Directors of thousands of Irish-registered non-resident companies are facing stricter regulation and licensing following a 10-month investigation into rules governing tax evasion and money-laundering on the Channel Islands and on the Isle of Man.

A British review of financial regulation on the islands has recommended that the rules relating to the directors of companies registered offshore should be tightened. This is aimed at effectively ending the so-called "Sark Lark" whereby islanders are appointed as "nominee" directors of companies they know little about. Up to 25 Sark residents are directors of thousands of Irish-registered companies. Some 40,000 non-resident companies are believed to have been formed here, many of them for legitimate purposes.

However, the appointment of nominee directors allows the true identity of the beneficial owners of the companies involved to be concealed, creating suspicion that at least some of these businesses are fronts used for laundering the proceeds of international drug-trafficking and other organised crime.

The new report, prepared by a retired British Treasury official, says enforceable codes of conduct are needed for directors, company administrators and agents and trustees, while service providers of questionable competence and integrity should be weeded out. It says regulation on these lines is the solution to combating the "nominee" director abuses in Sark and elsewhere. The Guernsey authorities, which have jurisdiction over Sark, plan early legislation for this purpose.

As the report was published yesterday, a spokesman for the Department of Finance here said a working group established by the Government earlier this year to consider tax changes which would bring non-resident companies registered in Ireland into the tax net was expected to deliver its report to the Minister for Finance, Mr McCreevy, soon.

In the meantime, an expert on the prevention of money-laundering told The Irish Times that it was a nonsense to suggest that any country could abolish front companies simply by legislating against them.

"The bad guys who want to form a company in somebody else's name will simply buy a local criminal to do that," said Mr Nigel Morris-Cotterill, solicitor and author of How Not To Be A Money Launderer.

"It is better to have a degree of control over these companies by having them operate within the legislative structure rather than having them operating on a completely subversive basis."

The review of regulation in the Channel Islands and the Isle of Man was carried out at the request of the British Home Office by Mr Andrew Edwards. Although it found that regulation was generally of a high standard, it said it needed to be strengthened in certain areas.

However, the report concluded that the battle against financial crime was not being convincingly won anywhere and that such crime remained too profitable. Its proposals to strengthen the islands' arsenal to combat tax-dodging and money-laundering will now be considered by the British government and the island authorities. Mr Morris-Cotterill believes it is unlikely that "hot money" moving out of the Channel Islands will be transferred to Ireland.

He said any outflow of dirty money from the Channel Islands would disappear all over the globe and go through the wires of the banks where it was already invested.