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Among Andrew's grounds for dismissal is that if any sexual activity did occur between the prince and Virginia Giuffre, it was consensual.
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The move comes with Queen Elizabeth II's "approval and agreement," Buckingham Palace said. The announcement comes one day after Prince Andrew lost his bid to quash a sex-abuse lawsuit.
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The British prince's lawyers argued that a $500,000 settlement that Virginia Giuffre and Jeffrey Epstein reached in 2009 should prevent her from suing him.
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The news comes days after the prince sat down for an hourlong interview with the BBC over his association with Jeffrey Epstein. He says the scrutiny has been a "major disruption."
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The Duke of York told the BBC that he let the royal family down by staying at the home of the New York financier after he was convicted of soliciting a minor.
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He has denied accusations by Virginia Roberts Giuffre, who says that as a teenager, she was recruited by Jeffrey Epstein and forced to have sex with the prince and other powerful men.
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A palace statement says Andrew is "appalled" by Jeffrey Epstein's alleged crimes after a British tabloid published video it says shows the prince with a young woman outside Epstein's mansion in 2010.