“Pandora papers”: how South Dakota became a magnet for the ultra-rich

South Dakota’s role in tax evasion has come up often since the revelations began on Sunday of the “Pandora papers”. This Midwestern state has built its fiscal reputation on a financial vehicle highly prized by the ultra-rich: the trusts. Explanations.

Its most famous town, Sioux Falls, smacks of cowboy and Indian times, and the iconic Mount Rushmore dominates its landscape. But since Sunday, September 3, South Dakota has found itself famous for its role in international tax evasion.

This state of the North American Midwest is at the heart of the revelations of the “Pandora papers”, this investigation into the tax secrets of the rich and powerful led by the International Consortium of Investigative Journalists (ICIJ) in partnership with 150 media outlets around the world.

The state with 360 billion dollars

South Dakota is so ubiquitous in the documents retrieved by the ICIJ that the Russia allowed itself, Monday, September 4, to assert that the great lesson of the “Pandora papers” was that the United States has become a tax haven.

The Kremlin certainly sought to divert attention from the revelations on all those close to Russian President Vladimir Poutine, also cited in the “Pandora papers”. But the United States has indeed found itself, for almost three years now, in second place in the ranking. the least transparent financial centers in the world, established by the NGO Tax Justice Network. The United States overtook Switzerland in 2018, and is now trailing behind the Cayman Islands, which have long been at the top of this list.

South Dakota is not the only state in the United States to claim this reputation as a tax haven among tax evasion experts. Delaware, Alaska, Florida and Nevada also attract billionaires seeking to remove their wealth from the tax authorities.

But South Dakota, by the sums involved and its history, holds a special place in the table of “made in America” ​​tax evasion revealed by the “Pandora papers”. Out of 100 cases related to the United States studied by the ICIJ and its partners, 81 concern this State.

There are at least $ 360 billion in financial vehicle assets set up in South Dakota for billionaires around the world. It is almost seven times more that barely ten years ago….

South Dakota has managed to attract all kinds of super-rich, like Guillermo Lasso, the President of the Republic of Ecuador, Carlos Morales Troncoso, the king of sugar cane in the Dominican Republic, or José “Pepe” Douer. Ambar, a Colombian textile tycoon, connected to the drug trade. Even “Trouble”, the dog of Leona Helmsley, who died in 2007 and self-proclaimed “queen of the real estate”, had been able to take advantage of the fiscal largesse of South Dakota to enjoy in all peace of a heritage of 12 million dollars until his death in 2011.

The “dynasty trusts”

South Dakota has long cultivated its image as a fiscally accommodating state. In the early 1980s, its governor, Republican William Janklow, was looking for a way to revive the economic machine and create jobs. He found it from Citibank.

This one had a problem: the interest charged by the Federal Reserve was too high for the banks, which could not pass this cost on to the customers because a law intended to protect the consumers framed the interest increases on the credit cards. . So, in exchange for 400 jobs created by Citibank, the governor of South Dakota decided in 1981 to cancel this ban on interest rate hikes in his territory. What feed a boom in banking activity in the region.

With this first success, William Janklow then wondered if he could not find tax tips to attract, this time, wealthy individuals. With the help of lawyers, he will seek on the other side of the Atlantic an old British institution: the trusts, those financial arrangements halfway between the private law company and the investment fund that had long had the favor of the aristocracy.

He thus made South Dakota the American capital of modern trusts. An update to fiscal taste that first went through a step backwards: in the United Kingdom, the deputies had fought at the end of the XIXe century so that trusts are no longer “eternal”. In other words, they had made sure that the assets put in a trust (money, land, works of art, etc.) by aristocrats wishing to keep everything for their families were not protected ad vitam æternam. .

William Janklow decided in 1983 that a trust in South Dakota could be “eternal”. It is the beginning of the “dynasty trusts”, which will make the fiscal heyday of this State.

“Banking secrecy is the basics of tax optimization, while trusts are for those looking for more sophisticated solutions in order to keep their property out of sight and out of sight. greed “, explains Andres Knobel, expert in trusts for the NGO combating tax evasion Tax Justice Network, contacted by France 24.

These financial tools pose two problems for the tax authorities: “they are opaque and offer a very strong protection of the assets which are placed there”, summarizes this specialist. Trusts operate like corporations, except that there are a multitude of participants with ill-defined roles and it is not clear who is the final beneficiary.

A “task force” to stay at the forefront of trusts

Additionally, in many jurisdictions, such as South Dakota, “there is no requirement to register a trust, so it is not known that they actually exist until scandals like the ‘Pandora papers’ lift the veil, ”notes Andres Knobel. This is why institutions like the World Bank believe that current estimates of assets managed by trusts are undervalued.

The example of South Dakota was quickly copied in the United States and elsewhere, with tax havens such as the Cook Islands, Saint Kitts and Nevis or Belize, which also specialized in the creation of trusts, underlines a study on this phenomenon published by Tax Justice Network in 2017.

In order not to be left behind, South Dakota created, in 1997, a “task force” which advises the governor to regularly update the laws on trusts in order to copy or improve the best tax innovations in this area from elsewhere. This is how the American state has managed to remain one of the most advanced in terms of the level of protection offered to the ultra-rich. Trusts in South Dakota make it possible to “protect assets from creditors of all kinds, including the tax authorities, and also ensure that there will be no inheritance tax payable or taxes on the property. fortune “, summarizes Andres Knobel.

For him, “it is clear that South Dakota has promoted its trust system much better than any other territory.” But he also benefited, by ricochet, from another scandal: that of UBS, in the mid-2000s. When the American administration realized that the Swiss bank had helped North American taxpayers to evade the tax authorities , she has put all her weight to ensure that the main fiscally uncooperative territories (such as Switzerland, Luxembourg, the various British Isles, etc.) share more information with Washington on the holders of bank accounts.

But this American pressure for more transparency was not exerted on the American states, recalls the Washington Post. As a result, “we have witnessed a transfer of hidden wealth in Switzerland and elsewhere to the territories in the United States, including South Dakota”, continues the American daily.

“I fear with all this that we will become [un paradis fiscal, NDLR] like Switzerland or Panama “, Craig Kennedy told ICIJ, a former South Dakota Democrat who was one of the few to ask about all the gifts his state has given to the super-rich. The pandora papers scandal shows that this step has already been taken. And the Biden administration has so far failed to respond to these revelations.

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