Turks and Caicos Islands: an economic free-for-all that veiled a culture of corruptionn

Stephen Foley uncovers the hang-out for the rich and famous

It could could have been a scene from the dying days of empire, generations ago: the indigenous people of a colonial outpost, taking to the streets to demand the end of a British "occupation" of their country.

But this is a 21st-century scene, in the modern-day Turks and Caicos Islands (TCI). Hundreds of "Belongers", proud citizens of the Caribbean archipelago, marched through the downtown area of its largest island, Providenciales, just a few weeks ago to protest a British regime that they damned as incompetent, high-handed and callous.

Gordon Wetherell, an affable British Governor nearing the end of a long diplomatic career that had seen him garden-partying in the ambassadorial mansions of Ghana and Ethiopia, has suddenly found himself hands-on ruler of an economically depressed and volatile territory. And on that day last month, one placard-waving demonstrator had pasted his face alongside those of Hitler and Hugo Chavez. It's fair to say that nine months after the British Foreign Office suspended local government and imposed direct rule here in the TCI, things are not going according to plan.

Many Britons would be hard pressed to point out the Turks and Caicos Islands on a map, but they have been under the protection of the British crown since 1962. About 160 sq miles-worth of them poke out of the Caribbean, east of Cuba, boasting coral reefs and 200 miles of barely developed beaches – barely developed that is until a building boom that stoked the local economy for the last decade.

A charismatic Prime Minister, a former estate agent named Michael Misick, had a vision of the country as a hangout for the rich and the famous, and contrived to live by example. He wooed developers with cut-price sales of Crown land, partied at the luxury hotel complexes they built, each more extravagant than the last, and even took a Hollywood starlet for his wife.

But behind the economic free-for-all was a culture of corruption, according to Sir Robin Auld, a British appeals court judge flown in to conduct a commission of inquiry. Sir Robin said the Prime Minister and several of his ministers took bribes from developers and enriched themselves through suspicious land deals, and recommended prosecutions and an array of reforms to the way the country is run.

Most explosively, he also recommended a temporary suspension of parliamentary democracy. Direct rule from Whitehall was duly imposed last August. The British expected to be welcomed as saviours, delivering islanders from a cabal of corrupt local politicians who had gorged themselves on the fruits of a development boom across these paradisical islands and left their country effectively bankrupt.

But if there were hopes for a new beginning and a quick resurgence, these have been dashed by cold economic realities.

At 6pm on a warm spring Friday, a full-blown banking crisis erupted. TCI Bank, the only institution owned by indigenous islanders, was put into liquidation, amid souring loans and the defection of some of its large depositors. Customers who rushed to its offices were told they could not get at their savings. Stanley Lightbourne, who is the chairman of the TCI's banking regulator, the Financial Services Commission, warned them that at least some of their money was gone. The TCI has no deposit insurance.

Whereas big nations such as the UK have used government money to save their banks, pump-prime their economies and mitigate the effects of the global recession, the TCI is having to do the opposite. Civil servants will have their pay cut by 10 per cent. Public spending is being slashed and taxes put up. And even then, according to the Governor's budget statement last week, the finances are still spiralling downwards. The end-of-year deficit was six times higher than forecast. A $79m (£55m) loan that has been six months in the planning is being used to pay a mountain of old bills and to fund the costs of the corruption investigation; more will have to be borrowed, but no one knows yet from where.

In a statement announcing the loan, shortly after publication of the latest budget, the Ministry of Finance said: "Although this is good news for many businesses in the country, the new loans will not be sufficient to pay all creditors. It will provide a small breathing space and enable the Government to assess future funding options to close the budget deficit and reduce the burden of national debt."

The financial crisis threatens to impact on the process of bringing to justice those who were at least partly responsible for TCI's current travails. Helen Garlick, the special corruption prosecutor whose job it is to try and unravel the corruption allegations against the country's leading politicians, is lobbying publicly for additional funds or loan guarantees from Whitehall, and Sir Robin has also returned to the fray. In a letter to the Foreign Office, he warned that the TCI's economy is "deteriorating" and that its politics cannot quickly be "cleansed".

"All or most of the troubles the Governor faces in trying to restore the territory to good order, efficient governance and financial health – and the increasing chorus of challenge to his conduct of the territory's affairs – flow from the British Government's failure to provide urgently needed financial support.

"This state of affairs follows decades of the Foreign Office's stewardship, or lack of it, in the exercise of its ultimate constitutional responsibility for the probity and efficiency of the territory's governance. The Foreign Office now has direct control, yet seemingly considers that that does not carry with it financial responsibility to lift its charge out of the administrative and financial mire into which it has allowed it to fall."

Doug Parnell is leader of the political party that used to be in opposition to Mr Misick, and is also a prime mover behind the demonstration last month. He says: "We marched for our democracy, we marched for the rights of people to decide the future of their country, how the constitution is made up, the makeup of who votes in the country, we marched for transparency in government, we marched against the high rates of crime and joblessness in the country." He warns now that any attempt to delay elections beyond the official deadline of July 2011 will make the TCI "ungovernable".

He believes the British have gone too far in their ambitions, which include shifting the economy away from high-end tourism, introducing VAT, and – most infuriating to Belongers, who make up barely 7,000 of the archipelago's 25,000-plus residents – extending the franchise to non-citizens. The British should stick to cleaning up corruption, Mr Parnell told The Independent – and, by the way, they should have come here in August with money. He plucks a figure out of the air: £400m. "The Governor said in January that the country is open for business, but people need to know the government is not going to go under. We cannot afford to have all our institutions just fail. They need to put in a considerable amount of money."

They call Gilley's Bar the TCI's "lower house of parliament". It is the airport watering hole, where politically minded locals go to sup Turk's Head beer and to debate ferociously the political stories of the hour. Its clientele of cabbies and businessmen tend to be supporters of Mr Misick's party; "Gilley" is Galmo Williams, the party stalwart who briefly succeeded Mr Misick as Prime Minister.

A reporter's gentle question – "What do you think of British rule" – rouses Thomas Ewing to rise from his stool and shout the question across the bar. A negative, and sometimes expletive, chorus comes back. "Since the overthrow of the legitimate government of the day, the economy has tanked, and they are making all of us pay for the alleged misdeeds of a few," says "Papa" Howie, a construction firm boss. Wilbert Handfield chimes in, saying "The British cannot free themselves of the charge that they were responsible, too, under a previous Governor," he said.

"The British have decided that we are no longer politically independent, but they have decided that we are still financially independent," concludes "Papa" Howie. "But we are being run by diplomats. They are going to get paid anyway."

Not everyone is disillusioned or distancing themselves from the British, of course. Shaun Malcolm, a former chairman of the opposition party and now a contributor to The TCI Journal, has travelled to the UK to urge British politicians to maintain direct rule until prosecutions have been secured and anti-corruption reforms fully implemented.

But many early supporters of direct rule are becoming disillusioned. A repeated criticism of the interim government is that it is trying to overlay a big-country bureaucracy on a small community where doing business has always been about personal relationships. Similarly, it is trying to apply standards of political behaviour expected in large democracies to a country where party affiliations are often dictated by family, and whose politicians are expected to deliver gifts to their supporters, such as hams at Christmas.

Stanley Hartling, who owns the luxurious Regent Palms complex on Grace Bay, arrived in the TCI in the Nineties. He is worried for the future.

He, too, fears that the Foreign Office is overreaching in its hope for top- to-toe reform. The result is that developments have been stalled for almost a year, leaving construction firms idle.

"Business people are not going to wait three or four years, they are going to look elsewhere," he says.

"The reality is we all want to see the commission of inquiry's full mandate filled out. But what I'm hoping is that we are being pragmatic about the resources we have and where we are employing them. There's a balance to be struck between perfection of the inquiry and the true, immediate needs of the country."