FSA's Davies warns offshore tax havens: Clean up your act

War on Terrorism: G7 countries to step up their campaign to stop money laundering

The Financial Services Authority issued a blunt warning last night to offshore tax havens to tighten their regulations against money laundering, and promised a clampdown on firms using havens for such purposes.

Sir Howard Davies, the FSA's chairman, said the world's finance ministers believed that political measures were necessary to raise regulatory standards offshore.

"The heat is on," he said. "Political leaders in the G7 economies are very concerned by what they see as dangerous gaps in the world's defences against financial crime and financial instability."

The most recent meeting of the international Financial Stability Forum (FSF) was dominated by concern that progress in improving offshore regulation was "simply inadequate". The FSF comprises finance ministers, central bankers, regulators and financial services firms.

Separately, European financial regulatorshad complained that tax havens were slow to respond to requests for information. "There remains something of a selling job to be done in Europe," Sir Howard said.

If offshore jurisdictions failed to clean up their act, their future was "bleak", he added.

Offshore financial centres risk a loss of reputation that could result in a rapid outflow of business elsewhere, as banks checked whether branches there complied with best practice, anti-money laundering regulations, following the US government's decision to freeze assets of organisations that fail to co-operate with its campaign against terrorism.

The UK's tax havens operate under the separate jurisdictions of the Jersey Financial Services Commission, the Financial Supervision Commission of the Isle of Man and the Guernsey Financial Services Commission. Each has only a handful of employees compared with the London-based FSA. None of the offshore regulators was available for comment.

The FSA is powerless to change financial regulation off the mainland, although a spokesman said it would take action against the UK operations of any company involved in criminal behaviour offshore. "What we say to companies here applies to all their branches," it said.

The FSA also said that it was considering obliging some insurance companies, among the both life and general insurers, to raise fresh capital or seek assistance from parents or partners to bolster reserves that have been weakened by the downturn in equity markets, following the terrorist attacks.

The City watchdog said last week that a handful of insurance firms were close to failing solvency tests.

"It may be that companies will need to raise capital. It is still a case of 'may'," said a spokesman, noting that equity markets were off their recent lows.

The regulator is considering introducing compulsory spot checks for insurance firms,to be conducted by independent actuaries, in an attempt to prevent a repeat of the Independent Insurance and Equitable Life debacles.