With increasing competition, tight new regulatory controls and threats of sanctions from the Organisation for Economic Co-operation and Development (OECD), Jersey, Guernsey and the Isle of Man face testing times.The islands' larger law firms all quote their financial work - and associated referrals from London's City firms - as generating most of their income.However, Guernsey is also renowned for captive insurance, and the Isle of Man aims to be a premier e-commerce centre - with Bermuda and Singapore - helped by last month's £7 million government cash injection, and BT's yen to showcase new technology there.

All are keen to throw off their traditional tax haven image, and new regulatory controls have helped.Anita Lovell, a director of Nigel Harris & Partners, Jersey's largest firm of English solicitors, says: 'When I started in 1978 there was far less regulatory control.

Jersey has made enormous efforts to rid itself of its tax-haven tag and is now as strictly regulated as you can get.'The islands all recently enacted legislation compelling lawyers to report clients they suspect of any money-laundering offences, not just those associated with drugs and terrorism.

And the Financial Services Extension Jersey Law 2000 and associated codes of practice put stringent controls on those conducting trusts in Jersey - including compulsory registration of trust operators, strict KYC (know-your-client) rules, and risk management requirements.Ms Lovell says: 'The KYC procedures are more stringent than in the UK.

In the old days you could take people on trust, now you practically have to take a blood sample.'Conrad Coutanche, senior partner of Jersey's largest law firm, the Mourant Group (known in Jersey as Mourant du Feu & Jeune), says the new controls will make Jersey the 'Rolls Royce' of the money management field, but he admits it may deter clients and impose heavy administrative burdens on lawyers.Mr Coutanche says: 'Some customers may take their business elsewhere rather than answer questions about their past.

This is not to say they have shady pasts necessarily, it's just they view privacy as paramount.'Law firms, he says, must increase productivity and efficiency to prevent the extra work costs being passed onto clients.

'We can't become more expensive than our competitors because of this,' he warns.The offshore islands - because of their low tax base - still attract the wealthy, even though successive governments have closed the tax loopholes.John Greenfield, managing partner of Guernsey's largest law firm, Carey Langlois, although dismissing the islands' image as a playground for the rich and famous, adds: 'It's not so much the rich living here, but being an offshore financial centre, it does attract people's wealth.'Indeed, Mr Coutanche specialises in 'private wealth management' which involves looking after clients' money to the grave and beyond, rather than just establishing the initial personal finance structure - which has been historically a lawyer's role.'We found clients needed advice from one source - we're not accountants or tax experts, but we can procure that advice and act as a clearing house.'The volume of work in the Channel Islands has increased in recent years, he adds, but the tax-driven work has decreased to 'virtually zero' - mostly because of successive governments legislating to reduce 'lawful tax avoidance'.However, the islands' low tax still attracts some wealthy immigrants.

Ms Lovell says: 'There are still a number here, but far fewer.

It's more difficult to leave your tax behind than it used to be.'And a cloud hangs over even this historic jewel in the islands' crown, with the OECD threatening sanctions after they were accused of having 'harmful tax regimes'.The Isle of Man government's response - says David Sherlock, head of forensic and e-commerce at leading Manx firm Cains - is to announce a lowering of the highest tax rate from 28% to 10%, and to pledge to rid itself of 'designer taxes' which benefit some companies over others.

'We can do that because we have VAT which gives us more flexibility than Jersey and Guernsey,' he says.Jersey and Guernsey are more circumspect.

Mr Greenfield says: 'It's a huge issue here: why should one pay the same tax as the higher paying EU countries?'He maintains that sanctions will not be imposed.

'The more realistic situation is that they will want an exchange of information.

If a national from one of the EU countries is trying to put money away offshore, the EU would want to see co-operation from us.'The OECD now appears to want to discuss with offshore countries common problems and how to address them, rather than dictate terms.Despite their proximity to Europe, the islands are not within the European Union, thus preserving their tax regimes.

All, however, are signatories to protocols allowing them to operate in Europe.

The Isle of Man, for example, allows free movement of goods.Ms Lovell says: 'Jersey is a conservative jurisdiction and most prefer to keep links with the UK than to venture into Europe.'Indeed, law firms on the islands all boast close UK links.

In 1998, the Mourant Group became the first Channel Island firm to venture into London.

The four-strong staff has grown to 40 and the firm expands into new premises in Croydon next month.

Mr Coutanche attributes the growth largely to the new all employee share option plans.

Two City firms have offices in Jersey: Gouldens and Watson Farley & Williams.In Guernsey, where London firm Wedlake Bell has an office, Careys has just become the first 'local' firm to be approved by the Law Society of England and Wales to take trainees.Mr Greenfield says: 'Bright, local youngsters want to qualify as English solicitors but have problems getting training contracts in the UK.

It could be that London firms do not want to risk training them, only to see them return to Guernsey as soon as they are qualified.'It is probably a practice which will catch on: both Mr Coutanche and Mr Sherlock concede that there are problems in attracting qualified lawyers to the islands - particularly, says Mr Coutanche, international markets and securitisation lawyers.If life on the islands is as good as many offshore lawyers say it is, this scarcity is surprising.

Ms Lovell sums it up: 'Top-quality work, in a delightful place by the sea and only a five-minute drive to the office - you do get the best of both worlds.' Most agree that native advocates and English lawyers co-exist well, although last year Jersey advocates proposed an Act making it more difficult for English solicitors to re-qualify and practise.Christian Wisskerchen, the Law Society's European policy executive, says: 'The Act would have put English solicitors on the same footing as other foreign lawyers - ignoring the fact that local lawyers can easily qualify as solicitors.

However, after we lobbied the Jersey Law Society, efforts to get a law on the statute books were discontinued.'A former partner at north-west England firm Davies Wallis Foyster, Mr Sherlock also complains that English lawyers cannot become partners in the Isle of Man without being called to the Manx Bar, which involves intensive back-to-basics study.He is disappointed that multi-national partnerships did not figure in the terms of reference of the recent review of Manx legal services conducted by Sir David Calcutt QC.

The results of this review - which concentrated more on disciplinary matters - have yet to be published.Mr Sherlock says: 'As a mature lawyer, I have no intention of studying criminal law again.

It's the psychological nature of picking up text books to do what you did 15 years ago.

Not being allowed to be a partner is clearly not just a cosmetic issue.'But Mr Greenfield, who moved in 1981 to Guernsey from former Peterborough firm Rigbys, enjoys his dual-qualified status.

'You get the same sort of challenging work as you would get in the City but if a case goes to court, I am the one who does the advocacy - which is an enormous attraction.'Despite the plethora of changes they have faced in recent years, the offshore islands appear to have a bright future.Carey Langlois's London consultant and former Linklaters partner, David Greenhalgh, says: 'Any successful offshore centre has to adapt to what is going on in the City.

Many are doing that well.

Offshore jurisdictions fulfil a vital role for City firms - they oil the wheels of certain international and global transactions which require a well regulated, tax-neutral jurisdiction.'