The Washington Post published on Sunday his first piece of the so-called Pandora Papers, a huge treasure trove of 11.9 million documents detailing how wealthy people use tax havens to hide vast amounts of money and other assets. The International Consortium of Investigative Journalists worked with newspapers around the world, including The Post, for a year and sifted through the remarkable cache.
Some common suspects, like wealthy Russian oligarchs and authoritarian rulers, make predictable cameos.
Some common suspects, like wealthy Russian oligarchs and authoritarian rulers make predictable cameos. The papers also include the usual jurisdictions where we know money is regularly hidden – including Switzerland, Singapore and the British Virgin Islands. But another, far more surprising port is prominently mentioned: South Dakota.
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The state was best known, at least until recently, for its dramatic Black Hills, Teddy Roosevelt and the Badlands, Mount Rushmore and Alfred Hitchcock’s “North by Northwest”. Its sparse population is spread over large areas where individualism and independence are spoken of. Governor Kristi Noem is a passionate defender of personal freedom and an ardent enemy of the mask requirement. She hosted great maskless homage to then President Donald Trump in the shadow of Mount Rushmore last year and an even more maskless motorcycle rally in Sturgis.
Yes sir, the South Dakota.
But the reasons this state is now supposedly a haven for (sometimes) nefarious global money are pretty simple. First of all, South Dakota is a classic low-tax state. There is no income tax, no inheritance tax, no capital gains tax. the Fees paid by trusts flow into the state treasury. In South Dakota, the more trust you have, the better.
Under the leadership of the legendary Governor “Wild Bill” Janklow, who was first elected in 1979, the recession made the state particularly greedy for money. Stimulated by economic hardship, the state took the lead in the abolition of perpetual rule – the old doctrine that limits the life of a trust. One version of the rule says that a trust must invest within a certain period of time – that is, it must distribute its assets. But not in South Dakota. In South Dakota today, well, trust can last forever.
The state combines this permissive regime with strict secrecy. In contrast to records in states like New York, South Dakota trust court documents are persistently private: even the existence of such a trust is not public. As a result, it is virtually impossible to find out who founded a South Dakota trust, who benefits from it, or whether it has been legally challenged.
Additionally The South Dakota Legislature then passed highly unusual legislation which enables the grantor of a trust to also be its beneficiary. That is, John Doe can set up a trust in favor of John Doe (waiting for him). (Other states appear to be somewhat ashamed of such a practice.) After a few years, the trust’s assets are safe from creditors of any kind. Most states – even otherwise trust-friendly states – do not protect trust assets to this extent.
True, other states have done this over the years mimicked some of the South Dakota rules. But Pierre, the state capital, has a dedicated task force working full-time to make sure South Dakota is one step ahead of the competition.
But wait, there’s more. After a US crackdown on traditional tax havens Like Switzerland and the global financial crisis of 2008, a number of countries, including some famous tax havens, have opted for a common reporting system. Now the participating countries are obliged to report to each other all assets that they hold for the benefit of the other people.
The FBI, it seems, desperately wants to know what you’re sending to Switzerland, but it’s not nearly as interested in what you park at home.
The US is not a party to the new reporting system – just as it is not involved in a number of other international institutions. Washington has its own reporting requirements – but these apply abroad, not the US states. The FBI, it seems, desperately wants to know what you’re sending to Switzerland, but it’s not nearly as interested in what you park at home.
It is for this reason that South Dakota is featured in the Pandora Papers. Has Pierre brought treasure to his people with his rich-people-friendly policies? Not really. The state budget will certainly benefit from the scheme – but for a variety of reasons, including the presence of Indian reservations in the state, some of the poorest counties in the US are located in South Dakota.
Still, it is far too late to reverse South Dakota’s tax haven policy because other states have emulated his model. We’d have to reverse the laws of Alaska too, Delaware, Nevada and all other states that have followed South Dakota’s approach to trusts.
People who want to change the impact of the South Dakota trust system will need to adjust their expectations. It’s going to be a long way.