OFFSHORE savers with two Icelandic banks, Kaupthing Singer & Friedlander in the Isle of Man and Landsbanki Guernsey, as well as thousands of insurance bond holders, may have lost millions of pounds following the collapse of the institutions.
Investors with the Guernsey branch of Landsbanki have been dumbfounded to discover that they may have lost their savings because cash was transferred to another subsidiary, Heritable, where depositors are being protected, as well as to the parent company.
Deloitte & Touche, which is liquidating Landsbanki in Guernsey, has announced there are currently sufficient funds in the bank to pay out only 30p in the pound to depositors.
Further repayment will depend on the recovery of nearly 50m "upstreamed" to the parent Heritable Bank, which has since been acquired by ING. Investors believe the payout would be nearer 70p in the pound had 36.3m not been transferred to Heritable and 12.7m to the parent.
Deloitte said: "The collapse of Heritable Bank and other uncertainties have now placed greater doubt on the ability of the (Guernsey] bank to recover sufficient assets to pay depositors in full."
Rick Garrard of Deloitte said: "The main reason for the bank's difficulties has been the placing of funds with Heritable Bank, which has now gone into administration."
Investors are particularly incensed given that as long ago as August, the Guernsey Financial Services Commission expressed concern that many banks in the island were upstreaming money to their parent companies elsewhere, and warned depositors could lose their money if the parent went down.
Savers put money in offshore accounts for a variety of reasons, but the days of using them to escape tax are over. UK residents must now disclose their earnings from these accounts and pay tax, or pay a withholding tax to the offshore authorities.
Most consumers open offshore accounts because they are working or retiring abroad, as it is not possible, following the introduction of anti-terrorist money laundering regulations, to open an account in the UK without proof of a UK address.
Simon Ripton, acting managing director of Alliance & Leicester in the Isle of Man, said: "Many UK expats working away from home find themselves in very volatile places such as Africa, where governments can be unstable and the banking and legal systems may not be robust."
However, as these offshore havens are outside the UK they do not normally qualify for compensation from the Financial Services Compensation Scheme. They are not even part of the EU, so are not protected by any European safety nets.
Expats and pensioners with money in Guernsey and Jersey are left completely high and dry if they save with an institution that goes bust, while the safeguards provided by the Isle of Man and Gibraltar are limited.
The Isle of Man has recently increased to 50,000 the compensation on offer, after a vote in its parliament. However, voting for compensation and paying it are different matters. Compensation is raised by a levy on banks and building societies, and the Isle of Man has a 500,000 annual limit which any one of the 34 participant institutions can be asked to pay in a 12-month period.
But depositors are not the only victims. Thousands with money invested in offshore insurance bonds have also been caught out. Most of the bonds sold by big companies such as Aegon, Skandia, Clerical Medical, Prudential, Axa and Norwich Union offered an offshore cash account as part of their bonds portfolios with the Icelandic banks. As corporate accounts, these would not be eligible for the kind of compensation available to ordinary investors.
So far, 300 Aegon bondholders have been hit with investments amounting to 57m, 300 at Axa with holdings of 50m, and 120 at Norwich Union with 15m in deposits. The Prudential, Skandia and Clerical Medical said they were investigating the extent of the problem.
Aegon spokeswoman Lesley McPherson said: "We are in discussions with the authorities and liquidators in order to do everything we can to safeguard our policyholders' money."
But offshore investors aren't going down without a fight. Hundreds have signed up to the iwantmymoneylandsbanki.com website, where campaigners are currently devising a strategy to get their money back.
Daniel Herzberg and his partner Lucy Kinnison, who set up the website, said: "We are young teachers working abroad in Spain and Australia, but planning to return to the UK.
"We had been saving hard and it looks like we may have lost that money. But in many ways we are lucky. At least we are young and still of working age.
"Many people are in a much worse position. Some have sold their homes to move abroad to work or retire, and have lost all that money."
Authorities in the UK and the offshore havens are in discussions with the Icelandic authorities about how to get investors their money back.
All at sea?
It is important to establish the status of a bank or building society before investing. Some may operate as branches of their UK parent and therefore may be fully covered by the onshore Financial Services Compensation Scheme.
• Jersey: There is currently no safety net should your bank or building society collapse. However, it is considering proposals to fully guarantee residents' deposits only, and is examining whether any protection could be extended to other savers.
• Guernsey: Currently there is no protection. However, there are plans to introduce something, but a deposit protection scheme working group has only just held its first meeting.
• Isle of Man: Maximum 50,000 but limits on annual levy on banks so investors may have to wait for their cash.
• Gibraltar: 90% of first 18,000. ?