EXPLANATION: How U.S. States Help Rich Foreigners Protect Assets


DOVER, Del. (AP) – The mention of “tax havens” typically conjures up images of sun-drenched Caribbean escapes like the Cayman Islands or the buttoned-up shores of Switzerland. Not South Dakota.

But a report detailing how world leaders and some of the world’s richest people hide their riches has re-examined the growth of tax havens in the United States.

The publication of the International Consortium of Investigative Journalists’ Pandora Papers report shed light on the financial affairs of the elite and the corrupt, and how they have used offshore accounts and tax havens to shield trillions of dollars in assets.

In addition to the well-known offshore ports, the report also revealed secret accounts in trusts scattered across the United States, including 81 in South Dakota, 37 in Florida, and 35 in Delaware.

According to the report, among those who have used South Dakota trusts as tax havens are Guillermo Lasso, president of Ecuador, and family members of Carlos Morales Troncoso, a sugar tycoon and former vice president of the Dominican Republic.

David Tassillo, the co-owner of Pornhub, one of the world’s largest online porn sites, has been linked in the Pandora Papers with two Delaware-registered mailbox companies.

Here’s a look at some of the ways some U.S. states have established themselves as attractive places for wealthy people to park billions of dollars:


How did it start?

South Dakota started its financial industry in 1980, an era of double-digit interest rates when banks paid higher interest rates on loans than the usury laws allowed them to charge on credit cards and consumer credit. To help South Dakota banks and fuel the state’s dying economy, officials have lifted the state’s usury line for banks. Then she invited financially troubled New York City Citibank to start a credit card business, which she did the following year. More banks and a booming trust industry soon followed.

As of 2019, the state had more than 100 trust companies with total assets of approximately $ 370 billion. A single company, South Dakota Trust Company LLC, boasts on its website that it has more than $ 100 billion in assets under management, with more than 100 billionaires and 300 “centimillionaire” customers. According to the website, international families from 54 countries make up 15% of the clientele.

Delaware started its credit card and financial services industries in 1981. The state now oversees 47 state and national trust companies, with approximately $ 3.8 billion in assets. It is also home to more than 1.6 million companies, including limited liability companies, whose membership and operations are not normally publicly controlled. Corporate franchise taxes are the second largest source of income in the state after income taxes, totaling nearly $ 1.3 billion last year.



A main reason why many wealthy people view certain states as tax havens is that the legislature has abolished the “rule against eternity”. The abolition of the rule has enabled so-called dynasty trusts to be set up, where wealth can be passed down from generation to generation while avoiding federal estate taxes.

Laws in South Dakota and Delaware also allow asset protection trusts, which protect assets from claims against creditors. Such trusts can be attractive to wealthy lawyers and doctors to protect their assets from malpractice lawsuits. They can also be used to protect assets from ex-spouses, future spouses, disgruntled business partners, or disgruntled customers. Both states have a variety of other laws that give wealthy people considerable flexibility in setting up, controlling, and modifying trusts at their discretion.

Tax avoidance is another big draw. While most states levy tax on trust income, trusts incorporated in Delaware are not subject to state income tax if the beneficiaries are not residents of Delaware. South Dakota does not tax personal, corporate, or capital gains.



The Pandora Papers revealed how hundreds of politicians, celebrities, religious leaders and drug dealers have used mailbox companies and trusts to hide their wealth and investments.

“The Pandora Papers are all about individuals exploiting what we would call tax havens if the goal is to evade taxes,” said Steve Wamhoff, director of federal tax policy at the left-wing Institute on Taxation and Economic Policy in Washington .

South Dakota provides comprehensive privacy protection for assets held in trusts, including the sealing of fiduciary court documents and legal proceedings. Delaware is a popular place to register limited liability companies, which may include letterbox companies that are specifically formed to hide assets or financial transactions. Delaware law does not require public disclosure of the names of LLC owners or members.



The trust industry can be lucrative, not just for wealthy people and the companies that help them protect assets, but also for the treasury.

In South Dakota, the fund’s state bank franchise tax balance, which included franchise taxes paid by trust companies, was more than $ 44.6 million in fiscal 2020, compared to $ 34.7 million in the prior year, and more than double the balance in the prior year Year 2015.

Delaware collected nearly $ 81 million in concession taxes from banks and trusts in fiscal 2020. Bank franchise taxpayers are exempt from Delaware corporation tax. But the overall impact of the fiduciary industry is much greater. A 2011 report commissioned by a coalition of law firms and banking institutions in Delaware estimated that foreign trusts contributed between $ 600 million and $ 1.1 billion a year to the Delaware economy.



While some in Congress are calling for stricter control over trust companies that work with overseas clients, the response to the Pandora Papers in Delaware has so far been subdued.

Rony Baltazar, a spokesman for the Delaware State Department, said the agency was unaware of a call from lawmakers or tax justice groups to change the way the state manages the registration of companies or trusts.

Meanwhile, federal officials have set some data protection measures as their goal with the adoption of the Corporate Transparency Act earlier this year. The law requires many companies to disclose to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) their “beneficial owners” who exercise significant control over a company or who own or control at least 25% of the ownership interest.

The law aims to ban anonymous mailbox companies that criminals and foreign officials have used to hide financial dealings and launder money, but contains exceptions and exceptions. Among other things, the term “beneficial owner” does not apply to a person whose only interest in the company is a right of inheritance.


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