Island should be ready to become independent, says senior minister after political attacks on finance industry

A barrage of regulatory clampdowns and political attacks on the Channel Islands' controversial financial industry has prompted one of Jersey's most senior politicians to call for preparations to be made to break the "thrall of Whitehall" and declare independence from the UK.

Sir Philip Bailhache, the island's assistant chief minister, said: "I feel that we get a raw deal. I feel it's not fair … I think that the duty of Jersey politicians now is to try to explain what the island is doing and not to take things lying down.

"The island should be prepared to stand up for itself and should be ready to become independent if it were necessary in Jersey's interest to do so."

In a Guardian interview, he said strained relations with the UK over the past five years had made it "very plain" that Jersey's interests were not always aligned with those of Britain.

"I hope that the constitutional relationship with the UK will continue. But if it becomes plain that our interests in fact lie in being independent it doesn't seem to be that we should bury our head in the sand and say we're not going to do that."

For decades Jersey's tax, legal and regulatory framework has been structured to draw in the financial activities of multinational businesses and wealthy individuals. But a growing backlash has seen politicians in the UK and elsewhere lashing out at aggressive schemes leeching tax revenues from the increasingly stretched public wallets.

François Hollande swept to power in France last month with a manifesto pledge to stop French banks operating in tax havens.

Meanwhile, Barack Obama has introduced draconian anti-avoidance laws that from next year will require financial companies around the world to report to US tax authorities the details of assets owned offshore by wealthy Americans. Failure to comply will result in punitive taxes.

David Cameron took the unusual step last week of condemning the personal tax affairs of the comedian Jimmy Carr, who was found to be using a controversial avoidance structure involving a Jersey trust company. The prime minister said it was "morally wrong".

Jersey's chief minister, Ian Gorst, has attempted to distance the island from this type of activity: "There is no wish or need to accommodate or give encouragement to those who seek to involve Jersey in aggressive tax planning schemes to avoid UK tax."

But his views are understood to have sparked heated debate among the islands' senior politicians, with the Treasury minister, Philip Ozouf, later tweeting: "I don't think it's the place of our government to comment on the moral application of activity which is legal."

Ozouf has always said he supported the chief minister's statement.

Jersey is one of five largely self-governing jurisdictions which make up the crown dependencies — the others being Guernsey, the Isle of Man, Alderney and Sark. The UK government is responsible for representing them internationally and for ensuring good governance.

In his March budget, George Osborne announced measures designed to claw back tax revenues leaking from Treasury coffers. "I regard tax evasion – and, indeed, aggressive tax avoidance – as morally repugnant," he declared as he outlined initiatives on stamp duty avoidance, offshore pensions and VAT-free websites.

His comments echo those of Treasury chief secretary, Danny Alexander, who last week repeated his claim that "people who aggressively avoid tax are the moral equivalent of those who cheat the benefit system". He claimed the coalition was doing "more than any previous government" to crack down on avoidance and evasion.

The chancellor has ordered a Treasury team led by Graham Aaronson QC to work up proposals for a general anti-avoidance rule designed to deter the most artificial tax schemes. Action to create fresh avoidance-busting laws was spurred by the court of appeal's reluctant decision last summer to wave through one of the most egregious tax schemes in recent years.

The scheme, known as SHIPS 2, involved transactions through Jersey and other tax havens, generating a tax loss that 70 wealthy UK residents were able to offset against income and capital gains tax bills.

It was marketed by the Mayfair firm Matrix Tax Solutions, a now defunct arm of the financial conglomerate Matrix Group. The group's co-founder and chairman, David Royds, has given £110,000 in donations to the Conservative party since 2008.

Lord Justice Toulson said the ruling to back the structure was made despite knowing "it instinctively seems wrong". Lord Justice Thomas noted the beneficiaries "received benefits that cannot possibly have been intended and which must be paid for by other taxpayers".

Matrix told the Guardian: "SHIPS 2 was marketed almost 10 years ago, and attitudes have changed." But Aaronson has singled it out as a prime example of a scheme that "shows the inadequacy of the existing means of combating highly artificial tax avoidance schemes".

Not everyone shares the moral outrage at legally permitted tax schemes, particularly in the Channel Islands.

"Every state in the world has a different tax regime which every individual, wherever they sit, has a right to take advantage of," said Julian Winser, head of Schroders' Channel Islands private banking arm and president of Guernsey Chamber of Commerce.

"The principle of the free market is that it [legal tax avoidance] is available to all – even if some of them can't reach it. You could argue exactly the same thing from a job perspective by dint of the fact someone didn't have the right education. Ultimately the politics of envy creeps in to it." Bailhache is equally robust in defending tax structures. "I think this idea that there is some kind of grey area where things are within the law but you shouldn't do them is potentially quite difficult … People have to ask themselves: 'If you feel strongly [about] something people ought not to be doing, why don't you change the law to make it unlawful?'"

In an interview before Carr's tax arrangements were condemned last week by Cameron, Bailhache said Jersey's financial industry had to deal delicately with moral outrage in the UK at legal tax avoidance.

Another senior Channel Islands politician, who asked not to be named, said there was much private frustration at suggestions a Jersey trust company should be blamed for Carr avoiding UK tax.

He said: "The UK tax code is horrifically complicated. It has all sorts of exemptions and allowances and schemes – and that's fertile ground for tax avoiders."

In the face of ferocious political attack, Jersey is for the first time opening an office in London and frantically building lobbying contacts in Washington in an effort to repair relations. It has hired a top London public relations firm, Brunswick.

"We want to educate. We want to explain what the island is doing," said Bailhache, who is also the minister in charge of Jersey international relations. "We understand that the movement is towards collecting as much tax as the UK legitimately can do and it's not part of our function to help UK citizens to avoid paying their dues in the UK."

Previously relying on Britain to look after its international interests, Jersey last year began forging its own relations in Brussels.

Meanwhile, the island's powerful finance lobbying arm, Jersey Finance, is looking at ways to reduce the heavy dependence on UK and continental Europe, recruiting representatives in Abu Dhabi, China and are considering a new bureau in Brazil.

Lord McNally, the UK minister responsible for dealing with the Channel Islands, said he was well aware of disgruntlement. "The Crown Dependencies [the Channel Islands and the Isle of Man] are quick to point out their rights. A couple have independence movements and talk about going completely independent. I think it would be rather ill-advised of them to do so."

Back from a tour of the islands this month, McNally told the Guardian he had left them in no doubt the days of Britain turning a blind eye to aggressive loophole industries in the Channel Islands were over. "Treasuries all over are making tough decisions in these difficult times," is his message to the Channel Islands. Following a series of tough measures in the budget, he recalls being asked: "Is this the last time [the UK] Treasury is going to come stopping us doing things?"

His reply was firm: "No. The Treasury will continue to do its job."

While Jersey, Guernsey, Alderney and Sark have their own elected parliaments, they are not constitutionally independent

The Channel Islands of Jersey, Guernsey, Alderney and Sark already each have their own elected parliaments and are responsible for their own public finances, but as the name suggests these crown dependencies are not constitutionally independent.

Lord McNally is the justice minister responsible for overseeing relations between the UK and this tiny cluster of governments in the Channel, under 20 miles from the coast of Normandy. He is also responsible for defence matters and representing the islands' interests on the international stage.

"One of the things which we have always got to manage is the fact that they have some of the responsibility of a parish council but they also have some of the powers of a sovereign state," McNally explains.

Reflecting on a tour of the islands earlier this month, he added: "You've got to pinch yourself when you're meeting presidents and chief ministers, [to remind yourself] you are talking about, in the case of Sark, a population that could fit in a Hackney tower block, and in Alderney, a very small hamlet."

The roots of the constitutional relationship lie in the islands' history within the Duchy of Normandy in 1066, when William the Conqueror invaded England. In 1204, the islands had to decide whether to revert back to the French crown or to stay under the rule of William's line, now the English monarchy. They chose the latter, but insisted on retaining their own system of Norman customary law.

According to the Ministry of Justice: "The constitutional relationship between the Islands and the UK is the outcome of historical processes, and accepted practice … The most recent statement of the relationship between the UK and the islands is found in the Kilbrandon Report. It acknowledged that there were areas of uncertainty in the existing relationship and that the relationship was complex. It did not try to draw up a fully authoritative statement."

The islands have never become part of the UK administratively or legally, and since the 1960s have had their own appeal court process. Ultimately, however, cases can still be referred up to the judicial committee of the privy council in the UK.

Perhaps the most significant link with the UK is that the Channel Islands are part of the sterling currency union, along with the Isle of Man, printing their own variants of notes and coins which are legal tender throughout the UK. They retain a £1 note.

The islands' position within the sterling zone became particularly significant in the 1970s when the UK tightened exchanged controls. This saw a rush of interest in the Channel Islands where the emerging finance industry was able to cater to those wishing to use sterling but retain a freedom to move their capital about.

Also in the 1970s, the islands' semi-detached relationship with the UK started to be mirrored in the strengthening institutions of Europe. Importantly for the local finance industry, the Channel Islands were included into the European community's customs territory, but otherwise were kept outside the EC.

Today the Channel Islands are not members of the European Union but retain this half-in half-out relationship with Brussels. The UK has been encouraging Jersey and Guernsey in particular to start to take on responsibilities for some aspects of their international relations.

In particular, the islands have been granted special dispensation to directly negotiate tax co-operation treaties with OECD countries around the world – an initiative pressed for by G20 leaders three years ago as concern grew about offshore tax.

The largest two Channel Islands have recently set up a joint office in Brussels for the first time. Jersey's assistant chief minister, Sir Philip Bailhache, who believes the island should consider plans for full independence, has seen the frustrations involved in trying to make representations in Europe as a crown dependency.

"We have found in certain respects as a crown dependency, the Brussels bureaucracy is accommodating and willing to talk to us. In other respects, if there is any whiff of a suggestion that there are differences between the Channel Islands and the UK the commission will have nothing to do with us – for obvious reasons the commission doesn't want to get involved in what it regards as the internal affairs of the UK.

"That is our problem – sometimes our interests don't coincide with the interests of the UK and sometimes we'd like to express that before it gets set in stone and draft directives are floating around and it becomes too late to influence the argument."

He points out the UK's decision to allow Jersey to negotiate its own tax treaties as an encouraging sign, but wants Whitehall to go further.

"What the UK has not so far been prepared to do is extend that principle, to allow Jersey to look after its own interests in a broader sense – maybe the view is: 'If you want to do that you should become a sovereign state and there are limits to the amount of rope we can give you.'"

While Jersey has its own elected parliament and is responsible for its own finances, it still has a constitutional relationship with the UK. Is it time for that relationship to end?

Visitors are now allowed to visit the private island where the winds and landscape have been tamed

In the Barclay family album there is a snap taken during a holiday on Sark which, according to the authorised Brecqhou history, shows one of the brothers' sons lounging on a clifftop opposite Point Beleme, the highest point on the neighbouring island. "Little did they know then that they would become the proprietors of Brecqhou," the author, Peter Rivett, reflects.

In 1993 Sir David and Sir Frederick Barclay bought the 32-hectare (80-acre) island for almost £3.5m. The Mayfair estate agent ad had described it as impressive, highlighting features such as a stone manor house, a private harbour and a helipad. Ownership also came with "tax free status".

The Barclays' official history, however, gives a more damning appraisal of Brecqhou when it was first taken on. It was "something of an eyesore ... There really was no alternative to knocking the lot down and starting again".

A bit of an extreme location, perhaps, but the perfect getaway for billionaires fiercely protective of their privacy. So reclusive are they that there is no photograph in circulation among newspapers taken since 2000, when they were pictured receiving their knighthoods for charitable works.

There followed one of the most ambitious landscape makeover operations conducted in the British Isles. Vast sections of the windswept, cliff-shorn island were cleaved off, lakes created and strategic hill ridges elevated such that the profile of Brecqhou was transformed.

The logic was all about wind. It was an attempt to engineer pockets of shelter from the salty Atlantic blasts that buffet the island for much of the year, making it almost impossible for anything to grow.

The previous manor house was razed and, in just three years, a concrete palace, with scores of rooms, was erected and precision-clad in granite to give a mock gothic fortress effect. Steel drainpipes were clad in lead, also for effect, with alternate drainage boxes, at the roofline, carrying the initials FB and DB. A green bench near the entrance is occupied by a bronze figure wearing a suit and reading the Scotsman – a plaque reveals it was commissioned in 1999 by Aidan and Howard Barclay, two of Sir David's three sons, when their father owned the Scottish newspaper.

This was Fort Brecqhou, known to all on the island simply as "the castle". To the architecturally unlearned it almost looks like a child's drawing of a fort in its simplicity – minus the moat and drawbridge. Stonework above the front door displays the motto "Aut agere aut mori" (Either do or die), thought to be a phrase associated with Scottish Barclay clan history. Two shields displaying the family coat of arms are carved beneath the Latin inscription, featuring Celtic crosses and ships.

At the back of the house, looking seawards, a sweep of lawn now takes visitors down to some mock ramparts spread from one side of the house, curving along the cliff edge and down a steep road to a newly constructed harbour. At precise intervals, there are 22 cannon – fired to mark special occasions, most recently the Queen's Jubilee. Also poking out from the parapet and elsewhere are a number of security cameras. A fake black hawk bobs around on a pole, frightening away seagulls who might spoil the pristine surroundings.

Work on the gardens has taken much longer than the house, but following completion the grounds have recently been opened to a limited number of visitors. Until recently, visitors to Brecqhou were unwelcome – when the BBC journalist John Sweeney was filmed landing on Brecqhou in an attempt to gain an interview in 1995, he was successfully sued for breach of privacy.

Now, though, anyone prepared to pay for two nights in one of the Barclays' hotels on Sark can visit for free – subject to security clearance. The official line is that the twins did not want to share their mid-Channel idyll until the gardens were finished. Only this year were they deemed ready for public enjoyment. Where once the poor soil and high winds left the island engulfed in dust storms, today there is an olive grove, vineyards, a carp pond with a bridge modelled on Monet's at Giverney, a football pitch and an organic market garden.

Mark Harrisson, a former helicopter pilot who manages the estate, delights in telling visitors of every hurdle set by nature in the Barclays' path; each one overcome despite the odds and cost. Rabbits had overrun the island, but a trapping programme was said to have cleared the entire population. Drainage and soil quality were also challenges.

Dozens of employees potter around the garden, some in golf carts, wearing navy shorts and light blue polo shirt with Brecqhou insignia. Harrisson wears a dark blue sports jacket and red tie, befitting his senior position. In 2008 the brothers sold Harrisson the rights to an enormous plot of land on Sark known as Vieux Port. Land registry records show he paid £25,000 for the land, which includes one of Sark's prettiest hotels, the Petit Champ.

Harrisson explains there is a strict rule that no photos are to be taken of the castle. After meeting our group off the boat, Harrisson says he will do his best to answer everybody's questions - "But if you ask something sensitive, I may have to side-step it." But he freely admits that the senior Barclays are not regular visitors to the island.

He estimates almost 120,000 tonnes of materials were brought on to the island during construction. Part of that would have contributed to the construction of several outbuildings, including the Dog & Duck pub for staff social events, an orangery, guest accommodation and a chapel, the design of which was closely overseen by Sir David and blessed by Cardinal Cormac Murphy-O'Connor.

Beneath the chapel there is a crypt. Asked if it may one day be someone's resting place, Harrisson says that time may well come. The church holds sporadic services – on Christmas Eve an Irish priest comes to lead a "lovely midnight mass", he says.

One of the few spots where you can still get a sense of the island's once more rugged beauty is Point Beleme, from where there are views to the west of other islands clustered in what is known as the Bailiwick — Herm, the much larger Guernsey and the privately leased island of Jethou, where the current tenant is British computer software tycoon Sir Peter Ogden.

In the opposite direction, little more than a stone's throw away are the jagged cliffs of Sark where the family holidayed. About 10 years ago, telegraph poles washed up on the shores of Brecqhou and the brothers had some fashioned into a cross and erected at Point Beleme. If it wasn't intended as a gesture to exorcise the demons from Sark it could well have been read as such.

The brothers' advocate responds on defeudalisation, the Sark Newsletter and Lord McNally

In a written response to the Guardian's queries about Sark, Gordon Dawes, the advocate for the Barclay brothers and Kevin Delaney made the following points:

1. The Barclay family would agree entirely that the Island should not be dominated by any single interest. The historic problem with Sark is that it has been dominated by a single interest for most of its recent history, that of the present Seigneur and his family before him. It is that interest which continues to dominate Sark and which the UK government should be addressing.

The Barclay family will continue to seek the de-feudalisation of Sark and it is, quite frankly, incredible that the UK government continues to support the Sark feudal establishment. It cannot be right in the 21st century to continue to give one person, unelected and unaccountable, the powers which the Seigneur has, and for no better reason than that he is the descendant of a person who foreclosed on a mortgage in the mid-19th century.

There is no question of the Barclay family seeking to dominate Sark; if they had wished to buy more property on Sark then they could have done, but have not done so. It is only because of the Barclay family that Sark has democracy to the extent that it has. It was in fact the Barclay family which caused the link between land ownership and political power to be abolished at all.

It is, in their view, essential that Sark is de-feudalised to complete the process and create a genuine democracy. Note that the Barclay family offered to purchase the Seigneur's rights and give them to Chief Pleas, but the Seigneur rejected all such offers;

2. The Newsletter is entitled to express an opinion and to express it forcefully. No one is compelled to read it. It has been proved consistently right in the criticisms it makes and the opinions it expresses, the Crowe report and Lord McNally's endorsement of the Crowe report being the latest instances.

Again, it needs to be remembered that Chief Pleas has the same powers as a national assembly. This is serious politics dealing with the legislation governing all aspects of the daily lives of Sark's inhabitants.

The degree of obstruction and opposition to the kind of reforms which took place centuries ago in the UK is such that a strong tone is justified. Nothing would have happened in Sark if the feudal establishment had not been taken to task. Male primogeniture would still exist, likewise private feudal taxation of property sales at 7.69%, domination of the parliament by unelected landowners and a combined speaker and judge appointed for life by the Seigneur.

The tone of the Newsletter is proportionate to the importance of the reforms and the intransigence of the feudal establishment. Those engaging in public life must expect to have to deal with challenge and scrutiny. They occupy the equivalent position of an MP. Membership of Chief Pleas is emphatically not the equivalent of parish politics;

3. If the reference to abuse of economic power is addressed to the Barclay family then this is rejected entirely. There is no abuse of economic power by the Barclay family. Lord McNally's concern should be the abuse made by the feudal establishment of the extraordinary and anti-democratic powers which it still retains and the abuse of democracy by the existing political establishment to use the legislature as a weapon against Barclay interests, recent examples being the targeting of the vineyards planted by the Barclay family and the use they can make of their cargo vessel.

As a general comment my clients would say that Lord McNally is poorly informed and has consistently and blindly sided with the feudal establishment without, apparently, ever asking himself what sort of political system he is supporting and whether such a system should continue to exist in any British Island. My clients are sure that Lord McNally would not personally support such a system and it is, quite frankly, bizarre that the UK government should spend so much time and money, particularly in the present economic client, defending the indefensible.

Meanwhile Sir David and Sir Frederick wholeheartedly endorse the Crowe report and the implementation of its recommendations as soon as possible. It is absolutely typical of the existing feudal political establishment that the report is not even mentioned in the agenda for the next meeting of the assembly on July 4th.

There is no excuse for this whatsoever and it is symptomatic of the bitter opposition to change on Sark. They have treated both Ms Crowe and Lord McNally with disdain and the Newsletter is again entitled to take them to task for their refusal even to debate at the earliest opportunity the contents of a report they themselves commissioned but appear not to accept the conclusions of. The agenda is, of course, drawn up by the Seigneur's lifetime appointee, the Seneschal.

My clients also ask you to note the following:

1. At a meeting with Lord McNally at his request some 18 months ago, Sir David Barclay persistently asked him about bringing an end to the feudal system on Sark. Lord McNally made it abundantly clear to Sir David that there were limits as to how far he could go. However, there was no mention whatsoever during this meeting that the Ministry of Justice could not allow the Island to be dominated by a single interest.

2. The Minister should be more concerned about the lack of laws against bullying, harassment, intimidation and abuse of power; laws for which the Sark Newsletter has campaigned for several years now. If Lord McNally were to ensure that such laws existed, he would have a better chance of reducing hostility on the Island and he would put an end to the Sark Newsletter's campaign for laws to protect the victims of such abuse.

3. Lord McNally did not mention to you that he has received correspondence from various people evidencing the intimidation and fear used by the feudal Establishment.

4. If the Minister feels that the best way for Sark to satisfy itself that there is no abuse of economic power is to put in place the framework recommended by Ms Crowe, why doesn't he go ahead and implement it? The truth is, and by his own admission, he cannot. It requires reform on the part of the feudal establishment, which has repeatedly demonstrated its reluctance to reform in the past.

My client Mr Kevin Delaney's response is that there have been many attempts to close down the Sark Newsletter, not least by the feudal lord and his loyal establishment seeking the support of the media in the UK and in Europe in what amounts to a proxy campaign. The feudal establishment and their supporters, many of whom are paid Island officials, would be emboldened by the Guardian, of all papers, appearing to give tacit support to their claim that they are the victims of, and intimidated by, the campaign for democracy on Sark by the Sark Newsletter.

Lawyer denies Telegraph owners are using political, economic or legal power to skew democracy on island, as residents tell Helen Pidd how employee's newsletter has spread fear and division

There are two police officers on Sark, who get no formal training or pay. In the 12 months from September 2010 the pair investigated, among other misdemeanours, 21 bike thefts, four cases of criminal damage, seven assaults, 10 reports of "people acting suspiciously" and 13 traffic complaints – despite only bicycles, tractors and horse-drawn carts being allowed on the island's dusty tracks. Break-ins are so rare that the front door to La Seigneurie, home to Sark's feudal lord until the advent of democracy in 2008, still cannot be locked from the outside.

It is not a dangerous place– lucky, given that the island's jail can hold just two prisoners and the two constables can't even take fingerprints. It's perhaps odd, then, that one man living in the 600-citizen sovereign state apparently feels so insecure that he is rarely seen without his own security detail.

In the eyes of bemused locals, the stocky young men who stand guard outside the hairdressers when Kevin Delaney is having a trim are his "bodyguards". Delaney doesn't give interviews these days but his bosses, the identical Barclay twins, confirmed he had indeed "taken steps to protect himself". The guards' role is "to act as witnesses to ensure that Mr Delaney is not deliberately placed in a difficult position by those hostile to him", said Gordon Dawes, the advocate of Sir Frederick and Sir David Barclay, septuagenarian owners of the Telegraph newspapers and a string of luxury hotels, including the Ritz.

That a man has felt the need for a security entourage on Sark is testament to the spectacular souring of relations on the once peaceful island, which many locals feel is in danger of being "taken over" by the Barclays, two of the richest men in the world.

Delaney's day job is head of Sark Estate Management (SEM), which manages the twins' considerable business interests on the island, a self-governing crown dependency that is not part of the UK but for which the UK retains the nebulous responsibility to maintain "good governance". In the past five years, the Barclay brothers have snapped up almost a quarter of land on the three-mile-long island, along with many of Sark's key businesses. They now have substantial interests in four out of six of the island's hotels, as well as the island's only construction firm, the sole estate agent and around half the main street.

Drastic measures

Dawes, who is also retained by Delaney, insisted: "There is no evidence that the Barclays have used any economic, legal or political power to skew the operation of democracy on Sark." He added: "There is no question of [the Barclays] buying up the island."

Yet his clients took drastic measures that reminded the islanders how dependent Sark has become on the Barclay millions. In late 2008, Delaney shut down all the Barclays' Sark interests overnight after residents largely failed to vote for Barclay-backed candidates in Sark's first democratic elections. Up to 140 people lost their jobs – a big deal on a tiny island without a social security system. Almost all the businesses quietly reopened a short while later and most people were re-employed, but it seemed the point had been made.

Dawes sees it as a proportionate response that prompted an "inconsistent" reaction from Sark locals: "The people of Sark appeared to have just voted very clearly against the investment and jobs brought by my clients to Sark but then protested even more vigorously at these events, which was, on the face of it, entirely inconsistent."

The Guardian tried to talk to Delaney but he refused, ignoring several phone calls and emails. When we eventually knocked on his office door we were told by his secretary that "everything he wants to say in public, he writes in the newsletter".

But, according to many Sarkees, it is what Delaney has written in the newsletter that is threatening the close-knit community. It has already prompted the resignation of the island's only doctor, prompting the first street protest in living memory. Peter Counsell quit in February following attacks in what he calls "a dangerous propaganda sheet" after he chose to evacuate an elderly patient to Guernsey using a medical lifeboat rather than the Barclays' luxury helicopter.

The Sark Newsletter is a primitive-looking publication printed on A4 paper and published by Delaney. Despite its innocuous appearance, it has become a divisive publication. The Barclay brothers say they have no connection with it: "It is not a matter for the Barclays to decide what [Delaney] should and should not do as far as the newsletter is concerned," said Dawes.

It's a claim met with widespread incredulity on the island. The newsletter carries adverts for their four Sark hotels, cheers openly for them and, even though it looks as though it were put together on a 1980s desktop publishing program, wields far more power on Sark than the Telegraph or any other more aesthetically sophisticated publication.

Recent newsletter editions suggest Delaney believes someone is out to get him. On 17 April, he claimed that two days earlier, "a serious incident of criminal intent to harm took place" outside his offices. A £10,000 reward was offered for anyone with information leading to the arrest of people involved in planting "explosive devices".

The newsletter named Delaney's prime suspect: local artist and elected politician Rosanne Guille, from one of the island's oldest families. Guille, according to the newsletter, was seen the morning after the incident with a "smile on her face", and "at the crack of dawn" posted a message on Facebook saying "life is good and if I see you on the way to the shops Kevin I may even give you a smile": evidence, suggested the newsletter, that she "had knowledge of what had taken place ... before it became public knowledge".

As with the damaging barbs in many other editions, the allegation found its way through almost every letterbox on the island, and to a mailing list including Ban Ki-moon, the UN secretary general, and José Manuel Barroso, president of the European commission.

Sitting in her kitchen a month later, Guille sighed. She had nothing to do with any so-called criminal activity, she said. She was at home with her husband and small children at the time of the alleged attack, she insisted. "And anyway: they were crow scarers. The only damage they can do are to the person who lights the fuse." Being targeted by the newsletter had made her life hell, she said. She pointed to red blotches on her face, which she claimed had been brought on by stress.

Like many other Sarkees the Guardian spoke to during a visit in May, Guille believes the insults and allegations in the newsletter are designed not simply to wound, but to serve a purpose. "I think it is all part of the Barclays' plan to take over the island," she said, suggesting the twins wished to deter her and other politicians on Sark from continuing to question their motives and blocking their business expansion.

She claims the Barclays have already succeeded in silencing much dissent on the island because so many people are employed by them, directly or indirectly, or live in houses on land the Barclays now own. She added: "It has created a climate of fear in which independent-minded people are too scared to stand for Chief Pleas [the island's parliament] because they don't want to be targeted by the newsletter. "

Tolerance

It's a claim backed up by Lord McNally, the government minister with responsibility for the crown dependencies. "A number of people have said to me that it was the sustained nature of attacks in the Sark Newsletter that made them withdraw from public life," he said after a visit to Sark in early June. He "deplored" the newsletter's tone "because I don't think it's constructive to the mood of tolerance that I'd like to see on the island".

Guille is far from the only conseiller – Sarkese for MP – to be attacked in the newsletter. It has also run a concerted campaign for the sacking of John Hunt, who mans the ticket booth for the ferry to Guernsey and runs a small IT firm on the island. Delaney brought a defamation claim against Hunt after he admitted making a series of spoof posters featuring Delaney's face Photoshopped on to, for example, a picture of Charlie Chaplin as the Great Dictator. No criminal charges were ever brought against Hunt, but Delaney pursued a civil claim for what he refers to in the newsletter as "the poster harassment campaign".

The Barclays made their presence known on Sark in 1993, when they snapped up neighbouring Brecqhou. Described by the estate agent as "a small impressive private island" with "tax free status", Brecqhou was to be the twins' mid-Channel base, an alternative to their homes in Monaco.

Only it didn't run smoothly. After a legal spat that rumbled on for years, Sark's then feudal government, the Chief Pleas, successfully argued that Brecqhou was part of Sark rather than a separate jurisdiction. As such, the owners would have to abide by Sark's laws.

Having lost that battle, the brothers then tried in 2005 and 2006 to strike a deal with the Chief Pleas, then still undemocratic and comprising wealthy landowners, to exempt them from any tax legislation Sark might have attempted to pass. Then as now, the tax burden was minimal – there is no income tax, but individuals are levied a "personal capital tax" of up to £4,700 a year. A property tax is payable by all landowners – the Barclays argue that they pay around £20,000 a year for Brecqhou. Sark has no debt and no plans for a more conventional income tax. But who knows when that could change?

To protect their wealth in the event a future parliament might vote to increase taxes, the Barclays drafted a "memorandum of understanding" asking the Sark legislature to promise not to "impose or seek to impose any other or any new taxes, charges, licence fees or fiscal measures of whatsoever kind upon Brecqhou". This was not an attempt at creating a tax haven on Brecqhou, insists Dawes. The concern, he says, "was that Sark would seek to turn Brecqhou into a cash cow in the crudest of ways". No matter: the Chief Pleas refused to sign it.

In 2008, the Barclays tried a new tack. Having used a legal challenge to force the island's first democratic elections after more than 450 years of feudalism, they endorsed a number of candidates running for the 28 places in Sark's parliament while urging the electorate to shun 12 others who they claimed wanted to keep Sark in the dark ages. In a glossy manifesto, they outlined their "vision for Sark", which included a funicular railway and a helipad – seen by some as heresy on an island which has a law prohibiting aircraft from flying within 2,000ft overhead.

The Barclays insisted they were not seeking to profit from Sark. "Nothing could be further from the truth," they wrote, adding: "We have not invested in Sark to make money. If our investment breaks even we would be pleased, but even that looks very doubtful. Our motivation is the common interest of Sark and Brecqhou, as well as a genuine love for the Bailiwick, where our family has spent a considerable amount of time for decades past, long pre-dating our purchase of Brecqhou."

Sarkees, though, voted for almost everyone on the "black list", shunning most of the billionaires' candidates – including Delaney.

But they were undeterred in their mission to wield more influence over the island. In 2010 they wrote to Michael Beaumont, who holds the feudal position of Seigneur, and offering him £2m in return for his feudal lease and title. Though Beaumont has relinquished much of his power since the advent of democracy in 2008 – until then he was the only Sarkee allowed to breed dogs or keep doves and pigeons and received cash (a so-called "treizieme") from every house sale – he still has the power to veto legislation by sending it back to Chief Pleas for amendments and can appoint the island's judge. But Beaumont refused the offer.

In 2010, the Commons justice select committee on crown dependencies noted that there could be problems with the "considerable economic and political power exercised" by "individuals" on Sark. The report said: "In a very small jurisdiction, there must always be the possibility that individuals wielding very significant economic, legal and political power may skew the operation of democratic government there." The report raised the possibility of "UK government intervention" should individuals' activities raise "any threat to the ability of that system to operate fairly and robustly".

In Sark in June, McNally held an open meeting in which he urged local people to resolve the dispute. He told the Guardian that Delaney had refused to meet him and yet turned up to the public meeting with his lawyer, Gordon Dawes. McNally called the move a "not a particularly friendly act". They took notes and even recorded proceedings. Guille was the only person who spoke out against the Barclays at the meeting; she believes other were too nervous.

McNally acknowledged her concerns but insisted that a solution had to be found. "A little bit of mutual tolerance would go a long way," he said afterwards. He finds fault in the way the island is run. "It's all very well for a very small group to say, 'We want to live in this quiet backwater as a kind of protected retirement home,' but there are 600 people on Sark, and some of them are not retirees, they want to make a living for themselves, they want opportunities for their children." A number of people employed on Barclays projects had told him their investment "has been very welcome", he added.

But any sort of ceasefire is too late for Counsell. The doctor handed in his notice after what he describes as "trial by the press, in the form of the Sark Newsletter". In an eight-page resignation letter posted on his website, he said he had been subjected to "attacks upon my professional reputation and competence of the most defamatory kind". Most damagingly, he was accused of "wilful neglect" and "unethical behaviour" by deciding to evacuate an elderly woman – the wife of the Seigneur – to Guernsey this year in the marine ambulance rather than the Barclay brothers' helicopter.

The patient was happy with the medical care she received and Counsell stands by his decision. While he has once used the helicopter, it is not always an appropriate form of evacuation, he said – not least because it is designed for luxury rather than medicine and because it is frequently unavailable when being used by Brecqhou (or when the frequent mists roll in).

Counsell is just 34 but says he feels "like 64" after recent months. He is nervous about speaking out, refusing to meet me in public and asking to see my press card before turning on his own Dictaphone to record the interview. He quit, he said, primarily because of his two small children. "We came here to give them a good upbringing but now I worry about the effect this is having on them."

Counsell questions the independence of the newsletter from the Barclays, said Counsell. "It echoes the view they set out in their 2008 manifesto; it is published by their representative on the island; it contains not one criticism of the Barclays; and it's full of adverts for their hotels. It's not a newsletter. It's a dangerous propaganda sheet. It causes fear. People are frightened of what the Barclays may do. They are reluctant to speak out in public because they worry that they may receive a letter from their advocate threatening legal action against them."

He added: "Over time, I have come to believe that the intention of the Sark Newsletter has been to undermine people who are seen to have any degree of power or responsibility in the community who do not openly support the Barclays' vision for the island."

Delaney's lawyer has defended the tone of the newsletter, saying it is proportionate to the importance of the issues covered.

Bob Parsons, who runs a souvenir shop on Sark, said he tried not to take sides in the endless spats but that he did not agree with Counsell's treatment in the newsletter. He wrote as much in the March edition of the Sark Scribe, which he describes as his non-partisan alternative to Delaney's mag. "Criticise politicians and journalists if you like, but leave our doctor alone, was my message," says Parsons. "The next month Sark Estate Management did not take out their usual advertising."

It could have been a coincidence, he said, adding that he appreciated the Barclays' investment in Sark and that their opponents did often not cover themselves in glory. "There can be a much heavier response from the establishment than the Barclays if you dare to disagree with them," he said, claiming that "several people who had spoken in support of the Barclays had received dog poo through their letterbox".

The island's postmistress, Caroline Langford, also became a target for the newsletter. The 21 October 2011 edition accused her of being "unfit to run the post office", alleging post office staff read islanders' postcards and suggested that employees deliberately hampered delivery of the newsletter. , which arrives via regular post through the letter box of most of the island's 600 residents.

A frontpage story said: "Sark is unable to pass a law restricting the freedom of the press, in other words The Sark Newsletter, so the next best way to achieve this objective is to restrict its delivery process," wrote Delaney, "as happened in Franco's fascist Spain and Hitler's Germany, where the free press was forced under ground and delivered after dark."

A few weeks later, in November, the newsletter announced that SEM had taken the "unprecedented step of having all post addressed to the company and the 30 properties under its management redirected to a Guernsey address ... Likewise, all mail generated at these addresses is posted from Guernsey."

Delaney insisted this move was "not victimisation of the Sark post office" but a "direct result" of Langford and her employees being "complicit in the long running anonymous hate mail campaign directed at the editor of the Sark Newsletter".

In a statement, Guernsey Post, which employs Langford, expressed full support for her, saying: "Guernsey Post has fully investigated all allegations made against Sark post office and finds that they are without foundation. Furthermore Guernsey Post has full confidence in Caroline Langford and believes that she is an asset to Sark post office."

Langford received a legal letter from Gordon Dawes, lawyer to both the Barclays and Delaney, after she posted on the Post Office noticeboard a spoof news item from Private Eye lampooning the Barclays. The letter threatened a defamation suit if Langford did not write a written apology to the Barclays.

Langford complied, writing: "I regret that the presence of the article on the noticeboard caused you any distress and would ask that you accept my apology."

Paul Arditti, a lawyer living on nearby Alderney, has represented "around a dozen" Sarkees who have had a legal letter from Dawes. In all but one case, he says, he wrote back telling Dawes, in the politest legalese, to back off (one of his clients, for whom he acts pro bono, ended up apologising).

A big question is: what is the Barclays' end game? When contacted by the Guardian, the twins asked their lawyer to make clear they "have never received a return on their investment on Sark".

Paul Armorgie, a conseiller and owner of Stocks hotel, one of two non-Barclay hotels left on the island, said the Barclays wanted influence over the parliament because "they live in fear of Sark throwing its lot in with Guernsey". While stressing that he had "utmost respect" for the Barclays as hoteliers, he said: "I remain convinced, even if it has never been confirmed, that they primarily want Sark to remain a tax-free environment."

Like many islanders, Armorgie believes the UK is failing in its duties to ensure good governance on Sark by allowing the Barclays to wield such economic power over the island. "I am deeply disappointed that the British government doesn't offer Sark more support from a distance," he said, adding: "If Argentina invaded Sark, would the British government send in the warships? I think they would."

But McNally is clear that Britain isn't about to swoop in and take control – as happened in 2009 when the Labour government suspended parliament in the Turks and Caicos Islands, an internally self-governing overseas territory of the UK. "There's no sense that we've reached anywhere near that stage," he said.

"We have international responsibilities. They have internationally defended rights. They have a constitution. They are sovereign in a whole range of areas. And we've got to respect that independence, but we've also got an overriding responsibility to protect that independence as well. It's that tightrope that I'm trying to walk."

The brothers' lawyer insisted they had championed democracy on Sark and expressed surprise that McNally had not challenged the feudal establishment.

• Read the response to the Guardian from the Barclay brothers' lawyer here

Poisonous dispute between the tycoon twins and Channel islanders drags in UK government

The justice minister, Lord McNally, has said he told the billionaire Barclay brothers that the UK would not let them turn the tiny Channel island of Sark into a "company town" as a poisonous row between the tycoon twins and local people threatens to break the island's antiquated system of government.

The unprecedented government intervention comes after 15 years of sporadic feuding in Britain's smallest crown dependency jurisdiction which has pitched many of Sark's 600 inhabitants against the reclusive businessmen Sir Frederick and Sir David Barclay, who live in both Monaco and a mock-gothic castle they have built on the 32-hectare (80-acre) island of Brecqhou, 200 metres west of Sark.

McNally, who conducted a whistle-stop tour of the crown dependencies this month, took the unusual step of holding an open town hall meeting in Sark. He said he heard from some Sarkees grateful for the jobs and investment that the Barclays had brought to the island. But the justice minister said others had raised concerns with the ministry about the behaviour of senior Barclay representatives on Sark, mainly their chief lieutenant on the island, Kevin Delaney.

Asked if he felt Delaney's actions were intimidatory, McNally said: "I invite you to look at the Sark Newsletter [a weekly mailshot to almost all households produced by Delaney]. I deplore the tone of the newsletter because I don't think it's constructive to the mood of tolerance I'd like to see on the island … A number of people have said to me that it was the sustained nature of attacks in the Sark Newsletter that made them withdraw from public life."

Those featured in the newsletter include the island's postmistress and its doctor. The latter resigned in February and calls the newsletter a "dangerous propaganda sheet". Some of those who fight back against attacks in print claim that they then receive menacing legal letters from lawyers.

McNally, the government minister responsible for managing the UK's relationships with the crown dependencies, told the Guardian: "One of the things that I've got to keep in mind is if Sark was in the hands of a single company or a set of individuals, would that be a threat to governance? I do not think the British government could simply accept such a state of affairs.

"The Barclays have never said that they plan to take over Sark, but I do not believe it would be compliant with our responsibilities [to ensure] good governance to allow Sark to become a company town. And I've said this to the Barclays."

Despite the minister's efforts not to take sides in the bitter Sark feud, his views sparked an angry response from the twins. Through their lawyer they said: "Lord McNally is poorly informed and has consistently and blindly sided with [Sark's] establishment without, apparently, ever asking himself what sort of political system he is supporting.

"It is, quite frankly, bizarre that the UK government should spend so much time and money, particularly in the present economic climate, defending the indefensible."

Many on Sark who spoke to the Guardian say they fear for the island's future as the reclusive Barclays – best known as owners of the Telegraph newspaper titles and the Ritz hotel – have snapped up almost a quarter of the island's land and many of the key businesses.

The economic colonisation, which the Barclays have admitted is unlikely to generate a return for them, comes amid years of costly legal challenges that they have brought over the archaic constitutional relationships between Sark, Brecqhou and the British crown.

McNally's recollection of his meeting is disputed by Sir David Barclay, whom he met, at the minister's request, 18 months ago. Barclay said the subject of Sark being dominated by a single interest had not been raised.

Whatever his discussions with the Barclays, McNally noted his powers to intervene in Sark affairs were constitutionally limited. Sark is the smallest of five self-governing crown dependency jurisdictions – the others are the neighbouring Channel islands of Jersey, Guernsey and Alderney as well as the Isle of Man in the Irish Sea.

McNally has expressed confidence that the Barclays would not want to attract a bad reputation through their behaviour on Sark: "One of the things I think is interesting, which I can't answer, is exactly what the Barclays are at," he said. "There is a matter of reputation here. And if, reputationally, they are willing to defend their role and their intentions – fine, let them do so."

McNally stresses his priority was to press for governance reforms in Sark in the interest of resolving differences fairly.

Meanwhile, the Barclays continue to kick back at hostility from many local Sark residents, characterising it as the behaviour of a "feudal establishment" clinging to political power. Their critics, they claim, have led a "culture of bullying and intimidation" on the island.

The Barclays are not responsible for the newsletter but insist it has played a vital role in pushing for modernisation in Sark. "The tone ... is proportionate to the importance of the reforms and the intransigence of the feudal establishment. Those engaging in public life must expect to have to deal with challenge and scrutiny."

Amid the backbiting, however, the Barclays have consistently put pressure on Sark's tiny parliament, known as the Chief Pleas, over various issues. Relations worsened when Sark's first democratic elections in 2008 – pushed for by the Barclays – failed to return Delaney or any of the candidates endorsed by the brothers. Afterwards, Barclay family businesses on Sark were temporarily shut down and staff let go.

Through their lawyer, the Barclays explained their take on the episode. "The people of Sark appeared to have just voted very clearly against the investment and jobs brought by my clients to Sark but then protested even more vigorously at these events [the business closures], which was, on the face of it, entirely inconsistent." They added that no one suffered financially as a result.

Offering his own reflections, McNally said: "They can give and they can take away. If the people of Sark say 'if the price of Barclays' investment is compliance – and we do not want that,' then they have the right to say that." But he has advised that the best course to defend the interests of all within Sark was to "put in place robust democratic structures that prevent the abuse of economic power".

He warned that this would come at a cost likely to force Chief Pleas to consider greatly revising its low-tax model. "I would hope that they see the price tag is worth paying. Democracy doesn't come free, but it does give protections."

The Barclays insist they too are supportive of the changes to governmental structures backed by McNally after an independent review of Sark's very limited machinery of state.

* Read the Barclay brothers' full response to the Guardian's questions about Sark here

The shabby peace of the smallest publicly accessible Channel Island sees the wealthy and world-weary return over again

As a private-jet pilot, Mark Hubbard could holiday anywhere in the world. "Next week I'm in Ibiza. I'm often in Switzerland, sometimes the Caribbean. I spend half my life in modern, five-star hotels. But it's all a bit blah – I'd rather be here." The tanned and trim 44-year-old gestured behind him to The White House, the only hotel on Herm, the smallest publicly accessible Channel Island.

At 1.5 miles long and less than half a mile wide, Herm has a strong case for being the prettiest of all the British crown dependencies, with golden beaches, resident puffins and – with cars and even bicycles banned – year-round peace and quiet. No wonder there is a lot of repeat custom: 85% of guests to the island this year have visited Herm before, according to Jonathan Watson, the island's hospitality manager.

Every summer since his birth, Hubbard has holidayed on Herm. He is not the only high-flyer to choose the slightly dog-eared charms of The White House over a Four Seasons suite with a mini-bar and 24-hour concierge somewhere abroad. On the wall by one of the bars is a framed £5 note signed by a former chief cashier of the Bank of England – another regular who comes back time and time again to a place with no TVs, telephones or clocks, and where you still have to wear a jacket and tie to dine in a restaurant that smells faintly of cabbage.

"That's our biggest challenge – maintaining standards while making it seem as though nothing has changed," said John Singer, the island's current leaseholder.

The 68-year-old could certainly afford to be somewhere more exotic himself. By the time he was in his 40s, he had made his fortune in the home-building company Fairview. Never needing to work again, he ploughed his bounty into various large-scale commercial properties then sailed around the world for 14 years with his wife, Julia. By 2008, Julia was fed up with life at sea and wanted her feet back on dry land, said Singer. "So I was thinking: where could I live where I would be surrounded by water but not be on a boat?"

When the £15m, 40-year lease for Herm came up in 2008, it seemed the perfect solution. Not only can you walk from a beach on one side of the island to the other in 10 minutes, but the Singers had had their first date there.

Originally, Singer wanted to buy Jethou – the twin island opposite. Both islands are owned by the States of Guernsey, Guernsey's government, but whereas Jethou is private – and currently leased by the computer magnate Sir Peter Ogden – whoever takes on Herm has to open it to the public during daylight hours.

Apart from the Singers and their two dachshunds, Maisie and Bess, no one else is allowed to live on Herm except those who work there or have direct family who do. Sixty-two people are in residence all year round, including eight children aged from five to 11 who attend the one-room school. Older children attend boarding schools over the water in Guernsey during the week.

In the "on" season, which runs from March to October, 93 seasonal staff are employed from as far away as South Africa and Austria. The island also opens for business for a few weekends in the runup to Christmas, when up to 500 Guernsey residents a day catch the boat over to buy presents in the island's shop. On Christmas Day, plucky daytrippers are invited to take a dip in the sea.

Like the other Channel Islands, Herm has a colourful history. In the 16th century it was home to monks, before being used between 1570 and 1737 as a playground for the governors of Guernsey, who would sail over to shoot rabbits. There followed a period when a granite quarry and then a silver mine dominated the island, before Prince Blücher von Wahlstatt, grandson of the Prussian Field Marshall Gebhard Blücher (a comrade of Wellington at Waterloo), bought the island lease in 1889. The novelist Compton Mackenzie was the next resident – he fictionalised the island in his novel Fairy Gold. Mackenzie sold the lease to Sir Percival Perry, chairman of the Ford Motor Company, who introduced the first car to the island.

Herm's darkest hour came during the second world war, when Hitler's troops moved in.

After liberation on 9 May 1945, Guernsey's parliament agreed that Herm should be handed over to a tenant who would care for the island, allowing its natural beauty to be enjoyed by everyone.

• This article was corrected on 2 July 2012 because the original mistakenly referred to the Royal Bank of England.

Jersey's assistant chief minister has threatened to break with the UK, but the island's clients need the stability of that relationship

In the wake of the Jimmy Carr tax avoidance scandal, Jersey's assistant chief minister, Philip Bailhache, threatened to rupture the tax haven's half-in, half-out relationship with the UK and go it alone. Jersey is "ready to become independent if it were necessary", he said.

Bailhache's threat is not new, and it is pure bluff: he merely wants to take the heat off a jurisdiction that has been caught red-handed, yet again, facilitating abusive tax schemes.

A bit of history helps put this in context. In 1972, Carl Gerstacker, chairman of the Dow Chemical Company, said he dreamed of buying an island "owned by no nation, and of establishing the world headquarters of the Dow company on the truly neutral ground of such an island, beholden to no nation or society". That same year, some American libertarians dumped a large pile of sand on a reef near Tonga in the South Pacific, proclaiming the Republic of Minerva as a tax haven with no taxes, and a society based on "rugged individualism", where "nothing will be illegal". Soon afterwards, the Tonga defence force tore down the Minerva flag and destroyed the sand platform.

Since then, several efforts have been made – usually led by white, male libertarians, gun nuts, drug-runners, Klansmen, arms dealers, mobsters, former CIA agents or ex-Nazis – to set up free-standing, self-governed tax havens in enclaves in the Bahamas, Costa Rica, the Azores, Haiti, Dominica, the Dominican Republic, Anguilla, Vanuatu, and even Libya.

Every attempt failed. What these adventurers did not understand is that successful tax havens are created, nurtured and protected by large, powerful nation-states and their rich and powerful elites, who wish to use these offshore zones to escape the rules, laws and taxes that they resent.

The world's financial actors come to Jersey because of the rock-like stability and predictability that stems from its umbilical relationship with the UK. While Britain's crown dependencies (such as Jersey) and overseas territories (such as the Cayman Islands) do have their own quasi-independent politics, their governors and some other officials are appointed by the Queen, Britain is responsible for their (supposedly) good governance and defence, and no laws can be passed in Jersey without final assent from the privy council in London. Has the Duke of Normandy – that is, our dear Queen – even been asked if Jersey may become independent?

If this reassuring bedrock were removed Jersey could still be a tax haven, but a more marginal one. When the Bahamas won full independence from Britain in 1973, its (then mostly criminal) financial sector decamped almost wholesale to the Cayman Islands, which remained a British overseas territory. If Jersey went it alone, its financial industry would be similarly devastated.

The people of Jersey wouldn't wear it either. Most Jerseyfolk want to be British. At a conference in Jersey in 2010 to discuss Jersey's constitutional options, there was, in the words of the Jersey Evening Post, a "total lack of participation by politicians" because "there is no groundswell of public opinion in favour of any kind of break with the status quo and no sign of any political momentum in that direction".

Statements like Bailhache's are not driven by Jersey's people, but by its financial sector – a sector with which Bailhache's family law firm has had a very profitable relationship over the years. If Jersey lost all the protections provided to it by the British establishment, it is likely that the seething and widespread corruption on the island – which I am not seeking to link to Bailhache – will be vulnerable to greater exposure.

Lenny Harper, an outsider appointed to be Jersey's deputy police chief until his retirement in 2008, gave a flavour of the small island's mouldy governance in an affidavit in 2009, following a high-profile child abuse investigation. "There are no checks and balances on power and the abuse of it," he wrote. "It was like nowhere else in the British Isles … this is obvious each time one tries to make a complaint against any member of the government … With such an absence of controls, such an absence of accountability, the ordinary decent people of Jersey are helpless."

The controversial former Jersey senator Stuart Syvret summarises clearly: "There is a kind of tatty credibility that clings to the public administration here, which comes from operating under the skirts of the establishment in London," he says. "If Jersey became independent as a quasi-banana republic in Europe, there would soon be serious doubts in the minds of offshore clients."

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Island belatedly prepares to adopt Europe-wide standards on what beneficial claims can be made about products

A £100m trade in mail-order vitamins and health supplements that has sprung up in Guernsey is facing a regulatory crackdown as the island belatedly responds to UK pressure and prepares to adopt Europe-wide standards on what beneficial claims can be made about such products.

British-based rivals claim few British customers know that, unlike in the UK, there are no laws to regulate food supplements, nutritional information or health claims on the island. The UK's Department of Health raised concerns as early as 2007 over the treatment of medicinal assertions in mail-order catalogues emanating from Guernsey's supplements industry.

Some Channel Islands firms have been using catalogues sent to the UK to promote products they allege are good for cancer, dementia, coronary heart disease, cardiovascular disease, Alzheimer's, strokes and diabetes.

Guernsey's health minister, Hunter Adam, instructed officials to start drawing up legislation to comply with European standards more than a year ago. A spokesman told the Guardian this remained a "high priority" and would be brought before parliament "at the earliest opportunity". Adam has told his fellow parliamentary deputies the delay was having an "adverse effect on the reputation of the States of Guernsey".

The most successful supplements firm on the islands is Healthspan, founded by a former Unilever marketing man Derek Coates. Like most of its competitors, Healthspan is largely focused on selling into the UK. In fact, Coates claims to sell more pills and capsules to UK customers than Boots – though the claim is hard to verify.

Healthspan is among several Channel Islands firms found to have breached UK Advertising Standards Authority (ASA) rules in its brochures on a handful of occasions in the past, though Coates says the company now leads the industry across a range of regulatory standards. He claims past marketing material has been no more aggressive than that of UK firms and that today the firm's record is exemplary.

While Coates says Healthspan's high standards already put it well within the bounds of proposed new rules, he has little regard for those who set such standards, particularly in the UK. "The lack of awareness of nutrition in our [sic] country is a crime," he says, speaking to the Guardian. "The poor consumer is left in a complete state of ignorance. No one can admit that the food and the diet that we are now serving our [sic] nation is nutritionally bereft."

Coates is damning too of the ASA, which he says is "lagging behind the curve of knowledge". Asked about a past ASA complaint upheld against Healthspan's promotion of Omega 3 – suggested in one brochure to boost brain function in schoolchildren – he said: "They're not nutritionists who make these rulings. They don't know."

A fervent advocate of dietary supplements, the 64-year-old Coates says his personal focus on nutrition came in large part after he was diagnosed with cancer aged 32 and given six months to live. While he is an evangelist for supplements, he does not profess to be an expert, recruiting a roster of GPs and nutritionists to write for his catalogues, lending their authority to the publications.

Moving to Guernsey after selling his stake in a west London advertising agency, Coates's success in supplements has delivered him a second fortune and made him one of Guernsey's most prominent business leaders. He has gone on to invest in local hotels and a small airline, Blue Islands.

After Healthspan, the second-largest operator in the sector in Guernsey is thought to be Simply Supplements, the owners of which remain anonymous behind a Jersey trust. It too has been accused of making unsupported claims.

Three years ago a Simply Supplements mail-order catalogue was sent to UK customers claiming: "Clinical trials have shown that supplementing Ginkgo Biloba can reverse the decline in cognitive function that often accompanies ageing."

The same brochure claimed: "Our natural ginger supplement offers an effective and safe means of treating joint pain and stiffness without the side effects associated with conventional pain killers" and: "Clinical studies have provided preliminary evidence that Feverfew may be able to prevent both the frequency and severity of migraines."

These and other claims were taken to the ASA, which upheld all but one count on the complaint. Asked to respond to the most serious allegation – that the brochure made medicinal claims for products not licensed as medicines in the UK – Simply Supplements told the ASA it was a Guernsey company and that the UK's Medicines and Healthcare Products Regulatory Agency (MHRA), which is part of the Department of Health, had no jurisdiction in the Channel Islands.

A spokeswoman for the company told the Guardian it had since complied with an ASA order not to reprint the Simply Supplements catalogue in that form. She said Simply Supplements maintained industry-leading standards.

While supplement firms contacted by the Guardian all said compliance with tougher European laws would have no impact on their business, the long-awaited changes have attracted considerable local resistance.

Last year, a petition signed by 2,000 islanders – almost 5% of the adult population – was presented to the health minister, its signatories protesting at his attempts to bring forward legislation to toughen up rules on health claims.

A spokesperson for Guernsey said that ministers were committed to introducing the new rules and officials were busy drafting the legislation. Part of the reason for a delay was because ministers wanted to co-ordinate the introduction of new rules with Jersey "in order to reduce the risk of business migration between the two islands".

In a statement, the spokesperson added: "The drafting of this legislation remains a high priority; however, there are a number of technical matters that need to be addressed before the legislation can be brought before the island's parliament.

"While some members of the community and certain sections of the industry opposed the law, there was not significant commercial resistance; rather, there was an expectation that the legislation would be introduced and recognition, certainly among the larger players, that if industry wanted to continue to sell their products in the UK and EU, they would need to ensure they complied with the regulations."

Graham Power claims he was punished for daring to investigate allegations against some of the island's power players

Before moving to Jersey to take charge of the island's police in 2000, Graham Power had served in the senior ranks of four other forces in a career spanning more than 30 years. A recipient of the Queen's Medal for distinguished service, he had been vetted by UK authorities to "top secret" level and was so well regarded that he had also been appointed an assessor for the body that selects chief officers for UK constabularies.

But after eight successful years on Jersey, Power found himself suddenly suspended in what one local politician supporter believes was a "coup d'etat engineered by a small group of powerful people who denied him natural justice".

The initial suspension, which related to Power's management and supervision of a child abuse inquiry centred around Haut de la Garenne, a children's home on the island, continues to be a hugely controversial topic in Jersey. It's an episode which Jersey's critics see as a prime example of the way the island's elite treats those who dare to challenge their authority.

Nine months before Power's suspension on 12 November 2008, the historic child abuse investigation made headlines around the globe after Power's deputy, Lenny Harper, told the world's media he thought his team had found human remains buried under Haut de la Garenne. He told hordes of journalists that suspicious forensic material discovered during excavation tallied with accounts given by various abuse victims of hearing children dragged from their beds at night who were then never seen again. .

By the time Power was suspended, Harper had retired. The very day Power was suspended, the new officer in charge of the inquiry, Detective Superintendent Mick Gradwell, said at his first press conference that there had never been compelling evidence to justify the excavation, and much of what was found there did not suggest murder, contrary to initial police reports.

"There are no credible allegations of murder, there are no suspects for murder and no specific time period for murder," said Gradwell. To this day, Harper vigorously defends the way he carried out the investigation.

Forensic experts still disagree over whether suspicious material found during the excavation of the home was 20th century human bone or a piece of coconut shell, and no one has ever been able to explain the discovery of 65 milk teeth found in the building's cellar. But Jersey's authorities eventually accepted they had failed some children in their care "in a serious way", and earlier this year opened a compensation scheme promising to pay victims up to £60,000 each for their distress.

The States of Jersey have also agreed to hold an independent "committee of inquiry" into child abuse within the island's care system.

By the time the historic abuse investigation was closed in December 2010, eight people had been prosecuted as a result of the Power inquiry – a far lower number than initially expected. Just four related to Haut de la Garenne, with one abuser receiving a light sentence having himself been abused at the home.

Power, as well as child abuse survivors the Guardian has spoken to on the island, claim that after his suspension, some victims lost faith in the investigation. He said: "After my suspension a police officer working in the incident room approached me in the street and told me that incident room staff were busy dealing with calls from victims who were distressed after hearing that I had been suspended and were saying that 'it would all be covered up again'. I have had similar messages from people close to victims and from individual victims who do not wish to be named."

David Warcup, Power's replacement, insisted at the end of the investigation that there was "no evidence from which it would be possible to mount any further prosecutions."

As Power sees it, his suspension was a punishment for daring to challenge Jersey's "secrecy culture" by investigating serious allegations made against some of the island's power players. Worse, by allowing Harper to talk freely to the media during the investigation, both men were damaging Jersey's reputation abroad – a nightmare for a small place with an economy so dependent on foreign finance that it as Power claims, had a "heightened sensitivity to reputational damage". Or as the Liberal MP John Hemming puts it: "I think he was suspended because he was too ethical. That is very worrying."

On Tuesday this week, politicians in the States of Jersey, the island's parliament, debated behind closed doors whether Andrew Lewis, the minister responsible for Power's suspension, had misled States members as to the reasons why he removed Power from office.

The deputy who demanded the debate, Mike Higgins, said disclosure was needed to "right a wrong". He wanted the parliament to agree to release a transcript of a States session held "in camera" shortly after Power's suspension, in which Lewis gave what Higgins believes is a misleading statement relating to Power's suspension.

But at the closed session on Tuesday, States members voted to keep the transcript secret.

Power was never found guilty of any charges of misconduct, and remained on full pay throughout his two-year suspension, which lasted until his retirement in July 2010. Contacted by the Guardian this week, Lewis insisted the reasons for suspending Power were "compelling". He said: "The act of suspension was fully in line with the disciplinary code and was a neutral act in order to give the chief officer sufficient time to defend his position uncompromised by the constraints of office." He could not go into more detail about the evidence which led him to suspend Power, he said, because he was "bound by the confidentiality requirements in the chief police officer's discipline code." He strongly rejected any allegations of a conspiracy.

Power is not the only one who feels cast out after asking difficult questions. In 2012, an American author and journalist, Leah McGrath Goodman, found herself banned from the UK and Channel Islands, which she says followed the Jersey establishment discovering she was writing a book about the historic child abuse inquiry focussed on Haut de la Garenne. Both the UK Border Agency (UKBA) and Jersey's customs and immigrations service insist her ban was unrelated to her journalistic investigations. But Goodman believes differently, having been flagged by Jersey customs officials as a potential criminal as soon as they found out what she was doing on the island – information she says she offered voluntarily after requesting a meeting to check that a flat and office she had leased in St Helier conformed to Jersey's strict rules on accommodation for so-called "non-qualified" residents.

A spokeswoman for the UK Border Force told the Guardian: "Ms Goodman was refused entry to the UK because we were not satisfied she was genuinely seeking entry as a visitor for the limited period she claimed. Further enquires showed that she attempted to mislead the Border Force officer about her travel plans and the reason she required entry to the UK."

Goodman disputes this. She said: "To date, the UK Border Force can do little more than accuse me of intending to possibly commit a future transgression, as it has been forced to admit there has been none. This has been a bit like the film Minority Report, in that I am being pursued for something that hasn't actually taken place. As a former Tier-1 visa holder with a spotless record, I was surprised to be locked up, denied legal representation and banned from a country for which I've always held the highest respect. I have never misled the UK Border Force, nor have I ever intended to. I do realise it is a delicate situation, but I hope I might finish my work."

Charities have also encountered problems after questioning Jersey's modus operandi. In May, ActionAid and Christian Aid, both of which have been critical of the island for providing shelter to tax avoiders, were two of 20 charities that lost support for their general overseas aid projects from Jersey's Overseas Aid Commission.

Funding was pulled following a threat floated last year by the commission's executive officer, Kathryn Filipponi, who warned Jersey may "reconsider" donating hundreds of thousands of pounds of public money to UK charities which repeatedly attacked the island for being a tax haven.

Announcing the decision last month, the commission chairman, Paul Routier, insisted the move was not motivated by political or religious factors, and said the two charities had still received approval to collect funding to provide disaster and emergency relief.

As Hemming sees it, Jersey's current system is compromised by nepotism and conflicts of interest which result in the most powerful protecting each other. "For the checks and balances to work, people cannot be related or close friends," said Hemming. "The problem in Jersey is that things are covered up rather than dealt with. That arises with any small group of people where conflicts of interest are built into the system."

Arriving on Jersey at the start of the new millennium after a successful spell as deputy to HM Chief Inspector of Constabulary for Scotland, Power soon realised there were special challenges policing a small island where everybody knew each other. "In Jersey there are often school and family connections between police officers, lawyers, politicians and criminals," he told the Guardian.

"This can of course happen in any small community. In the UK, forces deal with this by ensuring that police officers are rarely asked to police the community they were brought up in. In Jersey that is not possible. The island is nine miles by five and there is only one police station. We were constantly having to deal with issues where somebody involved in a case appeared to have a conflict of interest, or worse than that, where there appeared to be a leak of intelligence from inside the force which benefitted criminals who might have had some connection within the organisation."

In a signed affidavit he submitted when applying for judicial review to his suspension in 2009, he claimed that one of the officials on the island who played a "significant role" in his suspension publicly defended a suspect in the historic abuse investigation. "If anyone wants to get ____[the suspect], they will have to get me first," said Bill Ogley, chief executive of Jersey's civil service, according to Power. This show of support was applauded by a number of civil servants present, he added. Ogley denies having made these comments.

Power believes his suspension sets a disturbing precedent which needs to be challenged. Otherwise, he said in his affidavit: "There are potentially serious consequences for the independence and integrity of law enforcement in the island and an additional risk that future police actions will be subject to inappropriate political pressure and intimidation."

Power firmly believes his suspension was orchestrated by Frank Walker, then occupying the top political job on the island as chief minister.

In his signed affidavit, Power says he attended a meeting just before Lewis took over where Walker unleashed a "verbal attack on the historic abuse inquiry claiming that it was causing damaging publicly for the island."

When contacted by the Guardian last week, Walker declined to comment on this or any of 14 other claims put to him, saying: "I am surprised that you are seeking to raise questions which have been asked and answered many times in the years since Mr Power's suspension. I'm afraid I am not prepared to yet again go over such old ground. I will merely say that I was then, and remain today, absolutely confident that Mr Power's suspension was necessary and appropriate. His conspiracy theories are entirely baseless."

He refused to explain why he believed Power's suspension was justified, nor to comment on a claim made by a deputy in the Jersey's parliament, Paul le Claire, who in the debating chamber alleged that he took part in a conversation between Walker and Lewis in which they discussed "getting rid" of Harper. Le Claire only went public on this two years after the fact, explaining in an interview with the Jersey blog Voice For Children

that he had been too scared to talk out. He claimed there was on the island a culture of fear which deterred ordinary people from speaking out.

Higgins, the Jersey politician who tried to "right the wrong" of Power's suspension in Tuesday's parliamentary sitting, told the Guardian: "Jersey, like other small island states, has a small powerful elite which pervades all sections of public and private life and which uses its positions and influence to its advantage. In my opinion, the investigation and handling of the police investigation into Haut de la Garenne was not only acutely embarrassing to them but it also opened up a can of worms that they did not want exposed.

"In my opinion, Mr Power's original suspension resembled a coup d'etat engineered by a small group of powerful people who denied him natural justice and have attempted since then to thwart enquiries, investigations and scrutiny into this affair and the original child abuse investigations. They have been aided and abetted by a politicised civil service, compliant media and other well meaning but naive politicians".

It is a common complaint on Jersey that the island's media, particularly the only newspaper, the Jersey Evening Post (JEP), were more concerned with protecting the island's reputation than the victims of child abuse. In January, the Jersey Care Leavers' Association complained to the island's Health and Social Services department, after a JEP article seemed to disparage the compensation scheme soon to be announced for the victims. In a column, a JEP journalist had written: "By the way, you're about to pay out millions upon millions to abuse victims in civil compensation claims. That'll do wonders for the island's image, right?"

It is largely due to two tenacious bloggers, Rico Sorda (ricosorda.blogspot.com) and Neil McMurray (Voiceforchildren.blogspot.com) that Power's suspension has remained so high on the political agenda. Both complain that the JEP has failed to investigate what they see as the injustice of Power's treatment.

Senior politicians were also accused of putting Jersey's interests ahead of the vulnerable and abused. In a notorious 2008 speech to mark the island's liberation from the Nazis, Sir Philip Bailhache, then the island's bailiff, came under fire after he said : "All child abuse, wherever it happens, is scandalous, but it is the unjustified and remorseless denigration of Jersey and her people that is the real scandal."

Bailache, now an elected politician in the States of Jersey, was one of 19 MPs who on Tuesday voted against holding the "in camera" debate on whether Lewis as home affairs minister misled the States over Power's suspension. He is also known to have opposed the committee of inquiry soon to be set up to investigate how so many children being looked after by the Jersey authorities were abused.

Two years ago, a QC from the mainland, Brian Napier, was commissioned to produce an independent report into Power's ousting. He found no evidence of any conspiracy, but ruled that the suspension could not be justified by hard evidence.

In his report, Napier wrote: "Whatever view may now be taken of the substantive criticisms that have been made of Mr Power's conduct of the historic abuse inquiry, there was at the time a lack of hard evidence against him showing lack of competence in relation to the running of the historic abuse inquiry, the basis on which he was suspended on 12 November 2008 was in my view inadequate."

He added: "There were indications that Mr Power had not done his job well. But that is as far as it goes."

Napier found that at the time of the suspension meeting, Lewis had not read a key report later relied on to justify Power's ousting. The report, conducted by the Metropolitan police, was a standard critical appraisal, fairly common between police forces. It was never intended for any disciplinary use. And, as Napier noted, it was labelled "interim", carrying a warning that it was unfinished, that Harper had not yet been interviewed, and that views expressed in it could change when it was completed.

Napier suggested Lewis was wrong to suspend Power "without waiting for the results of a preliminary investigation into the facts in order to allow him to decide whether the matter was of the more serious kind or not."

What's more, Napier found that Lewis and colleagues were "actively preparing for suspension" some time before anyone on Jersey, let alone Lewis, had read the interim report: Warcup, Power's new deputy and anointed successor, only received it on 10 November, two days before Power was suspended.

Napier said: "It would appear that the administration was actively preparing for suspension some time before the interim report was sent to Mr Warcup on 10 November and that those responsible for making preparations for suspension, should the minister so decide, were making significant assumptions about what the Metropolitan police report would contain."

While accepting that mistakes were made in the inquiry, Power insists that had he ever been given a chance to appeal his suspension in a fair and impartial hearing, he would have "torn apart" the case against him. This week, Ian le Marquand, the current home affairs minister, said there was insufficient time to conclude such a complex hearing before Power retired in July 2010. While admitting the original suspension hearings were hasty, and that Power should have been given a proper hearing, Le Marquand maintained that sufficient grounds existed at the time for Power to be suspended. He argued that a report commissioned a long time after Power's original suspension –

written by the chief constable of the Wiltshire force – confirmed there were grounds for doubting Power's management.

Power is adamant he was targeted by an establishment riddled with conflicts of interest. "At the core of it all is the fact that as chief of police I was overseeing an investigation into serious child abuse in institutions run by the Jersey government which were themselves overseen by people who were still in positions of power within that government. In the midst of this I was suspended by the very government whose institutions were being investigated. You cannot get much more conflicted than that. It is not often that an organisation subject of a major criminal inquiry is able to suspend the police chief responsible for that enquiry. But in Jersey that happened."

It's an allegation Ian le Marquand rejects. "This simply does not stand up to any serious examination. The nature of the disciplinary complaints against Mr Power in relation to Haut de la Garenne is that he failed to exercise proper oversight over the deputy chief officer of police [Harper] who was acting as the senior investigating officer... By the time Mr Power was suspended he had had no role in relation to the investigation for some months. To therefore suggest that his original suspension had anything to do with his conduct of the investigation is simply untrue. In any eventuality there never was any evidence of criminal misconduct on the part of politicians or the government of Jersey in general."

• This article was amended on 29 June 2012. The original referred to charities that have been critical of the island for preventing, rather than providing, shelter to tax avoiders, and to allegations being refuted rather than rejected. This has been corrected.

We should tighten up the UK's own regulations – and increase demands for financial transparency

Jersey, Guernsey, Alderney, Sark. These are the most prominent members of what the British call the Channel Islands. But perhaps after our investigative series this week, we might give them a nickname: The Loophole Islands. Because what these island economies rely on for their living is exploiting the gaps in international law.

As we have shown, for instance, the fact that Guernsey has opted out of European standards on what claims can be made about vitamins and minerals means that it has effectively become the supplement capital of the continent, bustling with firms that for years have made unsubstantiated health claims for their wares. The number one market for these 21st-century super supplements is the UK. And of course, there is tax avoidance. As has become infamous, rich people in Britain can declare themselves to be not domiciled here, which exempts them from paying tax to the UK on money made abroad. This loophole effectively demands a place offshore through which non doms can run their affairs. Step forward Jersey, where 40% of finance employees hail from the UK and which has become a second home for the City of London.

Easy though it would be for the British to wag their fingers at the Loophole Islands, the truth is that their existence should as often as not be the cause of shame for the UK as well as regret for the islanders. For the islands, it is easy to see the downside. Some of the smallest places are effectively overwhelmed by big and footloose capital. Entire islands run the risk of becoming "company towns", unable to provide decent careers and lives for their residents. But if the UK was tougher in cracking down on tax avoidance, it would kill off the excesses of this corrosive shadow industry.

Rather than just moralise at the islands, Whitehall and Westminster should tighten up the UK's own regulations – and increase demands for financial transparency. Barack Obama has pushed through the Foreign Account Tax Compliance Act which will force financial institutions outside the US to report to Washington on income and interest paid to the accounts of American clients.

The US president famously took power fulminating against a building on the Caymans housing thousands of American corporations as "the biggest tax scam on record". But there are British counterparts; as the New Statesman recently noted "the New Raj Tandoori in St Helier is home to around 800 UK businesses". One Indian restaurant in Jersey housing 800 British corporations: is this any way to run Jersey's economy – or the UK's? A similar tax-avoidance rule in the UK would help both Britain and the people who actually live in the Channel Islands – rather than those who use them as a haven for loophole-seeking.

In headlining your editorial "Crown dependencies: The Loophole Islands" (29 June), you reveal that you have fundamentally failed to understand the true nature of Jersey's finance industry. Such a prominent misrepresentation cannot go unchallenged.

There has, over the last week or so, been a frequent conflation of the terms tax avoidance and tax evasion. The latter is the illegal concealment of taxable activity. It is a criminal offence in Jersey and the island has no need or desire to engage in schemes designed to help companies or individuals evade UK tax. As the Guardian does implicitly concede, tax avoidance is more complicated. It can mean no more than legally minimising the tax you have to pay. This is something that many individuals and companies (including Guardian Media Group) seek to do legitimately. It could even be used to refer to such accepted schemes as Isas.

For the record, Jersey will accommodate legally planned tax schemes. If these schemes are challenged by Revenue and Customs and deemed to be illegal, Jersey will not house them. If an elected British government disagrees with the propriety of the schemes, it should ensure that the law is amended to make them illegal.

Tax planning of this type is actually a very small part of Jersey's overall finance industry and you choose to ignore that much the greater part of Jersey's activity is actually focused on the pooling and structuring of international funds that have already been taxed. Jersey has been successful as an international finance centre because it is a stable, well regulated jurisdiction, with experience and skills which enable it to compete with other onshore and offshore locations around the world. In abusing Jersey with the term loophole, you are performing a gross disservice to its hardworking people.

Moreover, your assertions ignore academic studies by numerous highly respected institutions which evidence empirically that small international finance centres such as Jersey are accelerators of global economic activity. Far from detracting from major economies, there is clear evidence that they provide a significant net benefit.
Geoff Cook
Chief executive, Jersey Finance

Ray Bitar faces nine charges including fraud, money laundering and operating a 'Ponzi scheme' from a base in Guernsey

The gambling tycoon who ran the world's second largest online poker site from servers in Guernsey has surrendered to the FBI just over a year after the Full Tilt internet address was seized by America's top white-collar crime prosecutor and the business effectively shut down.

Ray Bitar, chief executive of the Full Tilt group, was arrested on landing at JFK airport. He faces nine charges including bank fraud, money laundering, wire fraud and operating an illegal gambling business.

In April last year the US authorities struck against Full Tilt and two other large websites they said were offering poker illegally in the US. Soon afterwards they discovered what they alleged was a "Ponzi-style scheme" at Full Tilt, where huge sums supposed to be in segregated players' accounts were missing.

On Monday Preet Bharara, US attorney for the southern district of New York, said the alleged fraud orchestrated by Bitar and co-conspirators had left Full Tilt unable to pay about $350m (£223m) to players around the world, believed to include thousands in the UK.

Bharara claimed Bitar had "bluffed his player-customers and fixed the game against them as part of an international Ponzi scheme that left players empty-handed."

In a statement through his lawyers, Bitar responded: "I know that a lot of people are very angry at me. I understand why. Full Tilt should never have gotten into a position where it could not repay player funds." He has pleaded not guilty and has been granted bail after posting a $2.5m bond.

Full Tilt had been operating with a poker licence from the remotest Channel island, Alderney, where the majority of the 498 registered companies are gambling-related groups according to the International Monetary Fund. In 2009, the IMF said, some 3 million people were using Alderney online gambling firms, wagering $2.1bn.

The Alderney Gambling Control Commission (AGCC) claims the island "transmits more egambling traffic than any other location on the globe and is in fact much larger than the combined activity of its three European offshore rivals [Gibraltar, the Isle of Man and Malta]."

The principal attraction of an Alderney licence to gambling groups is that there are no gambling or corporation taxes. Firms targeting players in countries such as the UK, where online gambling is legal but tax rates are 15%, are drawn to the island in large numbers. In 2007 even the then state-owned Tote began running its online operations through Alderney to avoid UK tax.

However, an investigation by the Guardian found there is almost no industry presence on Alderney, where power is provided a by a diesel generator and communications constrained by a single microwave transmitter.

Almost all Alderney licensees operate from banks of servers in data centres located on the sister island of Guernsey.

The alleged fraud at the heart of Full Tilt is a huge embarrassment for Guernsey, where the island's dominant financial services industry relies on a high regulatory reputation. The Guernsey financial services authority must sign off all companies before they can be incorporated in Alderney.

The gambling commisssion in Alderney knew that the US authorities regarded Full Tilt's activities in America as illegal when they granted a first license to the group in 2007; the regulator accepted that this position had not been proven in law and remained only an opinion.

Bharara claimed Full Tilt had "allegedly lied about its finances" to the AGCC.

Gamblers are routed through Alderney from throughout the world – including some where such activity is illegal

Alderney is the most northerly and remote of the Channel Islands. To get to the island there are 12 spaces on a passenger ferry from Guernsey, but the most common route is via a short flight on an ageing, 18-seat, triple-propeller Trislander from Guernsey or Southampton. The airport is a small box building, resembling a well-worn prefab classroom.

Three square miles of windswept heathland, overrun with rabbits, gently cresting out of the waters about eight miles west of the Cherbourg peninsula in Normandy, Alderney has a secret. It might not look it, but, according to the website of the Alderney Gambling Control Commission (AGCC), this is the a hi-tech internet hub for a multibillion-pound global online gambling industry.

Punters playing poker, slots, bingo and placing all manner of sports bets are routed through Alderney from almost all corners of the world – including some where such activity is considered illegal.

Near the centre of Alderney rises a microwave transmission mast through which communication with the outside world is conducted. Alderney's energy needs are provided by a diesel-powered generator.

The regulator's website has been closed for maintenance for several days recently but, when it is working, it tells readers: "Alderney transmits more internet e-gambling traffic than any other location on the globe and is in fact much larger than the combined activity of its three European offshore rivals [Gibraltar, the Isle of Man and Malta]."

Hunting down these online companies and their internet servers on the islands quickly leads to frustration. The island's company register is held at the modest court house, run by the friendly greffier, or official records-keeper, Sarah Kelly. She has just been updating the register and says there are now 498 companies incorporated in Alderney.

According to an IMF report published in January last year, the majority of companies on the island are online gambling firms. "E-gambling licence holders in Alderney had over 3m customers and conducted £2.1bn worth of transactions in 2009," the report found.

There is no requirement to file accounts at the Alderney court house, but official addresses and the names of directors are on the register. Poring through the files many of the same addresses come up repeatedly. One is a former hotel, converted into offices, another is an office above the island's popular Nellie Gray curry house.

One company above the restaurant is Lochaber Highland Estates (CI), which runs a website www.highlandtitles.com, selling plots of Scottish land as small as one sq ft which it says entitle the owner to use the courtesy title of Laird, Lord or Lady.

In many cases, the register shows Alderney companies have just one director, who gives an overseas address. The declared shareholder can be masked behind nominee companies.

Michael Ellen, the AGCC's director of licensing and strategy, works at the gambling regulator's offices, directly opposite the court house. He explains why there is little to see. All the hi-tech infrastructure has grown up on neighbouring Guernsey: "We do not have the power, the juice, the electricity to power the data centres."

A report by KPMG three years ago found that for every pound the e-gambling firms contribute to the Alderney economy, they contribute almost £10 to Guernsey.

Back on Guernsey the online gambling industry has become a significant employer. One of the biggest firms is London-listed Sportingbet, which is the shirt sponsor for Guernsey football club. Island ministers opening their arms to the industry have boasted of bandwidth capacity greater than that available across South Africa.

Robin Le Provost, who leads Alderney's drive to attract gambling firms, claims the industry is now the third largest economic contributor to Guernsey after finance and tourism, though this claim cannot be confirmed by island statistics officials.

The principal attraction of Alderney to gambling groups is that there are no gambling or corporation taxes. So firms targeting punters in countries such as the UK, where online gambling is legal but tax rates are 15%, are drawn to the island in large numbers. In 2007 even the then-state-owned Tote began running online operations through an Alderney licence which meant it avoided UK tax.

Boyd Kelly, husband of the greffier, is a retired West Midlands police officer who moved to the island 13 years ago now sits in Alderney's parliament. He was briefly involved in the early stages of gambling regulation on Alderney and recalls how islanders' first ambition in 1998 had been to build a casino. "That didn't take off but as a result of the negotiations with the business people it ended up with two sports betting companies that were licensed here – Sportingbet and Surrey Sport, which eventually became part of Sky."

At its peak the telephone betting operations of these firms brought almost 100 jobs to the island. Some of the new workforce had to speak several languages, as bets came in from the Far East and around the world. These jobs faded away, however, as companies switched to focus online.

Explosive growth in internet gambling from the start of the millennium saw even more business arriving in Alderney. Today, well-known names to hold licences are Gala, Unibet, SkyBet, Mecca, PKR, Partygaming.bwin, Boylesports and Playtech, a joint venture partner to William Hill.

But by far the largest group actively operating from servers on Guernsey, under an Alderney licence, was, until 15 April last year, Full Tilt Poker.

At the time this was the world's second largest online poker firm, branded around star players Phil Ivey, Howard Lederer and Chris "Jesus" Ferguson – each of whom had a stake in the business. Controversially, however, it continued to offer poker to customers in the US where payments for gambling activities had been outlawed in 2006.

In poker circles, 15 April 2011 is referred to as "Black Friday". It was then, after more than a year of rumours, the FBI seized the web address of Full Tilt and three other firms it said were illegally offering poker to US citizens.

One of America's most successful white-collar crime prosecutors, US district attorney Preet Bharara, charged senior executives, including Full Tilt's Dublin-based boss Ray Bitar, with bank fraud and money laundering on an industrial scale.

Back in Alderney, the news was a bombshell, the AGCC's Ellen recalls – despite the views of US authorities on offshore internet poker firms being well known. The AGCC had been aware of the rumours of a sealed indictment against Full Tilt but had been satisfied, after speaking to company representatives, that they were unfounded.

One of the first responses to Bharara's move was to try to provide reassurance to players around the world, including thousands in the UK. Whatever the situation in the US, punters needed to know funds in their Full Tilt accounts were safe. Ellen, an experienced businessman with a background in auditing, led an emergency investigation, flying to Dublin to get sight of paperwork showing the situation regarding the security of player funds.

Satisfied all was well, a statement was put up on the AGCC website. "There is no reason to believe player fund transactions are fundamentally threatened by any consequence of the US authorities' actions." It was a statement AGCC would later regret and has since been taken down.

Within weeks, whispers circulated that one of those arrested in the US had told the FBI that $60m held by poker players around the world in their Full Tilt accounts – either winnings or deposits into their accounts with Full Tilt – was missing.

In its literature and on its website, the AGCC had repeatedly stressed it attached "great importance to player protection" and that "transparency is paramount [in relation to] protection of player funds".

Regulated firms, the AGCC had promised, had all been through a rigorous "fit and proper" test and companies were incorporated on the island only after sign-off by the Guernsey Financial Services Commission.

In September, Bharara filed a revised indictment against Full Tilt bosses which seemed to confirm the worst fears about player funds. It said: "Not only did the firm orchestrate a massive fraud against the US banking system, as previously alleged, Full Tilt also cheated and abused its own players to the tune of hundreds of millions of dollars. Full Tilt was not a legitimate poker company, but a global Ponzi scheme."

The amount of money allegedly missing was not $60m but $350m (£220m). For 18 months, the FBI had been seizing millions from Full Tilt as it chased down alleged illegal poker payments involving US players. Bosses, the US allege, had responded by dipping into other players' funds to keep the business afloat. They were also alleged to have helped themselves.

Bitar flew to New York from Dublin this week and surrendered to the FBI. He has pleaded not guilty to nine charges including bank fraud, money laundering and running illegal online gambling operations.

In a statement he said: "I know that a lot of people are very angry at me. I understand why. Full Tilt should never have gotten into a position where it could not repay player funds."

The AGCC suspended or withdrew Full Tilt's licences, though the exercise was largely academic as the site has not been able to trade since and thousands of players today remain out of pocket.

When Full Tilt first set up in Alderney in 2007, above the Nellie Gray curry house, the regulator knew its business with US players involved what the American authorities regarded as illegal activities, though some lawyers had provided legal opinion that this view was incorrect. In the end the AGCC took the view – as they did with other licensees – that so long as there were not legal findings against them in the US, or elsewhere, Full Tilt should be welcome in Alderney.

Indeed, the regulator tried to accommodate Full Tilt, then estimated to account for close to 20% of the global online poker market. When the company proved reluctant to disclose in writing the identity of the ultimate owners of associate companies, AGCC officials were left struggling to satisfy themselves the company was "fit and proper".

A solution was found. Instead of demanding written certification of who owned Full Tilt companies, the regulator would allow the major shareholders to retain a degree of anonymity, in exchange for written assurances as to their good character submitted via the group's London lawyers, Jeffrey Green Russell.

Tony Coles from the law firm said the unusual arrangement had been entered into at the suggestion of the AGCC. He stressed Jeffrey Green Russell had acted only as an intermediary, offering no assurances itself.

In March, Peter Dean, former chairman of the UK's Gambling Commission, published an AGCC-commissioned review of the regulator's conduct, noting the "unusual, indirect means" the AGCC had used to satisfy themselves of the probity of Full Tilt. They were, he politely noted, "less than ideal". That said, he concluded, in the round the actions of the regulator had been "appropriate, timely and fair."

It remains to be seen whether the IMF's anti-money laundering team, when next they return to Guernsey and Alderney, take a similarly sympathetic view. Certainly, Bharara has not criticised the AGCC, suggesting Full Tilt had "allegedly lied about its finances" to the regulator.

Today the Full Tilt website says: "We apologise but the system is currently down. Please check back later." In a statement, US proceedings against company bosses, the site adds: "Over the two years preceding Black Friday, the US government seized approximately £115m of player funds located in US banks. While we believed that offering … online poker did not violate any federal laws – a belief supported by many solid and well-reasoned legal opinions – the department of justice took a different view."

Back on Alderney last month, AGCC chairman John Godfrey presented the regulator's annual report to the island's parliamentarians and reflected on the Full Tilt saga. "When you are provided with untruthful numbers there is very little a regulator can do," he told the audience, which included Boyd and Sarah Kelly.

There was good news too. Godfrey noted that the AGCC's contribution to the island remained colossal – some £12m over six years. This had helped repair the quay, provided a water filtration plant and paid for the some work on the court house.

With the number of gambling licensees coming to Alderney continuing to rise, there was, he said, every hope the AGCC would continue to contribute these considerable funds to the island for years to come.

It is an optimism not everyone shares. Many countries – including the UK – are preparing to follow the example of France and Italy, compelling online gambling firms to take a regional licence and pay local taxes. This could be another headache for Alderney next year. Islanders are closely watching moves in the UK as between 30% and 40% of its licensees target British punters.

"When it turns up, there will be some migration and we are prepared for this," said one senior figure at a drinks reception that followed Godfrey's speech.

The next morning, fog delayed the two early flights out of Alderney. Among those departing were one or two AGCC officials. Even many of the regulators commute from Southampton or elsewhere, and do not have a home on this remote island.

Despite its reputation as a millionaires' paradise, Guernsey is an island full of ordinary people and a lot of history

The islanders of Guernsey are known as a people of the sea, so naturally the torch relay begins by the beach in St Peter Port, where ancient traders landed cargoes of Mediterranean wine around the time the original Olympic Games were being staged.

Guernsey loves a carnival. There is an event with crowds and bunting more or less every week from Easter to September. Maybe a quarter of the island will turn out to watch the torch pass out towards Castle Cornet, which stands as testimony to 1,000 years of loyalty to the English crown, since King John lost the rest of Normandy to the French. Its cannon will boom out to join the festivities, the Napoleonic gun and its gunners in scarlet echoing the eight centuries during which France was frequently the enemy.

Back the runners will go, along the harbour arm built by the Victorians and past the fishing fleet. Many islanders keep boats and do a little fishing in addition to their day jobs (or a little day job in addition to their fishing). The bulky, windowless bunkers used for their gear are reminders that, for five years, Germans controlled this island.

By the old harbour, a cauldron is to be lit by the Olympic flame.

Merchants and privateers once made their fortunes sailing from here; these days, people who have made their fortunes elsewhere sail in. The marina will be full of visiting yachts and cruisers, their flags waving and crews mingling in the capital's many restaurants.

In truth, half the islanders were not born here. Like me, they have become enchanted with the place and found the means to stay. Guernsey has attracted more than its fair share of artists and writers, of course, including Victor Hugo and Pierre-Auguste Renoir, and more than 100 novels have been set here. An Antony Gormley installation has just been taken down, and the second Guernsey Literary Festival, featuring the likes of Michael Morpurgo and Carol Ann Duffy, takes place in mid-September.

I am the island's museums director, and on Sunday the torch convoy will pass the windows of my office, with its view of seafront, marina and castle, the like of which few city-dwellers in the UK enjoy. People from the mainland often seem surprised that St Peter Port is, at heart, just a cosy British town full of ordinary people. It is not a millionaires' paradise, tourist trap or any other cliche you'd care to construct.

Running on past pubs and the town's church, the Guernsey leg of the relay will end where it began: fittingly, perhaps, in front of the Credit Suisse building, one of the financial institutions that form a cornerstone of the island's modern prosperity. But before you jump to conclusions, some gaily decorated, fibre-glass Guernsey cows will be looking on (courtesy of a local art-and-literacy initiative), as if to remind visitors of the island's unexpected diversity.

Jason Monaghan is a member of the Crime Writers Association. The Guernsey Literary Festival is from 13-16 September.

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Rzeszowski stabbed his wife, daughter, son, father-in-law and two others to death because his marriage had failed, court hears

A man killed six people, including his wife and their two young children, in a savage knife attack on the island of Jersey because he could not face the break-up of his marriage, his trial has heard.

Damian Rzeszowski, a builder, struck as his wife, Izabela, was playing with the youngsters and a friend's daughter in the living room of their flat, the court heard.

Rzeszowski, a 31-year-old Polish national, is accused of murdering Mrs Rzeszowska, their children, Kinga, five, and two-year-old Kacper. He also allegedly murdered his wife's father, Marek Garstka, her friend Marta De La Haye and De La Haye's five-year-old daughter, Julia.

Rzeszowski, who has been held at Broadmoor hospital in Berkshire since his arrest, denies the six murders. He has pleaded guilty to manslaughter through diminished responsibility but the pleas are not accepted by the prosecution, which argues he was not suffering an "abnormality of the mind".

The royal court in St Helier on Jersey was told that witnesses described Rzeszowski as a "hard-working man" and a "loving father who provided for his family". But things changed in June and July last year.

Solicitor general Howard Sharp, for the prosecution, said Mrs Rzeszowska, 30, told her husband she had been having an affair and she threatened to kill herself. Rzeszowski started going out drinking, had a one-night stand and took an overdose.

In an attempt to save their marriage, the couple went to Poland to visit their families. But their problems continued.

The knife attack took place in the couple's home in St Helier on 14 August, the day of their return from Poland. Mrs Rzeszowska and her father went for a barbecue with De La Haye and her daughter, leaving the children in Rzeszowski's care. On their return they found Rzeszowski had gone out and left the children by themselves. When he reappeared at about 1pm, his wife remonstrated with him.

Rzeszowski says he cannot remember what happened next but Sharp said the killings began at about 2.45pm.

The prosecution believes that Garstka was the first to be attacked. He was lying on a bed when he was stabbed nine times with two knives. He did not move, suggesting he had been taken by surprise.

Mrs Rzeszowska was supervising the children in the living room. Sharpe continued: "Kacper was sitting on a chair at the dining table in the lounge. He was probably playing with a toy car when he was attacked." The boy was stabbed 13 times with two different kitchen knives. The girls, who had been painting, were stabbed 16 times each.

Sharp said Rzeszowski, who had been drinking whisky, attacked his wife in the flat but she ran out into a courtyard. She tried to call the police but dialled a Polish emergency services number. Out on the street she was stabbed again in front of neighbours. Her friend, De La Haye, was also attacked and staggered out of the flat before collapsing.

Neighbours tried to intervene and Rzeszowski then started stabbing himself. He fell to the ground with a collapsed lung.

Sharp said the lapse of time between the row over leaving the children and the start of the attacks showed the spree had not been the product of a momentary loss of control.

He said Rzeszowski had a history of violence and had been involved in up to 10 fights since moving to Jersey in 2005 and described him as a "pressure cooker who lacks a safety valve".

Sharp said: "This is the case of a man who cannot face the prospect of marriage failure and decides that if the family cannot go on as it is, it must not go on at all."

The trial continues.

Man accused of killing six, including his wife and children, has pleaded guilty to manslaughter through diminished responsibility

A man who killed six people, including his wife and two young children, in a knife attack has been hearing voices in his head, a court heard.

Damian Rzeszowski, 31, is accused of murdering his wife, Izabela Rzeszowska, 30, along with their daughter, Kinga, five, and two-year-old son, Kacper, in St Helier, Jersey.

Rzeszowski, a builder from Poland, is also charged with the murders of his wife's father, Marek Garstka, 56, her friend, Marta De La Haye, 34, and De La Haye's five-year-old daughter, Julia.

The royal court in St Helier has heard that Rzeszowski struck as his wife painted with the two girls and his son played with a toy car at their flat on the Channel Island.

He is said to have been a hard-working and loving father who provided for his family but went off the rails after his wife admitted to an affair.

Rzeszowski has pleaded guilty to manslaughter through diminished responsibility, but the plea is not accepted by the crown, which argues the defendant was not suffering an "abnormality of the mind" when the attacks took place. He denies murder.

Consultant psychiatrist Dale Harrison said that when he interviewed Rzeszowski five days after the attacks, which happened on 14 August last year, he found no definitive symptoms of psychosis.

Rzeszowski has been treated at Broadmoor hospital in Berkshire but Harrison re-examined him following his return to Jersey and reported that the defendant had been hearing voices.

Harrison said: "These voices are related to stress he is under. His stress levels are up since leaving Broadmoor hospital and being put in prison."

In the first interview Harrison conducted with Rzeszowski on 19 August last year the defendant said he could not remember what had happened.

Solicitor General Howard Sharp, for the prosecution, read from the notes the psychiatrist made during the interview. He read: "Damian said: 'I just remember the knife. I remember bits and pieces, going behind wife and running behind her.'" He told the psychiatrist he did not remember attacking the children.

At another point in the interview, Rzeszowski told Dr Harrison: "Everybody gone, it is father-in-law, my wife, my wife's friend and daughter. It is me, I did that."

He told the doctor he had no previous thoughts of killing his family or anyone else because he was not "that type of man", although he later added, "maybe when I was drunk or upset".

The court was shown the two kitchen knives Rzeszowski used during the attacks. It also saw a painting the children had been working on just before they were killed.

It has heard that he had been drinking whisky on the day of the killings but was under the drink-drive limit.

Damian Rzeszowski found guilty of killing six people, including his wife and their two children

A builder who killed six people, including his wife and their two children, in knife attacks on Jersey was convicted of six counts of manslaughter on Friday after a 10-day trial.

Damian Rzeszowski, 31, also killed his wife's father, a friend and her daughter with kitchen knives at their home in August last year.

The Polish national, who has been held at Broadmoor hospital since his arrest, denied murder, pleading guilty to manslaughter through diminished responsibility – pleas not accepted by the prosecution.

The court at St Helier heard that Rzeszowski's marriage had been under strain after his wife confessed to a two-month affair with another man and he threatened to kill himself. His defence argued he had moderate to severe depression, causing an onset of psychotic symptoms. He will be sentenced on 29 October.

No members of the victims' families were in court to hear the presiding judge, Sir Michael Birt, read out the verdicts reached by two jurats, whose role is similar to magistrates in the UK

Those killed were Rzeszowski's wife, Izabela, 30, daughter, Kinga, five, son, Kacper, two, father-in-law, Marek Garstka, 56, Marta De La Haye, 34, and her five-year-old daughter, Julia.

The trial heard that Izabela told him in June 2011 she had been involved in an affair with another man. He had previously caught her flirting with other men online and she had confessed she no longer loved him. In turn, he retaliated by having a one-night stand, which he told his wife about.

But after Rzeszowski took an overdose in July last year, the couple agreed they would try to save their marriage and went to Poland to visit their families. On the day of their return to Jersey, his wife and her father went for a barbecue with De La Haye and her daughter, leaving the children in Rzeszowski's care. On their return, they found he had gone out and left the children by themselves. When he reappeared at about 1pm, his wife remonstrated with him.

Rzeszowski said he was unable to remember what happened next but the prosecution told the trial the killings began at about 2.45pm. It believed Garstka was the first to be attacked. He was lying on a bed when he was stabbed nine times with two knives.

Kacper, was probably playing with a toy car when he was attacked, according to the prosecution. The boy was stabbed 13 times with two different kitchen knives. The girls, who had been painting, were stabbed 16 times each.

Rzeszowski, who had been drinking whisky, attacked his wife in the flat but she ran out into a courtyard. As she tried to call the police, she dialled the Polish emergency services number. Out on the street, she was stabbed again in front of neighbours. Her friend, De La Haye, was also attacked and staggered out of the flat before collapsing.

As neighbours tried to intervene, Rzeszowski started stabbing himself and fell to the ground with a collapsed lung.

The solicitor general, Howard Sharp, told the court that Rzeszowski had a history of violence. He had been involved in up to 10 fights since moving to Jersey in 2005 and was a "pressure cooker who lacks a safety valve".

He added: "This is the case of a man who cannot face the prospect of marriage failure and decides that, if the family cannot go on as it is, it must not go on at all."

John Kerr, who has died aged 94, was the much-loved equestrian correspondent of the Guardian for 30 years. Having tentatively begun his journalistic career on the local paper in Bideford, Devon, he also wrote for the Irish Times, spending long evenings manning the paper's London office.

John was a kind and unassuming man, who hated the limelight and yet was instantly recognisable in any press room. He was the only journalist I knew who preferred to write copy on a large, manual typewriter while the rest of us tapped away on laptops. He was also known for his sturdy plastic bags which contained (among other things) packets of biscuits and collections of newspaper cuttings that his friends might find amusing, informative or helpful.

John's first love was the cinema. His encyclopedic knowledge of films was nurtured during his schooldays on Guernsey, in the Channel Islands, where his father was manager of a cinema. He was an only child whose parents had split up. On a visit to see his mother in London, aged 22, he learned that the Germans had occupied Guernsey, so he did not return.

John was a dedicated follower of horse sports, but always preferred to nibble his biscuits from the stands rather than join a sponsor's lunch. Many of us gave into that temptation, but John was generous enough to fill us in with the essential details of the races, with a few added witty comments.

There was one gaping hole in John's abilities: he lacked any sense of distance. He never drove, so he sometimes had to walk for miles from the station to the equestrian venue - which he did cheerfully enough. In later years, when lifts were more plentiful, he was blissfully unaware of the huge detours that others made to get him to his destination – but he was too good a travelling companion for anybody to moan about it.

John asked for Ev'ry Time We Say Goodbye, sung by Ella Fitzgerald, to be played at his funeral. His wish was duly granted.