But Western Isles angrily denied reports that it benefited from a 'secret deal' by which the Scottish Office gave it extra funds at the expense of Shetland IC.
Western Isles vice-convenor Angus Graham has said he is 'appalled' at the article in last week's Guardian which said the Scottish Office adjusted the special islands needs allowance to bail out Western Isles after it lost £23 million when BCCI collapsed in 1991.
Western Isles director of finance Robin Bennie told LGC the Guardian report was a 'total distortion of the facts'.
The SINA was set up in the 1980s to compensate Shetland for losses following industrial derating of oil terminals. Western Isles had argued that it should benefit more from the allowance, since its needs were greater than those of oil-rich Shetland and Orkney.
The Scottish Office accepted its arguments and changed the distribution formula to one based on needs indicators such as population and income. Western Isles' share of the £20m grant rose from £5.5m a year to £9.9m.
Shetland Islands IC says it lost around £4m a year through the changes.
'Nothing was done behind closed doors,' Mr Bennie said. 'From Western Isles' point of view, this change was long overdue.' The islands need more help than Shetland, he said: 'You can hardly say that Harris tweed and crofting are boom industries.'
He agreed it could be argued that the council's BCCI losses were a factor in prompting the Scottish Office to make the changes and bring them in immediately instead of phasing them in. 'But we do not think there is any relationship between the two events. The Scottish Office said they were not bailing us out,' he said.
Unlike other losing councils, Western Isles was allowed to borrow over 30 years to cover its losses. It is paying this off, at about £2.4m this year.
Mr Bennie said it was the only way the council could continue to deliver services.
The Scottish Office said there was no basis for making any connection between the SINA changes and Western Isles' losses. It said the SINA review was started well before BCCI crashed
Western Isles council said its view remains that the government should compensate BCCI depositors. 'We are deeply appreciative of the efforts of Keith Vaz,' Mr Graham said. 'However he should accept that the question of the SINA is a red herring and that the failure of the compensation campaign has more to do with the apathy of his Parliamentary colleagues to the plight of the depositors than any so-called secret deals.'
But Mr Vaz said the SINA arrangements were 'clearly a clever deal, whether secret or not'. He said that whereas the Scottish Office had been willing to help out Western Isles, councilselsewhere which lost money were no nearer getting support from the government.