London – the unlikeliest of tax havens

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The FT ran an article under the above heading yesterday. It could be seen as celebratory comment from the private banking sector following Alastair Darling's failure to tackle the domicile issue. Let's be candid, the article reads as if they are putting out a notice saying "open for business as usual, plundering the world to order." Because that's what this "industry" is about.

But what also got me is just how little the FT obviously knows about tax havens. The fact is that London hosted the world's first offshore market activity when the Euromarket emerged there in 1957.

Faced with mounting speculation against the pound after the Suez Canal crisis, in that year the British government imposed restrictions on the use of pound sterling in trade credits between non-residents. As a consequence British and other international banks sought to use the US dollars in their international dealings.

Faced with this phenomena the Bank of England decided that transactions between non-residents and in a foreign currency (i.e. not the British pound) mediated by banks located in London, whether British or not, were considered to be taking place abroad or 'offshore' even when contracted in London. This mean that they were not subject to British regulatory supervision.

It was this decision to consider transaction that took place in London to be "elsewhere" in a new unregulated space called the Euromarket that created a large part of the offshore phenomenon - that bit which trades on tax and regulation abuse on the pretence that the transaction is undertaken "somewhere else" unspecified by any party - and made London the first tax haven to live in the make believe world in which they all now participate.

As such London is far from being the unlikeliest tax haven - it is the grandmama of the modern phenomenon.