How Tax Haven States Enable Billionaires to Hide Trillions

How Tax Haven States Enable Billionaires to Hide Trillions

How Tax Haven States Enable Billionaires to Hide Trillions

The US has now become the global center for money hiding and illicit wealth storage.

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As he prepared to take office, President Joe Biden called out corporate corruption as a threat to national security. “I will lead efforts internationally to bring transparency to the global financial system, go after illicit tax havens, seize stolen assets, and make it more difficult for leaders who steal from their people to hide behind anonymous front companies,” Biden wrote in Foreign Policy.

But if he intends to crack down, he should start with a long look in the mirror. The United States has now become the global center for money hiding and illicit wealth storage. And Delaware, the state Biden represented in the Senate for 36 years, is the go-to destination for plutocratic tax dodgers and criminal money launderers.

It’s tempting to believe illicit finance is an “offshore problem,” especially because of the fine investigative reporting focused on leaks in offshore tax havens from Panama to Bermuda. But in the last decade, the United States has become the premiere global destination for hidden wealth and kleptocratic capital. According to the biennial Financial Secrecy Index 2020, produced by the UK-based Tax Justice Network, it is now the world’s second largest tax haven, moving ahead of Switzerland. Only the Cayman Islands are a more porous secrecy jurisdiction than the United States, which now accounts for over 21 percent of offshore global services.

This hiding activity—shell companies, offshore accounts, trust creation—has accelerated as wealth has concentrated in recent decades. An estimated $24 trillion to $36 trillion in wealth, controlled by the planet’s wealthiest 0.1 percent, is now hidden in various mechanisms.

Onshore Tax Havens

Starting in 2009, the Obama administration made it harder for US citizens to hide money in foreign banks, passing laws like the Foreign Accounts Tax Compliance Act and entering into international treaties to require global banks to meet US reporting standards. This discouraged the use of the storied “Swiss Bank account” and other offshore banks for US nationals.

At the same time, member countries of the European Union and OECD agreed to high levels of financial transparency, including “country-by-country” reporting standards on movements of funds and disclosure of corporate beneficial ownership.

The problem was that the United States didn’t reciprocate. Foreigners shifting funds to this country had no comparable reporting requirements. This was partly made possible by our federalist system of government, which allows states like Delaware and South Dakota to compete in a race to the bottom to lower disclosure standards and create conditions for anonymous shell companies and dynasty trusts favored by the world’s wealthy.

And driving this process is a growing “aealth Defense Industry,” the subject of my new book, The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions. These professional money managers, tax attorneys, and accountants are essential to aiding the world’s wealthy in a global wealth vanishing act. In the United States, they worked to bring some of common offshore wealth hiding tools back home.

For example, in the area of “asset protection trusts,” an insidious innovation that allows the rich to mask ownership, offshore jurisdictions such as Nevis, the Cook Islands, the Cayman Islands, and the British Virgin Islands have been competing for decades in manipulating and mutating the trust form. Not to be outdone, several US states, such as Alaska, Nevada, South Dakota, and Delaware, have joined the low-accountability arms race in attempts to bring the advantages of trust manipulation “onshore.” These wealth defender claim they are “just obeying the law,” but some are actively involved in creating new legal mechanisms and blocking fixes to the current porous system.

If you are a Russian oligarch, a Chinese billionaire, or a dictator from a resource-rich nation in the Global South, and you need to get your money out of your home country, the USA is now your destination to park and hide large amounts of wealth. And as a global movement to tax billionaires to pay for pandemic recover emerges, it is now a weak link in the global system of transparency and accountability.

Shell companies incorporated in Delaware and trust companies in South Dakota provide powerful pathways to subvert law enforcement. It is through vehicles like these that billions and probably trillions of global wealth are being funneled into the country.

Delaware and Shell Companies

As the premiere secrecy jurisdiction in the country, Delaware is the weakest link in the US effort to institute transparency reforms. Several other states have attempted to mimic Delaware, including Wyoming, South Dakota, and Nevada.

But there is nothing quite like Delaware. Transparency expert Richard Murphy believes Delaware is the largest source of anonymous shell entities in the world. As Leslie Wayne observed in The New York Times, “Big corporations, small-time businesses, rogues, scoundrels and worse—all have turned up at Delaware addresses in hopes of minimizing taxes, skirting regulations, plying friendly courts or, when needed, covering their tracks.”

From its founding, Delaware built a large corporation registration service industry—and the professionals from the Wealth Defense Industry have labored to protect it. This includes a corporate-friendly judiciary, the Delaware Chancery Court, which rapidly dispatches challenges to corporate rule.

In the last several years, however, things have gotten embarrassing for President Biden’s home state. A dizzying amount of criminal activity has been traced to Delaware limited liability companies (LLCs) with no requirements to disclose real owners. The company behind the notorious child sex trafficking and prostitution website Backpage.com was a Delaware LLC. Once known as the “world’s top online brothel,” the website was involved in nearly three-quarters of the 10,000 child trafficking reports received annually by the National Center for Missing and Exploited Children. Other scandals involving Delaware shell companies include Mexican narco-trafficker El Chapo, a huge embezzlement scandal involving a Malaysian sovereign wealth fund, the Madoff securities fraud and Ponzi scheme, and other shady narco-trafficking activities.

Special counsel Robert Mueller found that former Trump campaign chairman Paul Manafort and political consultant Rick Gates deployed nine Delaware LLCs and corporations to hide millions in payments from Ukraine from US officials. When candidate Donald Trump’s former attorney and fixer Michael Cohen was asked to channel $130,000 in hush money to porn star Stormy Daniels before the 2016 election, he used a Delaware registered LLC to facilitate the transaction. An alarming number of modern crime stories can trace their corporate structures back to Delaware.

Nearly half of all US corporations are registered in Delaware. There are now more corporations than people, with 1.3 million entities and a state population of 960,000. In 2017 alone, over 198,000 entities were formed, more than half of them as one of Delaware’s famous limited liability companies. One building, located at 1209 Orange Street in Wilmington, is the mail drop for over 285,000 companies.

The industry generates $1.3 billion in direct annual revenue for Delaware, about 28 percent of the state’s budget. Add in tax revenue from the wealth defense industry and the 8 to ten percent of Delaware’s revenue—roughly half a billion dollars a year—that comes from recovering abandoned property, and effectively half the state’s tax dollars come from “imported money.” Delaware should be renamed the “First Freeloader State.”

The Dynasty Trust Industry

Trusts are an essential component of the wealth hiding apparatus. There may be some legitimate purposes to trusts, such as holding funds for a person with special needs. The problem begins when the very wealthy—and their wealth defense enablers—deliberately design opaque rules and legal structures that fog up the question of ownership. Let’s be clear: They have done this with the sole intention of sequestering and protecting their client’s wealth from tax collectors and other legitimate claimants.

South Dakota has built an industry around creating trusts for dynastically wealthy families to avoid estate and other forms of taxation. I learned a lot from sitting in on a meeting of the Sioux Falls Rotary Club in South Dakota. The guest speaker, Matt Tobin, gave a talk titled, “Overview of South Dakota’s Trust Industry.”

“We help dynastic, multigenerational families. Think like the Rockefellers,” said Tobin. “These are mostly families with more than $1 billion in wealth, second- and third-generation families.”

Tobin works for the South Dakota Trust Company, a financial services firm with 43 trust company partners, “some public but mostly private family trust companies and family offices.” Tobin also spoke as a board member of the South Dakota Trust Association, representing more than a hundred trust companies and a growing state-based Wealth Defense Industry employing 500 people. In 2010, these trust companies managed a total of $57 billion. By 2020, they were managing over $350 billion.

Tobin told the Rotarians a story that was intended to be a folksy story of local entrepreneurship. What I heard was a parable of a state legislature being captured by a tiny financial services sector and turned into a global mecca for wealth hiding.

In 1980, a Wisconsin lawyer representing a wealthy family moved their trusts to South Dakota to take advantage of weak regulation and no state income tax, dodging over $12 million in Wisconsin income taxes. This lawyer lobbied South Dakota governor Bill Janklow to repeal the state’s “rule against perpetuities” to make the state the “top jurisdiction for personal trusts.”

The rule, in the words of journalist Nicholas Shaxson, is “an arcane but powerful democratic curb to stop large concentrations of wealth from passing down family bloodlines from generation to generation inside trusts.” The state repealed its “rule against perpetuities,” which the Trust Association described as opening doors “for South Dakota trust companies and banks to provide a significant added benefit to their customers.” That benefit is the elixir of immortality for dynastic wealth.

Under Janklow, the state was already rewriting its laws for Citibank. In 1980, the state also eliminated its New Deal–era anti-usury laws, passed in the 1930s to prevent loan sharks, predatory lending, and the charging of exorbitant interest rates. This is why most major credit card companies are South Dakota corporations, and why they can charge interest rates of over 20 percent to their customers.

In another epoch, the mercantilist Rotarians might have led the charge to protect their economy against feudalistic wealth dynasties and instigated the rule against perpetuities. But South Dakotans are new to living in a plutocratic economy and will probably have to learn the lesson the hard way.

Over the next 20 years, the industry grew and the overseas reputation of the state was solidified. Wealthy families began establishing “dynasty trusts” in the state, including the Chicago Pritzker family (Hyatt hotels), the Minnesota Carlsons (Radisson Hotels), the Wrigley family (heirs of chewing gum magnate William Wrigley), and others. And now the anonymous wealth of global billionaires is flowing into the expanding trust industry that Tobin described.

Fixing the system

The first step in fixing the global wealth hiding system is for the United States to get its own house in order. No longer can we point our fingers at other countries for their weak oversight and opaque systems. Congress made an important first step in December 2020 with the bipartisan passage of the Corporate Transparency Act, legislation requiring corporations and companies to disclose their beneficial owners to an arm of the Treasury Department.

Pressure from around the country led to Delaware’s attorney general finally ending the state’s opposition to such legislation. Unfortunately, trusts and partnerships are exempt from the law, creating a glaring loophole the Wealth Defense Industry will exploit. To close down dynasty trusts, William and Mary Law School professor Eric Kades calls for a federal rule to limit the lifespan of trusts, what he calls the National Anti-Feudalism Act.

Lawmakers must both clamp down on the advisers and enablers—outlawing certain tax loopholes and trusts that exist solely for hiding money. Senator Bernie Sanders’s estate tax reform legislation would outlaw a number of abusive trusts. And Representative Ro Khanna has introduced the Stop Cheaters Act, legislation to strengthen enforcement of tax rules and crack down on tax dodging by the wealthy.

The United States needs to clean up its act and then work across borders to lift up global standards and exert pressure on other tax havens. The signs are moving in the right direction, with progressives calling for increased enforcement of existing laws and closing down the hidden wealth system.

In the aftermath of a Biden victory—and amid talk of taxing the wealthy—wealth advisers are pushing more money into the shadows. Like a restaurant patron anticipating a large bill for a reprobate party, they are slipping out the door to dodge the tab. The political movements that will emerge as the pandemic winds down should insist that the wealthy pay their fare share, starting with closing the door on the hidden wealth system.

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