugano Conventions on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters.

CONCLUSION

  74. Her Majesty's Government retain important obligations in respect of Gibraltar and commitments to its people. The central element is the commitment on sovereignty in the preamble to the 1969 Constitution. Our objective is to achieve a secure and prosperous future for the people of Gibraltar.

  75. We believe the rapidly developing bilateral relationship with Spain is as much in the interests of Gibraltar as the UK. We have supported the Brussels Process and stressed the importance of dialogue and co-operation between all concerned.

  76. Her Majesty's Government are responsible for Gibraltar's external relations. We have defended Gibraltar's interests in the EU. We have worked to resolve the problems arising over fishing activity. We have registered protests during the recent escalation of tension over border delays and reacted firmly to other reported threats to Gibraltar's interests. We have repeatedly told the Spanish Government that such action against Gibraltar is counter-productive. We believe that Spain should seek to reduce confrontation and remove barriers, developing understanding and goodwill between the people of Gibraltar and their neighbours.

March 1999