A British Treasury minister yesterday said UK offshore financial centres like Bermuda should broaden their tax bases to better withstand economic shocks.

The comments from Stephen Timms, a junior UK finance minister, came after the publication of a review of nine of the country's Overseas Territories and Crown Dependencies can be made more sustainable and resilient to shocks like the financial crisis.

The report was authored by Michael Foot, a former Bank of England director who helped to set up UK financial regulator the Financial Services Authority, and who visited the Island on a fact-finding mission in March this year.

In his 93-page report, Mr. Foot said: "Some now face difficult decisions and will need to look afresh at options for controlling public expenditure and increasing revenue." None of the nine jurisdictions could afford to be complacent, he added.

"This report sends a strong signal to overseas financial centres that they must ensure that they have the correct regulation and supervision in place, while also ensuring their tax bases are more diverse and sustainable to withstand economic shocks," Mr. Timms said yesterday.

Deloitte, a consultancy which contributed to the report, said there was a compelling case for the jurisdictions to introduce value added tax on goods and services as part of efforts to broaden out revenue.

In his review Mr. Foot said Bermuda had weaknesses in its efforts to tackle financial crime, but praised the Island for decisive action in helping Butterfield Bank to raise the capital it needed to ensure it could withstand a severe economic downturn, and also for its record on tax transparency and for doubling the staff employed at financial regulator the Bermuda Monetary Authority.

The report highlighted the low level of prosecutions for financial crimes in most of the offshore centres, particularly Bermuda.

"In 2008, there was one prosecution for financial crime in Guernsey, two in the Isle of Man and eight in Jersey," Mr. Foot wrote. "Prosecutions in the Overseas Territories in the same year ranged from 15 in Gibraltar (three for money laundering and 12 for fraud) to one (for money laundering) in Bermuda.

"The jurisdictions with low prosecution rates tend to argue that the perpetrators of financial crime are typically located in other jurisdictions and so prosecutions will take place elsewhere. Those jurisdictions which have achieved high levels of compliance with the FATF Recommendations also argue that improvements in the detection of financial crime have deterred criminals from using the jurisdiction.

"Whilst these arguments carry some weight, it is likely that suspicions will remain in some quarters about the vigour with which prosecutions are pursued. The direct personal relationships between officials and citizens which exist in small jurisdictions may expose prosecutors to pressure, which may be subtle, not to pursue cases against individuals who may play a prominent role in the life of the jurisdictions."

The report added that Bermuda had last been assessed as "non-compliant" with international customer due diligence standards. He added that the Island was suffering a decline in government revenue, but not so severe a shortfall as Anguilla, the Cayman Islands or the Turks and Caicos.

"Bermuda has close economic ties to the United States and has been affected by the downturn there," Mr. Foot wrote. "This has been offset by the buoyant insurance sector (Bermuda's major financial sector niche), although there has been a sizeable fall in the number of new insurance companies incorporating in Bermuda, which may reflect the maturity of the market.

"Employment appears to have held up relatively well in Bermuda, but employment data for 2009 was not available to verify this."

Bermuda won praise in the report for underwriting Butterfield Bank's $200 million capital raise through a preference share issue earlier this year.

"Such prompt action helped the share issue to be oversubscribed, leaving the local Government without any short-term financing obligation," Mr. Foot wrote. "This demonstrated the importance of the regulator maintaining close oversight of systemically important banks (and other financial institutions) and being ready to act decisively in the event of problems occurring."

Mr. Foot made an error in the report - spotted by Financial Secretary Donald Scott - in stating that all all Overseas Territories, except Gibraltar, must obtain UK approval to borrow money. Bermuda does not need UK permission to borrow.

The report stated that "Bermudian law limits debt to a percentage of GDP, which the Foreign and Commonwealth Office (FCO) monitors".

Also highlighted was the symbiotic relationship between Bermuda and the UK in the insurance industry. "Bermuda insurers and reinsurers reportedly wrote 30 percent of the 2008 premium at Lloyd's of London, a total of £5.4 billion," the report stated.