South Dakota is sheltering billions of dollars in wealth, some linked to individuals and companiesaccused of financial crimes or serious wrongdoing, according to documents in the Pandora papers.
The files suggest the US midwestern state now rivals Switzerland, Panama, the Cayman Islands and other famous tax havens as a premier venue for the international rich seeking to protect their assets from local taxes or the authorities.
Wealthy foreign individuals and their families are moving millions of dollars to South Dakota trust funds, which enjoy some of the world’s most powerful legal protections from taxes, creditors and prying eyes.
The US has previously faced international criticism over the ease with which shell companies – which can be used to perpetrate tax fraud and financial crimes – can be incorporated in the state of Delaware.
But the Pandora papers – a leak of 11.9m files from 14 different offshore services providers around the world – reveal how the US is also emerging as a key location for trusts, which are typically used to shelter the personal wealth of super-rich individuals rather than multinationals.
The International Consortium of Investigative Journalists (ICIJ) and the Washington Post said their analysis of the data had identified 28 trusts in the US tied to individuals or companiespreviously accused of misconduct overseas.
The disclosures will be a major embarrassment for the US president, Joe Biden, who upon entering office pledged to “lead efforts internationally to bring transparency to the global financial system”.
The papers were leaked to the ICIJ, a US-based journalism nonprofit, which shared access to them with the Guardian, the BBC, the Washington Post and other media partners around the world.
According to a 2020 state report, South Dakota’s burgeoning trust industry holds an estimated $367bn (£273bn) in assets, a sum approaching the annual economic output of the Republic of Ireland – up from $75.5bn in 2011. The phenomenal growth has been supercharged by the state’s aggressive drive to attract money by shielding trust owners’ assets from foreign governments, taxes and even former spouses.
South Dakota’s moves have inspired other states to “liberalise” their trust regulations, a phenomenon that helped the US overtake Switzerland in the Tax Justice Network’s 2020 global ranking of countries most complicit in helping individuals hide their finances from the rule of law.
More than 200 US trusts appear in the Pandora papers data, sheltering at least $1bn. While South Dakota emerges from the leak as the most popular location, with 81 trusts, Florida, Delaware, Texas and Nevada account for dozens more.
The trusts appear to be catering mostly to non-US citizens. Analysis by the ICIJ linked the trusts to individuals in 40 different countries outside of the US. Twenty-eight of the trusts appeared to be linked to individuals or companies accused of misconduct overseas, according to the ICIJ and the Washington Post.
Money laundering allegations
Among those for whom South Dakotan trust firms have acted are a Colombian textile magnate who was previously fined $20m by US authorities investigating a major money-laundering network.
José Douer-Ambar set up a South Dakota trust in 2013, according to the files. However, less than a decade earlier in 2004, US, UK and Canadian authorities had announced the dismantling of a massive Colombian money-laundering ring in which Douer had been partly implicated.
The Colombian Black Market Peso Exchange (BMPE) laundered millions of dollars accrued by narcotics traffickers. US authorities alleged that Douer had repeatedly purchased millions of dollars in the BMPE system over a period of years. Douer, who died last year, agreed to forfeit $20m in connection with a deferred prosecution agreement and the settlement of a civil asset forfeiture action.
Prior to establishing the new trust, Douer’s trust provider made inquiries about his history. Douer’s representative described his involvement in the BMPE scheme as an “unfortunate experience” in a reply to the offshore provider.
“The case arose from a transfer of US$190,000.00 to a bank in the UK using a broker who had been highly recommended to Mr Douer as an honest person by other wealthy Colombians,” the representative said. “Unknown to Mr Douer the broker was unlicensed and had also received US dollars from persons involved in narcotraficking and that led to Mr Douer’s problems.”
That explanation appears to have been sufficient for the provider. Although the total sum sheltered in the trust is unclear, email correspondence suggests a previous entity linked to Douer contained as much as $100m.
The state capitol building in Pierre, South Dakota. Photograph: ChrisBoswell/Getty Images/iStockphoto
In a separate 2019 case, a trust was settled by the family of Carlos Morales, the former vice-president of the Dominican Republic and chief executive of Central Romana, the largest sugar producer in the Dominican Republic. The trusts control assets of at least $14m.Morales died in 2014.
Two dozen plaintiffs tried to sue Central Romana via its US shareholder last year, accusing it of forcing workers and their families off their land at gunpoint and destroying their homes. In a separate legal case, Central Romana was accused of exposing workers to toxic chemicals while working in fields without protective gear.
A spokesperson for Central Romana, Jorge Sturla, said US courts had dismissed both of the legal cases against the company. He said all employees were provided with PPE and that the firm had been defending its land against “squatters” and had never illegally evicted people.Advertisementhttps://d9750e415d2ea2d042075fb64ef593d9.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
Records in the Pandora papers show that the Morales family moved money to South Dakota in 2019, after the government of the Bahamas mandated the creation of an ownership database for legal entities.
A lawyer for the Morales family told the ICIJ and the Washington Post they had never been involved in the operations of Central Romana. They did not respond to questions about why the family’s assets had been shifted from the Bahamas.
In a ‘race to the bottom’
The family behind the Isaias Group, an Ecuadorian conglomerate with interests in real estate, media companies and sugar production, are also using South Dakota to hold their assets.
Estéfano Isaías, who co-owns the Isaias Group along with his brothers, is named as the beneficial owner of three trusts. Although the family is established in the US, and even made donations to the Obama campaign, it has also attracted controversy.
Estéfano’s brothers, Roberto and William, were convicted of embezzlement by an Ecuadorian court in 2012 following the collapse of Filanbanco, then one of the country’s largest banks. The collapse wiped out the savings of ten of thousands of its customers and the brothers fled to Miami in 1999.
The brothers, who were briefly detained by the federal Immigration and Customs Enforcement agency (ICE) in 2019 and released after posting a $1m bond, have long denied any wrongdoing in the Filanbanco debacle.
In a statement to the ICIJ, the Isaías brothers said the allegations and charges against them had been contrived by Ecuador’s former president for political reasons.
“Roberto and William Isaías have been victims of unprecedented political persecution by Ecuador’s corrupt authoritarian regime, which included the illegal seizure of all their assets and a show trial in absentia,” they said.
In a statement to the ICIJ and the Washington Post, Bret Afdahl, the director of the South Dakota division of banking, which regulates financial services in the state, cited various measures his department could use in order to ensure compliance with state laws. He said trust company providers were vetted before they could begin operating.
Chuck Collins, the author of The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions and the director of the programme on inequality at the Institute for Policy Studies, said the situation with regard to South Dakota was “an embarrassment” for the US.
“We are the weak link. And South Dakota is in a race to the bottom to be the weakest link on trusts,” said Collins. “We have seen the hidden wealth apparatus but it is always considered offshore. The more we understand that it’s onshore, the US is a weak link and we are now the magnet for kleptocratic capital the better for national understanding and the greater the potential for national legislation.”