The US, the New Switzerland

States like Delaware, South Dakota and Wyoming have become go-to destinations for criminals, corrupt actors, and people with wealth of dubious origins seeking to park funds. Pandora Papers, 2021

This is the fourth in a series on tax evasion that begins here with how easy it is to do — if you’re rich.

Multiple whistleblowers blew apart the Swiss mystique of being an invulnerable vault of secrecy:

• In 2007, Bradley Birkenfeld revealed a list of thousands of American citizens that held undisclosed bank accounts at Swiss Bank UBS. American citizens are required to disclose foreign assets and value above $10,000 on their FBAR report. Many on the list hadn’t.

• In 2008, computer techie Harvey Faciane disclosed $100 billion of foreign owned assets, including US citizens, in HSBC Switzerland.

• In 2009, former Swiss Bank Julius Baer auditor Rudoplh Elmer released a trove of documents to Wiki leaks.

For a deeper look see: The Department of Justices’ War On Whistleblowers

If Switzerland was no longer the impenetrable vault, where were the tax dodgers going?

In 2017, the International Consortium of Investigative Journalist (ICIJ) released a blockbuster report revealing extensive holdings in tax havens by the wealthy, political figures and celebrities called the Panama Papers (English majors will detect the allusion to the Pentagon Papers).

There was something odd about the data. Now there were no names of American citizen.

Somebody asked New York House rep Carolyn Maloney (D), why not? She replied, “Because we don’t have to go to Panama — we can hide it right here in the US. It’s outrageous.”

Soon others pointed out the new hypocrisy in the US’s supposed fight against offshore tax evasion:

● Peter Cotorceanu, a Swiss tax lawyer agreed with Maloney: “How ironic — no, how perverse — that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour. That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”

● “We’re viewed as hypocrites”, Carl Levin, the retired 36 year veteran Michigan senator agreed, “We go after tax havens and people who launder money … but then we become a haven.”

There are books available overseas promoting the US as the new and most secure tax haven for wealthy foreign citizens. Have a look at the blatant title of Romanian accountant Laslo Kiss’ book, “United States Tax Haven — Uncle Sam Will Fight Your Taxes”.

Could it be true? While the US was publicly leading the charge against Swiss banks driving away the Swiss lucrative customer base for tax relief, were some of its states quietly giving refuge to this new group of huddled masses yearning to breathe free of taxes?

Bloomberg journalist Jesse Drucker saw that Rothschild Wealth Management & Trust was offering a talk on wealth management entitled: “Using US Trusts in International Planning: 10 Amazing Feats to Impress Clients and Colleagues.”

Drucker got a look at a draft of presenter Andrew Penny’s pitch. Penny wrote,

“The US is effectively the biggest tax haven in the world”.

Drucker understood Penny’s message to mean: You can help your tax evading clients move their fortunes to the United States, free of taxes and hidden from their governments.

Drucker was enticed. He bought a ticket. At the seminar, Rothschild presenters said that the money had been flying from the Caymans, Bahamas and the British Virgin Islands and even venerable Switzerland to Nevada, Wyoming and South Dakota.

Penny said he pitched only legal ways to avoid taxes, both US and foreign. He gave a theoretical example of a client you might have from China who didn’t want the Chinese government to know of his assets (this was somehow legal in Penny’s eyes). Advise him to put assets into a Nevada LLC, owned by a Nevada trust. They would generate no US tax returns. Any forms the IRS would receive would result in “no meaningful information” to exchange under any possible tax information exchange agreements between any foreign country and the US.

Emma Rees of Rothschild’s explained it’s all legal. We have lawyers review all files to ensure the schemes are in full compliance with tax laws.

With eerie foreshadowing of the Pandora Papers, a co-presenter was Alice Rokahr of Trident Trust’s South Dakota branch.

Trident’s Website promotes South Dakota as the place for impregnable secrecy:

“South Dakota is frequently ranked the number one trust jurisdiction in the United States. It is recognized for its modern trust laws, which include powerful privacy, asset protection provisions and the ability to establish dynastic trusts for multi-generational planning.”

Rokahr said there is a legitimate need for secrecy. Confidential accounts that hide wealth, whether in the US, Switzerland, or elsewhere, protect against kidnappings or extortion in their owners’ home countries.

Lame reasoning. For kidnappers, there are enough wealthy people who like to flash their affluence: huge estate homes, chauffeur driven limousines, yachts, memberships at exclusive clubs and private jets. They don’t try to hide their wealth from the public; they flaunt it.

The Pandora Papers: How Offshore Became Onshore

In October, 2021, four years after the Panama Papers, the ICIJ published The Pandora Papers disclosing:

● 206 US-based trusts holding more than $1 billion in combined assets linked to 41 countries.

● South Dakota as the home of more trusts named in the leak than any other US state

● Nevada, Wyoming and Delaware as competitors for the wealth hiding industry

According to the Washington Post, the document leak came mostly from the Sioux Falls office of Trident Trust. In a written statement to the WaPo, Trident said it is committed to compliance with all applicable regulations and routinely cooperates with authorities. The company declined to answer questions about its clients.

The Pandora Paper’s data reveals:

● Billionaires who come from 45 countries, with the largest number from Russia (52), Brazil (15), the U.K. (13) and Israel (10).

● Nearly 30 of those trusts — many of which were in South Dakota — were linked to entities and individuals accused of criminal activity and human rights abuses.

There’s much more money held in South Dakota trusts then mentioned in the Pandora Papers. The Guardian recited an excerpt from South Dakota’s 2020 report:

“Its 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.”

Why Trusts Are a Serious Problem

Trust companies like Trident that administer trusts are public entities and formed somewhat like a bank. The trusts that they administer are not public but private confidentially in a lawyer’s office. A common example of a private trust would be:

● a mother (the settlor) gives $1 million

● to a trustee who has control over the money

● for the benefit of her two children (the beneficiaries).

Trusts can be created in a lawyer’s office with only hardcopies given to the clients and digital copies kept in an encrypted file on a computer that is never connected to the Internet.

Trusts are used in a chain of ownership of shell corporations, each of which is incorporated in several diverse, secrecy jurisdictions. Only the trustee’s name will appear on any data related to the corporation such as director or shareholder. And there’s no way of discovering that the person named is a trustee. It brings the investigation to a full stop.

The law in most countries only permits a search warrant if the investigators have reasonable grounds, which means some evidence, not speculation, to believe there are documents related to the commission of a crime in the lawyer’s office. The secret trust creates the perfect Catch22 for the investigators. The investigators can’t get the slightest information that the named person is a trustee because it is never stored in a place where they can get it. Even a hacker cannot reach an air gapped computer. So, the only hope for disclosure is by a whistleblower.

More on how trusts are used in a chain of shell corporations to hide the true owner: Easy Tax Evasion.

The Era of the Perpetual Trust Fund Babies

You might ask: why the advantage of secret trusts in states recommended by the Rothschild Bank? Why not do any of this in other states? Good questions.

There are a few reasons.

The common law puts restrictions on the lifecycle of a trust. As an early English judge said, “we should not let the dead rule us from their graves.” Therefore, the judges created a law to prevent trusts from lasting in ‘perpetuity’, to use the now outdated term the judges of the time favored.

But these laws had the effect of letting the third generation have access to the entire family inheritance. A saying sprang up: The first generation makes it, the second generation spends it, and the third generation loses it.

● The new tax haven states changed that law to allow private trusts to exist in perpetuity thus more effective in creating dynastic wealth.

● The private trust is not administered by a family friend, but professional management at a trust company.

Additionally, there is no tax on the trust income, so no filing by it with the IRS and thus no record of it with the US government. The IRS would not have information to share of the trust’s existence or taxable gains with a foreign government under any tax information exchange agreement.

While the trusts do not pay tax, the trust company does on its profits and provides local employment. Both wins for the state because it wouldn’t get the trust income otherwise.