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Pandora Papers Show Secrecy Behind State Trusts Runs Deep

Oct. 8, 2021, 8:45 AM

More than a dozen states across the country are sheltering billions of dollars in wealth, according to leaked documents in the Pandora papers, but that may represent only a sliver of known existing trusts across the United States due to sweeping state secrecy laws.

The unprecedented leak of financial documents earlier this week cast a bright spotlight on the United States where more than 200 trusts are being held with at least $1 billion in assets. States like South Dakota, Nevada, Florida, Alaska, and Texas were among the most popular destinations to shelter the personal wealth of ultra-wealthy individuals.

Revelations showed a former vice president of the Dominican Republic finalizing several trusts in South Dakota to store his personal wealth and shares of one of the country’s largest sugar producers. The family behind Ecuadorian conglomerate, Isaias Group, were also found to be using the state to hold their assets.

But those disclosures could be a small slice of a much larger and largely unseen labyrinth of trusts scattered across the country. “We don’t even know how many there are—let alone how many assets they have or even who is behind it,” said Andres Knobel, a senior researcher for the Tax Justice Network.

South Dakota—with 81 U.S. trusts—has been arguably the most aggressive in marketing itself as a haven for shielding trust owner’s assets from foreign government, taxes, and even former spouses, catalyzing other states to follow suit.

Pervasive Practices

But such aggressive tax competition among states come with a warning label, says David Lesperance, a managing partner at Lesperance & Associates.

“Assume there’s going to be a whistleblower in every one of these states,” said Lesperance. “So, if you are engaging in something that is nefarious behavior then it’s not a question of if, but when, and are you prepared to deal with it.”

This week’s bombshell suggests that such practices may be far more pervasive in the U.S. than previously known, and that such secret financial arrangements may not only be limited to the superrich.

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“U.S. states are trying to replace those other tax havens and then offer these secrecy provisions, but also this shielding of assets not only for Americans but also people from all over the world,” said Knobel, the author of a paper entitled, Trusts: Weapons of Mass Injustice.

To be sure, trusts can be used for a variety of legitimate reasons like keeping financial matters private or meeting the legal requirements to maintain property in a foreign country.

And while the superrich captured headlines for hiding their assets offshore, any individual taxpayer with some material wealth can create a trust to ensure their assets are safe for their children, or protected from litigation, or even a messy divorce.

“They’re used by people of all different levels of net worth,” said Tom Simmons, a law professor at the University of South Dakota whose specialty is trusts, estate administration and the estate tax.

Susan Wismer, a former Democratic state senator and candidate for governor, was a frequent critic of South Dakota’s dynasty trust regime, but she was powerless to do anything with many of the laws and regulations established long before she arrived in the state Legislature in 2009. And in a Republican-controlled state anxious to accommodate the trust industry, Wismer said she was little more than “a lone voice out in the wilderness.”

Each legislative session brought at least one bill, drafted by trust industry lobbyists, expanding protections and secrecy rules for trustees. Wismer said she tried to raise awareness of South Dakota’s complicity in structures used for tax avoidance and hiding assets for powerful people. Few of her fellow legislators took notice.

“There was never any opposition to this stuff,” said Wismer, who lost reelection last November. “I was always battling windmills.”

Secrecy vs. Privacy

Knobel, and other tax justice advocates maintain the lack of transparency over such trusts leaves a wider door to allow illicit behavior like tax evasion and money laundering, especially in the absence of clear reporting requirements of beneficial owners.

Many countries with reporting requirements to identify a company or trust only cover local companies, says Knobel. For example, Denmark’s beneficial ownership registry only covers Denmark’s companies; it doesn’t cover a company from Panama owned by a Danish individual.

In the U.S., Congress passed a law in January requiring beneficial ownership disclosures but stopped short of including trusts. So, while companies may be required to register with the Internal Revenue Service or Financial Crimes Enforcement Network, individual taxpayers don’t face the same level of transparency. Often, it’s not until a leak or a triggering personal event such as a divorce that brings a trust to light.

Experts like Simmons argue that there is a distinct difference between secrecy and privacy. And in South Dakota, the trust industry is “heavily regulated” to flush out and eliminate things like criminal activity, he says.

“But beyond that, confidentiality about what a trust holds is akin to keeping the details of your bank account private,” said Simmons. “If I were to ask, ‘Where do you bank? What’s your account balance?’ I would say, ‘I don’t have to tell you that.’ That’s privacy.”

Josh Rubenstein, a trusts and estates attorney and national chair of the private wealth department for Katten Muchin Rosenman LLP said cases of illicit activity are rare and regulators “bend over backward to make sure they’re not facilitating tax evasion.”

Attorneys worry a potential legal crackdown on trusts could be over-reaching and unnecessarily jeopardize a family’s right to privacy.

“It’s sort of like going after a gnat with a bazooka,” said Rubenstein. “There are so many more targeted approaches that would protect the legitimate uses of trusts.”

To contact the reporters on this story: Donna Borak in New York at dborak@bloombergindustry.com; Michael Rapoport at mrapoport@bloombergindustry.com; Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Yuri Nagano at ynagano@bloombergtax.com

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