South Dakota is known for being the home of Mount Rushmore and not much else. But thanks to its relish for deregulation, the state is fast becoming the most profitable place for the mega-wealthy to park their billions.
Late last year, as the Chinese government prepared to enact tough new tax rules, the billionaire Sun Hongbin quietly transferred $4.5bn worth of shares in his Chinese real estate firm to a company on a street corner in Sioux Falls, South Dakota, one of the least populated and least known states in the US. Sioux Falls is a pleasant city of 180,000 people, situated where the Big Sioux River tumbles off a red granite cliff. It has some decent bars downtown, and a charming array of sculptures dotting the streets, but there doesnt seem to be much to attract a Chinese multi-billionaire. Its a town that even few Americans have been to.
The money of the worlds mega-wealthy, though, is heading there in ever-larger volumes. In the past decade, hundreds of billions of dollars have poured out of traditional offshore jurisdictions such as Switzerland and Jersey, and into a small number of American states: Delaware, Nevada, Wyoming and, above all, South Dakota. To some, South Dakota is a fly-over state, the chief justice of the states supreme court said in a speech to the legislature in January. While many people may find a way to fly over South Dakota, somehow their dollars find a way to land here.
Super-rich people choose between jurisdictions in the same way that middle-class people choose between ISAs: they want the best security, the best income and the lowest costs. That is why so many super-rich people are choosing South Dakota, which has created the most potent force-field money can buy a South Dakotan trust. If an ordinary person puts money in the bank, the government taxes what little interest it earns. Even if that money is protected from taxes by an ISA, you can still lose it through divorce or legal proceedings. 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 wont 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 worlds money as it can. US politicians like to boast that their country is the best place in the world to get rich, but South Dakota has become something else: the best place in the world to stay rich.
At the heart of South Dakotas 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. Anyone who can afford the legal fees to profit from this mismatch is able to keep wealth that the rest of us would lose, which helps to explain why all over the world the rich have become so much richer and the rest of us have not.
In recent years, countries outside the US have been cracking down on offshore wealth. But according to an official in a traditional tax haven, who has watched as wealth has fled that countrys coffers for the US, the protections offered by states such as South Dakota are undermining global attempts to control tax dodging, kleptocracy and money-laundering. One of the core issues in fighting a guerrilla war is that if the guerrillas have a safe harbour, you cant win, the official told me. Well, the US is giving financial criminals a safe harbour, and a really effective safe harbour far more effective than anything they ever had in Jersey or the Bahamas or wherever.
Those of us who cannot vote in South Dakota elections have little hope of changing its laws. But if we dont do something to correct the imbalance between global wealth and local legislation, we risk entrenching todays inequality and creating a new breed of global aristocrat, unaccountable to anyone and getting richer all the time with grave consequences for the long-term health of liberal democracy.
South Dakota is west of Minnesota, east of Wyoming, and has a population of 880,000 people. Politically, its voters enthusiastically embrace the Republicans message of self-reliance, low taxes and family values. Donald Trump won more than 60% of the vote there in 2016, and the GOP has held a super-majority in the states House of Representatives since the 70s, allowing the party to mould South Dakota in its image for two generations.
Outsiders tend to know South Dakota for two things: Mount Rushmore, which is carved with the faces of four US presidents; and Laura Ingalls Wilder, who moved to the state as a girl and wrote the Little House on the Prairie series of childrens books. But its biggest impact on the world comes from a lesser-known fact: it was ground zero for the earthquake of financial deregulation that has rocked the worlds economy.
The story does not begin with trusts, but with credit cards, and with Governor William Wild Bill Janklow, a US marine and son of a Nuremberg prosecutor, who became governor in 1979 and led South Dakota for a total of 16 years. He died almost eight years ago, leaving behind an apparently bottomless store of anecdotes: about how he once brought a rifle to the scene of a hostage crisis; how his car got blown off the road when he was rushing to the scene of a tornado.
In the late 70s, South Dakotas economy was mired in deep depression, and Janklow was prepared to do almost anything to bring in a bit of business. He sensed an opportunity in undercutting the regulations imposed by other states. At the time, national interest rates were set unusually high by the Federal Reserve, meaning that credit card companies were having to pay more to borrow funds than they could earn by lending them out, and were therefore losing money every time someone bought something. Citibank had invested heavily in credit cards, and was therefore at significant risk of going bankrupt.
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