The “tax haven” stigma has come back to bite Cayman again, this time in the form of recent announcements by a handful of United Kingdom water companies that they will be shutting down their Cayman-based subsidiaries.

The shutdowns are in response to demands for more transparency made by U.K. regulatory and government officials, who have criticized the companies’ use of “opaque financial structures.”

The firms, for their part, have maintained that their usage of Cayman entities is for legitimate reasons, and have pointed out that the use of such financial structures has always been publicly available information.

Cayman Finance, the organization that promotes the territory’s financial services industry, also has come to the defense of the water companies, stating that their use of Cayman has helped channel investment into the U.K.

“Investment in U.K. infrastructure through Cayman-domiciled investment vehicles is an excellent example of how the Cayman Islands is an extender of value for Great Britain, channeling billions of dollars of foreign investment into the country,” Cayman Finance stated. “Water and other major infrastructure companies choose the Cayman Islands to access capital from international investors, because Cayman is a premier global financial hub, efficiently connecting law abiding users and providers of investment capital and financing around the world.”

Nevertheless, with mounting pressure in the U.K. – members of the country’s left-leaning Labour party have reportedly proposed nationalizing the companies – at least four water suppliers intend to withdraw from Cayman this year.

The issue first made headlines last summer when the Daily Mail’s business publication, This is Money, ran an article titled “Thames Water turns its back on Cayman Islands after paying no corporation tax for a decade,” reporting that Thames was considering closing two of its Cayman-based subsidiaries, Thames Water Utilities Cayman Finance Ltd. and Thames Water Utilities Cayman Finance Holdings.

This is Money stated that the closures could be part of an overall effort to repair the reputation of the company, which was fined 1 million pounds (about US$1.3 million) in January 2016 for polluting the Grand Union canal with sewage from a faulty treatment plant – the latest of 106 convictions for environmental offenses committed by Thames Water, according to the BBC.

Thames Water, which serves about 25 percent of the population in England and Wales, initially disputed the report.

“We haven’t turned our back on the Cayman; we have a couple registered entities there,” a Thames spokesman told the Cayman Compass at the time, adding that the company is reconsidering its corporate structure as a part of an overall review by its new CEO. “They may open more [entities] in the Caymans or they may close it down.”

But in November, Thames acknowledged that it is indeed shuttering its Cayman entities, saying that they are no longer necessary for the company’s operations. A publication that explains the company’s corporate structure states that they were established in 2007 to raise funds, and to work around U.K. regulations that were in place at the time.

“In 2007, it was not possible for a U.K. company to issue public bonds to repay debt provided by investors to help finance its acquisition,” the publication states. “These restrictions have now largely been amended or removed.”

Around that time, the country’s fifth-largest water provider, Yorkshire Water, also announced that it too would be closing its Cayman subsidiaries due to issues of “public concern.”

“There is a real challenge to the water industry’s legitimacy at the moment, and complex financial structures only add to public concern as to the way in which companies are financed,” stated Yorkshire Director of Finance Liz Barber in an October press release.

“We have some offshore companies in our structure which are no longer necessary or appropriate and we’re taking steps to remove these as soon as possible.”

In December, Thames again made headlines when the Daily Mail reported it had issued bonds from Cayman despite announcing that it would be withdrawing from the jurisdiction.

In a statement sent to the Cayman Compass, Thames officials stated at the time that they still plan to shutter the Cayman entities and establish a holding company in the U.K. in about six months. In the meantime, Thames may continue to use the subsidiaries to issue bonds, according to the officials.

Thames Finance Director Brandon Rennet explained that the Cayman entities will still be used because, “If we wanted to issue it through another vehicle, we would need the bondholders’ permission, which would take time.”

Even though restructuring Thames could cost in the “single-digit millions” of pounds, Thames stated that it is making the move in part because the Cayman entities have become “toxic.”

“Even if it’s entirely symbolic, there’s a point when you have to say it’s just time to reverse the noise,” Thames CEO Steve Robertson stated last December.

But those statements and promises did not stop government from increasing its scrutiny on the industry.

In January, Environment Secretary Michael Gove wrote an open letter to Jonson Cox, the chairman of the U.K. Water Services Regulation Authority (Ofwat), asking him to investigate the issue of water companies having “opaque” financial structures.

“The water sector has rightly come under even closer scrutiny in recent months with growing concern about the behaviour of water companies,” Gove stated in the letter. “The use by some water companies of opaque financial structures based in tax havens and high gearing is deeply concerning.”

Cox responded on behalf of the regulator earlier this month, telling Gove that “most” U.K. water companies have pledged to remove their Cayman-registered entities.

That looks to be the case, as two more water companies have recently announced their intention to close Cayman subsidiaries.

On April 9, Anglian Water filed a petition in the Grand Court to reduce the capital in its Cayman subsidiary from £300,000,000 ($348,000,000) to £1 ($1.16), with the goal of removing the subsidiary from its corporate structure.

“Ofwat and the U.K. Government have expressed a strong desire for the Anglian Water Group to remove this Cayman Islands-incorporated company from its corporate structure as soon as possible (the company being the only Cayman Islands incorporated company in the Anglian Water Group),” Anglian states in its Grand Court petition, which is posted on the financial services site OffshoreAlert. “The transaction is intended to effect that removal.”

Anglian, which operates in the East of England, explains in its petition that the U.K. regulator and government have made “certain comments” on the complexity of the corporate structures built by the country’s water companies, referencing the letter written by Environment Secretary Gove to the regulator’s chairman, Cox.

Four days later, Southern Water stated that it has been working to close its subsidiary finance company in Cayman since late 2017.

“Southern Water and all Southern Water group companies pay taxes in the U.K. and have never offshored their tax obligations,” stated Southern Water, which provides water and wastewater treatment services across Kent, Sussex, Hampshire and the Isle of Wight. “However, we know that our subsidiary financing company in the Cayman Islands contributes to misconceptions about our business practices and this is why we are working towards closure by the year end.”

The announcement of the Cayman closures, as well as other intended reforms, seems to have satisfied government. Gove wrote Cox again on April 18, congratulating the regulator on his work.

Gove also warned that government may act if the water companies do not follow through on their promises.

“I therefore hope that you can implement your proposals in full without the need for government intervention or legislation,” the legislator stated. “However, if you find that water companies are not fully and promptly cooperating with your proposals, we are ready to revisit how government can give Ofwat stronger powers to amend licences, through legislation if necessary.

“Moreover, if you find there is any need for government intervention or legislation beyond your current proposals, we will carefully consider any further recommendations.”

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