THE European Union has for the first time put a British overseas territory on its tax haven blacklist over money laundering and tax avoidance.

Until Brexit, the Cayman Islands could not be blacklisted, but yesterday EU finance ministers included the archipelago, along with the Seychelles, Panama and Palau.

Turkey was given a grace period until the end of the year.

The EU said the legal system in the Caymans would facilitate the establishment of offshore structures for tax evasion.

German MEP Markus Ferber said the decision was a warning to the UK as a whole: “The dream of some Brexit supporters to make the United Kingdom a tax haven off the European coast will not work.”

He added if that happened, “the British will also end up on the blacklist”.

Turkey was due to create conditions for an automatic exchange of tax information with the EU by the end of last year, but the measures have not been implemented.

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Finance ministers, however, decided not to blacklist Ankara and gave it more time “for political reasons”.

Austrian finance minister Gernot Blumel warned if Turkey continued to fail to comply with EU requirements, Vienna would call for it to be blacklisted.

A decision is expected to be made by the end of the year.

The Panama Papers and other financial revelations over tax evasion and money laundering led the EU to clamp down on tax havens at the end of 2017, and a dozen countries are now on the EU blacklist.

They include the US Virgin Islands, American Samoa, Fiji, Guam, Oman, Samoa, Trinidad and Tobago and Vanuatu.

Those on the blacklist face reputational damages, higher scrutiny in their financial transactions and risk losing EU funds.

Adding financial centres like the Cayman Islands and Panama marks a shift for the EU after several reviews had left on the blacklist mostly Pacific and Caribbean islands with almost no financial relation with the EU.

This drew criticism for being too lenient on tax havens.

The Cayman Islands was listed because investment funds based there do not reflect real economic activity on the archipelago, the ministers said.

That could lead to investment vehicles being created solely to reduce taxes in other jurisdictions.

The Seychelles was added because it has a “harmful preferential tax regime”, and Panama ­– which is already blacklisted for money laundering shortfalls by the Financial Action Task Force, a global watchdog, was added to the EU list because of shortcomings over exchanges of tax information.