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How the EU Broke Up with the City of London – but Not with UK Tax Havens

Six years after the Brexit referendum, the amount of money lodged in British tax havens has reached mind-blowing levels. Florence Autret explains why

Photo: Zelma Brezinska/Alamy

How the EU Broke Up with the City of London But Not with UK Tax Havens

Six years after the Brexit referendum, the amount of money lodged in British tax havens has reached mind-blowing levels. Florence Autret explains why

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It is an open secret that the EU did little to avoid the post-Brexit estrangement of the City of London from its EU customers. Once it became clear that the UK would leave the single market, EU Brexit negotiator Michel Barnier persistently ruled out any special Brexit deal for the City of London. Financial passports had to go, along with everything else – the common trade or fishery policy, the jurisdiction of the EU Court of justice, etc. There was to be no “cherry-picking”. 

Even financial equivalences – a second-best arrangement tailored for non-EU financial centres like the US or Japan and aimed at removing regulatory barriers for specific services or entities – were off the table.  

A few days after the signature of the Trade and Cooperation Agreement, Mr Barnier made it clear again on French television BFMTV: “There are no and there will be no negotiations on financial services, adding that the EU could “give, and withdraw, equivalence unilaterally”.  

Yet, at the same time, while EU officials were pointing to the danger of a “Singapore-on-Thames” at the gates of Europe, one thing went widely unnoticed. If the City of London was to be unplugged from the single market, major British tax havens would not. Quite the opposite. 

Self Governing Territories

A deep dive into official records shows that over the years since the Brexit referendum, Jersey, Guernsey, the Isle of Man and Bermuda had been solidly moored to the European mainland (and Ireland) by a series of legal decisions that allow financial services providers or companies to continue to operate there almost as if they still were part the single market. Just what the UK wanted for the City of London and was denied. 

This web of decisions was not constructed by Barnier’s team while “the clock was ticking” but over the years preceding the Brexit referendum, when the UK was still a full and influential Member State and the British dependencies and Overseas territories were already “third countries” under EU law. 

As a result, banks under the supervision of the European Central Bank (ECB) could, and still can, cover risks lodged in bank accounts in Jersey, Guernsey, or the Isle of Man with no more regulatory capital than if they were in any EU member state. Insurance companies can do the same with their subsidiaries in Bermuda, despite the well-known massive profit shifting to this zero-tax jurisdiction.  

Confronted with the evidence in an interview back in 2021, Markus Ferber, a senior German conservative MEP, couldn’t hide his surprise. “I’m more than disappointed to hear that. Someone should ask the Commission”. And he did.  

Asked by Ferber for written answers, the financial services commissioner Mairead McGuinness confirmed, in an unpublished letter seen by Byline Times, that under such equivalence provision: “EU banks can apply reduced capital charges for their exposures towards certain categories of entities established in several equivalent jurisdictions”. In the case of the Channel Islands, this equivalence is “partial”, and applies “only” to “local financial institutions”, she added. In other words, EU banks are not required to post more capital if they lend money to a bank or fund registered in Jersey than they do for EU-based borrowers. 

Similarly, companies can go public in Amsterdam or Frankfurt, while being domiciled and audited in the Channel Islands, where EU regulations on money laundering, not to mention taxation rules, don’t apply.

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This is not just theoretical. Several mining companies are listed in Frankfurt and London while being registered in the Channel Islands with no oversight of EU authorities in charge of auditing supervision on their accounts.

In her letter to Ferber, McGuinness stated that “Jersey and Guernsey were self-governing territories” and did “not form part of either the UK or British Overseas Territories” and that those decisions had little legal effect.

This appears ostensibly reasonable. Yet, why would a company exploiting gold mines in South Africa, and listed in the EU, register in the Channel Islands rather than London or Frankfurt? Why would a French insurer list a closed-end fund in Amsterdam and let it be audited out of view of EU money laundering, tax, and auditing authorities, if not to circumvent EU laws? 

A Hidden Timeline

The striking thing about these decisions is their timeline. Several were granted at crucial moments of the talks that punctuated those pre-referendum years. The Channel Islands and the Isle of Man, along with a set of large international financial centres, were granted equivalence under the banks’ Capital Requirement Regulation (CRR) two days before the European summit where a “new settlement” was proposed to David Cameron in February 2016.

Equivalence under the audit directive was signed by former UK Commissioner and financial services lobbyist Lord Hill just two days before the referendum itself and even published the very day the British people voted to leave the EU. 

Back then, “the UK was intervening all the time. They wanted their overseas territories and satellites to achieve equal treatment to the City”, says Jean Russotto, a Swiss lawyer based in Brussels. “And the EU granted it in most parts”. 

In office from 2014, the Juncker Commission openly treated the referendum/Brexit debate as a “UK domestic matter”. Yet Juncker appointed a British lobbyist and former leader of the House of Lords, namely Lord Jonathan Hill, at the request of Prime Minister Cameron (and to the despair of many MEPs) as the new EU financial services Commissioner, and gave Jonathan Faull, a top British EU Commission official (and future lobbyist), the helm of a very opaque “task force on the British referendum” with a strong focus on financial services. Most equivalences under the new regulations adopted in the aftermath of the 2008 financial crisis were granted between 2013 and 2016.

Six years after the Brexit referendum, and two years after the signature of the Trade and Cooperation Agreement, the amount of money lodged in British tax havens has reached mind-blowing levels. For example, net foreign direct investment (FDI) from Jersey into the EU 27 has multiplied by a factor of six between 2013 and 2021, which means that six times more EU companies are owned “from” the island than a decade ago, at the time of David Cameron’s Bloomberg speech

On 24 September 2021, Commissioner Mairead McGuinness paid an unpublicised visit to the Square Mile. In a photograph posted on Twitter, she can be seen alongside the Lord Mayor, head of the City of London Corporation. The meeting is not listed on her transparency documents as is mandatory for every Commissioner. On 1 October that year, she signed a renewed equivalence decision under CRR with a number of financial centres around the world, including, again, the Channel Islands and the Isle of Man. 

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‘Informal Consultations’

The so-called Windsor Framework agreed in principle on 27 February 2023 was welcomed by the Lord Mayor who called it “a new Brexit deal” and “an opportunity for UK financial services to once again engage productively with our partners in the EU for the benefit of both our economies”. 

Officially, negotiations on financial regulation have not resumed. Although there exists a Memorandum of Understanding (MoU) on regulatory dialogue, agreed in March 2021, in line with the Trade and Cooperation Agreement.

The document, obtained by Byline Times, provides for the creation of a “Joint EU-UK Financial Regulatory Forum” that will seek “dialogue”, “exchange of views” and other “discussions” on market access and regulatory issues at least twice a year. 

Adam Farkas, head of the mega lobby Association for Financial Markets in Europe (AFME), said: “It is crucial that both sides now activate the Memorandum of Understanding and enable enhanced cooperation and coordination, including allowing for regular exchanges on trade and market access issues as well as equivalence provisions.”

“Once the Windsor Framework is implemented, this MoU would allow for a relationship similar to that with other third countries with an important financial services sector”, a European Commission spokesperson told by Byline Times.  

While these “formal consultations” remain officially pendant to the Irish issue, informal ones might go on, just as they have been all along.  

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