EXPLANATION: How the US is helping wealthy foreigners protect their assets



DOVER, Del. (AP) – A mention of “tax havens” usually conjures up images of Caribbean escapes bathed in sunshine like the Cayman Islands or the buttoned shores of Switzerland. Not South Dakota.

But a report detailing how world leaders and some of the richest people on the planet are hiding their wealth has drawn new scrutiny of the growth of tax havens in the United States.

The publication of the International Consortium of Investigative Journalists ‘Pandora Papers’ report has shed light on the financial transactions of the elite and the corrupt and how they have used offshore accounts and tax havens to protect billions of dollars. active.

Along with familiar offshore havens, 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.

Those who have used South Dakota’s trusts as tax havens, according to the report, include Guillermo Lasso, President of Ecuador, and family members of Carlos Morales Troncoso, a sugar industry mogul and former vice-president. President of the Dominican Republic.

David Tassillo, co-owner of Pornhub, one of the world’s largest online porn sites, was linked in the Pandora Papers to two shell companies registered in Delaware.

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



South Dakota launched its financial industry in 1980, an era of double-digit interest rates where banks paid higher rates to borrow money than the interest rates they were allowed under usury laws to charge on credit cards and consumer loans. In an effort to help South Dakota’s banks and boost the state’s dying economy, authorities removed the state’s usury limit on banks. She then invited the financially troubled New York-based Citibank to set up a credit card transaction, which she did the following year. Other banks and a burgeoning trust industry soon followed.

In 2019, the state had more than 100 trust companies with combined assets of approximately $ 370 billion. Only one company, South Dakota Trust Company LLC, boasts on its website that it has more than $ 100 billion in assets under administration, with more than 100 billionaires and 300 “centimillionaire” clients. International families from 54 countries represent 15% of its clientele, according to the website.

Delaware launched its credit card and financial services industry in 1981. The state now oversees 47 state and state trust companies with approximately $ 3.8 billion in assets. It is also the headquarters of over 1.6 million business entities, including limited liability companies whose members and operations are generally not subject to public scrutiny. Franchise taxes on business entities are the state’s second-largest source of revenue after personal income taxes, bringing in nearly $ 1.3 billion last year.



One of the main reasons that many wealthy people look to certain states as tax havens is that their legislators have abolished the “rule against perpetuities”. The elimination of the rule allowed for the creation of so-called dynasty trusts, in which wealth can be passed from generation to generation while avoiding federal estate taxes.

The laws of South Dakota and Delaware also allow “asset protection trusts,” which protect wealth from claims against creditors. Such trusts can be attractive to high net worth lawyers and physicians as a way to protect their assets against malpractice claims. They can also be used to protect the assets of ex-spouses, future spouses, disgruntled business partners or angry customers. Both states have a host of other laws that give the wealthy considerable flexibility to establish, control, and modify trusts as they see fit.

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



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

“The Pandora Papers relate only to individuals using secret jurisdictions, which we would call tax havens, when the goal is to evade tax,” said Steve Wamhoff, director of federal tax policy at the Institute of left on taxation and economic policy in Washington.

South Dakota offers extensive privacy protections for assets held in trusts, including the sealing of court documents and legal proceedings related to the trust. Delaware is a popular place to register limited liability companies, which can include shell companies created specifically to hide assets or financial transactions. Delaware law does not require public disclosure of the names of the owners or members of the LLC.



The trust industry can be lucrative, not only for the wealthy and the businesses that help them protect their assets, but also for government coffers.

In South Dakota, the state bank franchise tax fund balance, which included franchise taxes paid by trust companies, stood at more than $ 44.6 million during the l fiscal year 2020, up from $ 34.7 million the previous year and more than double the balance in 2015.

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



While some members of Congress are calling for a stricter scrutiny of trust companies working with foreign clients, the response to the Delaware Pandora Papers has so far been muted.

Delaware State Department spokesperson Rony Baltazar said the agency was not aware of any calls from lawmakers or tax fairness groups to change the way the state handles registration corporations or trusts.

Federal officials, meanwhile, targeted some privacy protections with the enactment of the Business Transparency Act earlier this year. The law requires many companies to identify their “beneficial owners” who exercise substantial control over an entity, or who own or control at least 25% of the equity interests, with the Financial Crimes Enforcement Network, or FinCEN.

The law aims to ban anonymous shell companies that criminals and foreign officials have used to hide financial transactions and launder money, but it includes exemptions and exceptions. Among other things, the term “beneficial owner” does not apply to a person whose only interest in the entity is an inheritance right.

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