WASHINGTON — A massive new leak of secret financial documents highlights how some smaller U.S. states have become magnets for the world’s wealthiest people to hide their fortunes, including those accused of crimes and human rights abuses.
On Oct. 3, the International Consortium of Investigative Journalists and news organizations worldwide began publishing the Pandora Papers , based on millions of leaked records from more than a dozen global firms offering offshore financial services. The confidential documents revealed previously unknown details about how hundreds of public figures and politicians from countries across the globe move their money to offshore havens.
Though certain tropical island nations and U.S. states such as Delaware have been more commonly known for offering financial secrecy to questionable international clientele, the Pandora Papers put in stark relief lesser-known trends that experts have previously identified — particularly that South Dakota has become a major player in the offshore game through the legal but secretive trust services it offers, attracting unsavory customers in the process.
“The only thing that is new is the publication of these specific papers,” Jim Richards, a former prosecutor and head of financial crimes risk management at Wells Fargo, told the Washington Examiner. “It’s not a surprise to anyone who knows anything about this that Nevada registered agents and Wyoming LLCs and South Dakota trusts all have attributes that, if all the actors aren’t playing by the rules, will encourage financial crime, kleptocracy, etc.”
South Dakota, a state of fewer than 1 million residents, is now home to $360 billion in assets in trusts, the ICIJ and Washington Post reported , and one trust company alone has clients from 54 countries. “The industry’s rapid expansion was led by a group of trust company insiders, who, year after year, pitched legislative proposals that were highly appealing to customers in the United States and abroad: protecting trusts from creditors, from taxing authorities, from foreign governments,” the publications wrote.
Another South Dakota trust company, Trident, set up trusts for the family of the former president of a Dominican sugar producer accused of human rights abuses, the publications found, shielding millions in assets. Trident also set up large trusts for a Colombian textile tycoon who paid the U.S. government $20 million as part of an investigation into a Colombian drug and money laundering operation, as well as a powerful Guatemalan whose family business was accused by the U.S. of labor abuses and polluting an important river in the Central American country.
But as Richards and the ICIJ note, it’s not just South Dakota. States such as Nevada and Wyoming have also become attractive places for the world’s most powerful people, however problematic, to store their funds.
“Wyoming is actually the original home of the limited liability company in the United States,” said Richards, who now runs financial compliance consulting firm RegTech. “They borrowed it from Panama, so Wyoming is somewhat famous for establishing LLCs.”
Wyoming, Nevada, and other states also offer shell companies and “shelf” companies, which experts have said are prone to abuse.
“These are shell companies that were officially incorporated some time ago but have been sitting inactive — ‘on the shelf’ — for many years, providing the appearance of a business history,” wrote Moyara Ruehsen, a professor at the Middlebury Institute of International Studies who specializes in financial crime, and Leonard Spector, a nuclear nonproliferation expert, in 2015. “This can give a patina of legitimacy to what might otherwise be easily detected as a sham corporation.
“Reflecting the value of such camouflage, shelf corporations are more expensive than simple shell companies: A new shell company might cost as little as $300 to set up, whereas acquiring a five-year-old shelf company might cost $3,000,” they wrote in the Bulletin of the Atomic Scientists.
Though both shell and shelf companies have legitimate purposes, they can be exploited by those looking to hide ill-gotten gains. But Richards said the states have a strong financial incentive to keep the practice going because they profit from the fees they charge to create companies and trusts.
“It’s what they call a race to the bottom,” Richards said. “The lesser the standards, the more trusts and LLCs they’ll get.”
Graham Barrow, a British expert in fighting money laundering, wrote on LinkedIn that the Pandora Papers “deeply reinforce what we already know.”
“Offshore centers and complex legal entity structures allow rich or influential people (almost exclusively men) to hide wealth that they would find hard to justify were it disclosed transparently,” Barrow wrote. He has worked with major European banks, including HSBC, Societe Generale, and Nordea. “Too many institutions, be they financial, legal, accounting or corporate service providers, are still far too willing to turn a blind eye to make a fast buck.”
In a 2016 report , the Financial Action Task Force, an international regulatory body, found that the U.S. was “non-compliant” with several recommendations related to oversight of businesses outside traditional financial institutions, identifying it among the “significant gaps” in the American regulatory regime.
“The U.S. is one of a very few major countries in the world that does not require these gatekeepers to adhere to anti-money laundering laws,” Richards said.
The Pandora Papers are the latest in a series of projects led by ICIJ that have relied on secret documents to uncover financial wrongdoing worldwide, such as the Panama Papers in 2016 and the FinCEN Files last year.
“The question I think within the financial crimes community is, this layering on of disclosure after disclosure … is it accumulating enough weight that it will eventually lead to change?” Richards said. “And I think the community feels that it is.”
Last year, the U.S. enacted broad anti-money laundering reforms following the publication of the FinCEN Files by BuzzFeed News and ICIJ, which was based on leaked Treasury Department records that showed how banks and the U.S. government stand by as criminals, kleptocrats, and drug kingpins move their money through the financial system.
And already, members of Congress have introduced legislation to address some of the issues identified in the Pandora Papers. On Oct. 6, a bipartisan group of lawmakers introduced the Enablers Act , which would extend due diligence requirements and suspicious activity reporting beyond the banks to accounting, real estate, and law firms that set up investment vehicles such as trusts.
“If we make banks report dirty money but allow law, real estate, and accounting firms to look the other way, that creates a loophole that crooks and kleptocrats can sail a yacht through,” New Jersey Rep. Tom Malinowski, a Democrat, said in the press release. “Our bill closes that loophole and encourages the administration to move in the same direction.”
“Dictatorships like the Castro regime in Cuba, the Maduro regime in Venezuela, and the Ortega regime in Nicaragua regularly use enablers to facilitate the movement of stolen assets into the United States,” Florida Rep. Maria Elvira Salazar, a Republican, said in the release. “These kleptocrats rob their people and undermine democracy. It’s time to crack down on this manipulation and stand with the victims of corruption who cry out for freedom from this oppression.”