Isegoria

Money has poured out of traditional offshore jurisdictions, such as Switzerland and Jersey, and into a small number of American states, such as Delaware, Nevada, Wyoming, and, above all, South Dakota:

A South Dakotan trust changes all that: it protects assets from claims from ex-spouses, disgruntled business partners, creditors, litigious clients and pretty much anyone else. It won’t protect you from criminal prosecution, but it does prevent information on your assets from leaking out in a way that might spark interest from the police. And it shields your wealth from the government, since South Dakota has no income tax, no inheritance tax and no capital gains tax.

A decade ago, South Dakotan trust companies held $57.3bn in assets. By the end of 2020, that total will have risen to $355.2bn. Those hundreds of billions of dollars are being regulated by a state with a population smaller than Norfolk, a part-time legislature heavily lobbied by trust lawyers, and an administration committed to welcoming as much of the world’s money as it can.

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At the heart of South Dakota’s business success is a crucial but overlooked fact: globalisation is incomplete. In our modern financial system, money travels where its owners like, but laws are still made at a local level. So money inevitably flows to the places where governments offer the lowest taxes and the highest security.

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When Citibank based its credit card business in Sioux Falls, it could charge borrowers any interest rate it liked, and credit cards could become profitable. Thanks to Janklow, Citibank and other major companies came to South Dakota to dodge the restrictions imposed by the other 49 states. And so followed the explosion in consumer finance that has transformed the US and the world. Thanks to Janklow, South Dakota has a financial services industry, and the US has a trillion-dollar credit card debt.

Fresh from having freed wealthy corporations from onerous regulations, Janklow looked around for a way to free wealthy individuals too, and thus came to the decision that would eventually turn South Dakota into a Switzerland for the 21st century. He decided to deregulate trusts.

Trusts are ancient and complex financial instruments that are used to own assets, such as real estate or company stock. Unlike a person, a trust is immortal, which was an attractive prospect for English aristocrats of the Middle Ages who wished to make sure their property remained in their families for ever, and would be secure from any confiscation by the crown. This caused a problem, however. More and more property risked being locked up in trusts, subject to the wishes of long-dead people, which no one could alter. So, in the 17th century, judges fought back by creating the “rule against perpetuities”, which limited the duration of trusts to around a century, and prevented aristocratic families turning their local areas into mini-kingdoms.

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Then Governor Janklow came along. In 1983, he abolished the rule against perpetuities and, from that moment on, property placed in trust in South Dakota would stay there for ever.

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In most jurisdictions, trusts have to benefit someone other than the benefactor – your children, say, or your favourite charity – but in South Dakota, clients can create a trust for the benefit of themselves (indeed, Sun Hongbin is a beneficiary of his own trust). Once two years have passed, the trust is immune from any creditor claiming a share of the assets it contains, no matter the nature of their claim. A South Dakotan trust is secret, too. Court documents relating to it are kept private for ever, to prevent knowledge of its existence from leaking out. (It also has the useful side effect of making it all but impossible for journalists to find out who is using South Dakotan trusts, or what legal challenges to them have been filed.)

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When a whistleblower exposed how his Swiss employer, the banking giant UBS, had hidden billions of dollars for its wealthy clients, the conclusion was explosive: banks were not just exploiting poor people, they were helping rich people dodge taxes, too.

Congress responded with the Financial Assets Tax Compliance Act (Fatca), forcing foreign financial institutions to tell the US government about any American-owned assets on their books. Department of Justice investigations were savage: UBS paid a $780m fine, and its rival Credit Suisse paid $2.6bn, while Wegelin, Switzerland’s oldest bank, collapsed altogether under the strain. The amount of US-owned money in the country plunged, with Credit Suisse losing 85% of its American customers.

The rest of the world, inspired by this example, created a global agreement called the Common Reporting Standard (CRS). Under CRS, countries agreed to exchange information on the assets of each other’s citizens kept in each other’s banks. The tax-evading appeal of places like Jersey, the Bahamas and Liechtenstein evaporated almost immediately, since you could no longer hide your wealth there.

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But the US was not part of CRS, and its own system — Fatca — only gathers information from foreign countries; it does not send information back to them. This loophole was unintentional, but vast: keep your money in Switzerland, and the world knows about it; put it in the US and, if you were clever about it, no one need ever find out. The US was on its way to becoming a truly world-class tax haven.

The Tax Justice Network (TJN) still ranks Switzerland as the most pernicious tax haven in the world in its Financial Secrecy Index, but the US is now in second place and climbing fast, having overtaken the Cayman Islands, Hong Kong and Luxembourg since Fatca was introduced.

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