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South Dakota Trusts and the Oligarchs

by Jeff Jacobsen


The war in Ukraine has put the spotlight on Russian oligarchs. Nations around the world have chosen to sanction these oligarchs, who support Putin's stranglehold on Russia and his attempt to steal another country. However, there are many ways for the oligarchs to legally protect their wealth or even hide it from seizure. Trusts are one such way. A trust is a legal transaction where a person hands over money or property to a trustee. The trustee is a designated person who will then be in charge of the grantor's assets, in an agreed upon manner. Trusts are designed so the grantor assigns those assets to a beneficiary. There are many permutations of trusts that define the powers of the trustee and beneficiary to control the assets. The grantor, such as an oligarch, can then declare that he no longer owns these assets, yet he has designated who eventually will benefit from them.

A recent example of this was the Russian oligarch Alisher Usmanov, who placed his home and a mansion into a trust just before the British government came to seize them. Mr. Usmanov's spokesman said he no longer owned the properties, “Nor was he able to manage them or deal with their sale, but could only use them on a rental basis.”

Who would want to take advantage of a trust? Those who are in the business point to perfectly legitimate uses of trusts to explain why they exist and who should use them. Kiplinger lists several, including;

  • To avoid court-supervised probate of trust assets and be private;

  • To manage and control spending and investments to protect beneficiaries from poor judgment and waste;

  • To protect trust assets from the beneficiaries’ creditors;

  • To protect premarital assets from division between divorcing spouses;

  • To set aside funds to support the grantor when incapacitated.

"'A trust is the single most commonly used vehicle for providing tax benefits to wealthy people,' Ray Madoff, a professor at Boston College who specializes in estate law, said in an email to CBS MoneyWatch. 'What it does is enable you to chop up interest in a way that avoids taxation and creditors, but still allow you to live off the money.'” Obviously, this system is designed for those who have enough money to make hiring lawyers and specialists to set up a trust worthwhile.

Let's now turn to South Dakota trust law. Governor Bill Janklow was the main instigator of our current trust law. He wanted to help the state's economy by making it attractive for the wealthy to place their assets here. This would provide jobs for those who establish and run trusts, and the lawyers who deal with the minutia involved. They would charge fees for their services. The state would get a cut.  A Governor's Task Force populated by these very same people would meet annually and give recommendations to the state legislature on how to write and tweak the laws. And as former representative Susan Wismer stated, “Legislators do not have a clue what it is that they are really voting on other than that these attorneys that deal with big money are telling them that it’s good for South Dakota’s economy to do this.”  This is the very definition of the foxes guarding the hen house.

South Dakota wrote their trust laws so they would be more appealing to the wealthy than the laws in other states, and even other countries. They allowed trusts to last forever instead of ending at a certain time. They allowed for almost complete secrecy over who owns a trust, or even whether a trust exists. They allowed the grantor to be his own beneficiary. This worked, and many wealthy started opening trusts in our state.

Have Russian oligarchs parked their money in South Dakota trusts? This is a question I have been trying to answer. The federal government has just sweetened the pot by offering a $5 million reward for whomever could uncover hidden oligarch riches. I am not a lawyer, so reading the actual law is difficult for me since it is hard to parse all the dense legalese. So I have read up as much as possible. But many government officials do not seem to be able to answer this question either. Senator John Thune was asked on SDPB whether there was any hidden oligarch money in South Dakota. He replied hopefully “clearly there are ways of ascertaining, I think, and disclosing some of these people who would be hiding assets... I don't think for a minute that, if the will is there, there isn't a way to expose these people...” one state senator responded to my inquiry; “In my questioning of representatives from the trust industry, I am told that all clients are pre-screened and researched to make sure their money was not illegally obtained. Clients are not accepted if they are on any lists.” Once again, the foxes are guarding the hen house, but maybe the senator has trouble reading legalese too. Governor Kristi Noem on KELO was certain that there was no Russian oligarch money in South Dakota, but she also wanted to make sure that trust privacy is kept secure.

I've read quite a bit of media coverage of our trust laws, and from this I conclude that our representatives don't really know how opaque our state trust laws are, nor quite how they work. PBS' Frontline stated that “Under current South Dakota law, trusts can be held secretly.” NBC News stated that “it is virtually impossible to discover who has established a South Dakota trust, who benefits from it or whether legal challenges to it have been filed.” The Guardian newspaper states that “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.”  So it appears to me that Russian oligarchs could indeed safely hide their assets in a South Dakota trust, because that's exactly how we set the trusts up.

The Pandora Papers are a collection of leaked documents from trusts from several countries, and South Dakota. Here we actually can have a tiny but interesting view of what is going on in trust land. While no illegality was uncovered from these papers, it did show some interesting people with South Dakota trusts, including “A Colombian textile magnate caught in a scheme to launder the proceeds of an international drug ring, an orange juice mogul who settled with authorities in Brazil for allegedly colluding to underpay local farmers and family members of the former president of a sugar producer in the Dominican Republic that has been accused of exploiting laborers and forcibly evicting families from their homes.” According to PBS Frontline, “nearly 30 South Dakota-based trusts held assets connected to people or companies accused of fraud, bribery or human rights abuses.” But it takes a leak for us to peer however incompletely into these trusts.

Casey Michel, author of American Kleptocracy: How the U.S. Created the World's Greatest Money Laundering Scheme in History, stated in an interview on SDPB:

And beyond that in the U.S., there are no anti money–laundering provisions for lawyers when they're setting up these vehicles, when they're setting up these trusts and shell companies. They have nothing they have to do in terms of checking the source of the income for their clients. They can work with whoever they want, for as long as they want.”

In April, 2022 the yacht Amadea fled from Mexico to Fiji to avoid being seized by sanctions against Russian oligarchs. The United States went to court in Fiji to seize the yacht, but it was difficult to prove who actually owned it. The US claimed that Suleiman Kerimov is the actual owner of the Amadea. But then “Lawyers for the 107-metre motor yacht's registered owner, Millemarin Investments, have denied it is ultimately owned by Kerimov. They told the court it was owned by another Russian oligarch, Eduard Khudainatov, the former president of oil giant Rosneft, who has not been sanctioned, media reported.”

Why would it be so difficult to find out who owns a yacht? Because the rich take advantage of corporate and trust law to hide their ownership. Trusts, such as in South Dakota, do not have to declare who the grantor is. Offshore specialists create shell corporations that a trust deeds a yacht to, hiding the actual owner in yet another way. If you make a chain of shell corporations and trusts, each with legal secrecy rules behind them, it is next to impossible to see who is at the other end of that maze. So the US had to follow that maze to find the rightful owner.

We've grown up hearing about Switzerland being the country to go to if you want to hide ill-gotten wealth. The Bahamas is the place to go to set up a shell corporation with strong secrecy guarantees. We look derisively at such countries and businesses that help bad actors keep their wealth safe from authorities. And yet, South Dakota is one of those places now, thanks to our trust laws.

South Dakota trusts are governed by law and “guidances” from the state Division of Banking. The state codified laws, found in Title 55 (Title 51A-6A covers creation of a trust), mostly explain the rules for running a trust, including obligations between the grantor, trustee, and beneficiary. While many of these laws are common sense and expected, some seem almost outlandish. Consider this:

“Expenses incurred by trustee in performance of trust—Reimbursement. A trustee, including a former trustee, is entitled to the repayment, out of the trust property, of all expenses actually and properly incurred by the trustee in the performance of the trustee's duties. The trustee is entitled to the repayment of even unlawful expenditures, if the expenditures were productive of actual benefit to the estate. “ [55-3-13.] My non-lawyer reading of this is that even though a trustee has broken the law in running a trust, so long as he made money for the trust, he's entitled to compensation. Sweet deal, huh?

South Dakota's Division of Banking has “guidances” for trusts that are “derived from best business practices utilized by South Dakota-regulated financial institutions to mitigate business and fiduciary risks” and thus are not laws. The apparent stick behind failure to follow these guidances is that “deviations from the guidance could heighten the institution’s overall risk profile which may negatively impact regulatory assessments” [ibid]. This sounds a bit less risky than breaking a law.

The Division of Banking's “Foreign Trust Acceptance and Oversight Guidance” is the clearest explanation of how trusts are to perform “due diligence” in making sure that their potential customer is not a bad actor, noting that “there is also a risk that these types of trusts are created to conceal the sources and uses of funds, the identity of beneficial and legal owners, or to avoid foreign reporting requirements.“ How to avoid this problem? First, “financial institutions must collect the name, date of birth, address, and identification number for non-U.S. Persons.” If a foreign trust is trying to set up a South Dakota trust, then “enhanced due diligence” is called upon. But, at the same time, the guidance says that the trustee of the foreign trust can count as the owner [note I am not a lawyer but that's how I read it]. If a legal entity like a company or corporation is setting up the trust, then the “beneficial owner” must be identified. A beneficial owner is someone who owns at least 25% of the equity interests, or has “significant responsibility to control” the entity. It only takes a minute or two to think of ways that would make this “guidance” pretty much useless as far as keeping bad actors out. And remember too that the penalty for ignoring this “guidance” is that you may get a bad review from the Division of Banking some time in the future.

Can Russian oligarchs have money stashed in South Dakota trusts? No one has asnswered this definitively yet. And that is the problem. The public cannot know. And apparently our representatives cannot know. The system must be changed. Fortunately, there is a proposed federal law called the Enablers Act that is being proposed. “The ENABLERS Act would impose stronger due diligence requirements on such U.S.-based middlemen, to ensure that the United States never again facilitates the corruption and dictatorship we claim to oppose by giving kleptocrats and criminals a safe haven for the money they steal from their people. In turn, it would protect Americans from inflated real estate prices, job loss, human trafficking, and influence peddling. “

The Tax Justice Network has compiled “10 measures to expose sanctioned Russian oligarchs' hidden wealth". These include “4. Public disclosure. Publish all asset ownership information (eg beneficial ownership and shareholder information held on the commercial register) or at least share information with a committee of volunteers from the public sector (eg journalists and civil society organisations) to allow the public to help in the detection of assets potentially held by persons subject to sanctions. “

Federal law is probably the best way to bring sunshine to trusts, but also state law should be changed as well. It is distasteful for the wealthy to gain such huge benefits from trusts while the average South Dakotan cannot even imagine there is a legal way to hide money from creditors and the tax man. All South Dakotans should be on a level playing field when it comes to such things. And we should not be giving outsiders such incredible asset protection when it can easily be misused by Russian oligarchs and other bad actors.

Governor Bill Janklow wanted to put South Dakota on the map with new trust laws. He has, but mostly by tarnishing our reputation. Very few jobs are generated in South Dakota from these trusts. It is not a good deal for our state. Let's fix this problem now, and maybe even collect $5 million along the way.

To summarize what is wrong with South Dakota trust law:

It makes a 2-tier economic system where the wealthy have many tools to hide and protect their assets that the average citizen has no access to and probably has never heard of.

It keeps assets away from legitimate concerns such as tax assessors, divorce courts, child support rulings, court judgements, etc.

It gives South Dakota a bad name, piling us in with Switzerland, the Bahamas, and other countries that help hide the wealth of bad actors.

It twists even normal trust law simply to make South Dakota a more attractive place for the wealthy to put their assets. The benefit for South Dakota is a small amount of tax income and a few jobs.

It is essentially run by the industry itself, where the Governor's Task Force advises the legislature what updates to trust law would make things better for the industry. Many legislators find it difficult to understand the ins and outs of the industry, so they rely on the Task Force to know what to do.

 

FURTHER INFORMATION:

Vox 2023 article

Axios 2021 article

Forbes 2021 article

PBS Frontline

SDPB interviews Casey Michel

Tax Justice Network

Tracking Russian Oligarchs

International Consortium of Investigative Journalists

US Aid: "Dekleptification Guide"

whistleblower speaks out

South Dakota Trust Company explains its side

Canada also struggles with a similar problem