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Politics

South Dakota trust industry: Vulnerable to corruption or political punching bag?

American Kleptocracy
Lori Walsh
/
SDPB
Journalist Casey Michel is the author of the book "American Kleptocracy: How the U.S. Created the World's Greatest Money Laundering Scheme in History."

This interview is from SDPB's daily public-affairs show, In the Moment, hosted by Lori Walsh.

The South Dakota trust industry is facing increased scrutiny over money held in the state privately. But is South Dakota really harboring ill-gotten gains and enabling international corruption?

We look at the fight against corruption as a national security effort. And we'll ask the questions: Is the state's trust industry finally being held accountable, or is it merely being used as a political punching bag?

Our guest is journalist Casey Michel. His book is called American Kleptocracy: How the U.S. Created the World's Greatest Money Laundering Scheme in History.

The following transcript has been auto-generated and edited for clarity.

Lori Walsh:

Many people in South Dakota have at least a functional knowledge of how the trust industry began here. A lot of people remember Governor Bill Janklow. So I think it's maybe a good time to start with what's been happening lately: There has been this increased call for federal oversight of the trust industry through Congress and through the Biden administration.

Lori Walsh:

Let's start there and say, why is that happening in the 2020, 2021 timeframe? Why the sudden interest?

Casey Michel:

There are a couple reasons that this is all seemingly coming to a head now; certainly as we're speaking here on Thursday, March 3rd.

Casey Michel:

Obviously we're watching Russian tanks roll through Ukraine. And all of a sudden there's this great realization that a regime like we've seen out of Moscow, all of the oligarchs, that entire class of figure that propped up the regime, we know how they move their money. We know how they hide their money. We know how they use Western financial secrecy tools and mechanisms to hide and launder their money to nonetheless control it and prop up their own regime.

Casey Michel:

Things have absolutely come to a head. Here we are in early 2022, but there've been a couple of different developments over the last few years that have gotten us here.

Casey Michel:

On one hand, we've had an increasing understanding across the West that these oligarchs, these figures, have been coming to the West for years and years to use these financial secrecy tools, to invest anonymously in real estate, to invest elsewhere across the country, and use these financial secrecy — pro-anonymity, pro-kleptocracy financial secrecy — vehicles to do so in places like Delaware, in places like London; but also increasingly, in places like South Dakota.

Casey Michel:

I think listeners may be familiar with the fact that a couple years ago, we had Panama Papers, then we had the Paradise Papers; just late last year, we had the so-called Pandora Papers: millions of documents shining a light on how all of these oligarchs, all of these dictators, these human rights abusers, environmental destroyers, all of these really horrific figures are using and abusing offshore financial secrecy networks.

Casey Michel:

Now, what was interesting about that, though, is how it's shone a light specifically on the United States, and especially on South Dakota's trust industry. I mean, boy, this (data leak) is a fraction of a fraction of a single percent of South Dakota's total trust industry.

Casey Michel:

Even within that fraction, we saw corrupt politicians. We saw human rights abusers, those who were dodging lawsuits, those who were destroying local environments. I mean, it was a whole range, a whole real potpourri of all the world's worst. That was only in the one tiny little fraction that we saw out of the Pandora Papers last year.

Casey Michel:

So you have all these different developments really adding up with one another, building on one another, to where we are here in early 2022.

Casey Michel:

And you have folks out in Washington suddenly realizing that, "Boy, oh boy, South Dakota has become this gargantuan offshore empire in the middle of America, and it's doing incredible damage to American interests."

Lori Walsh:

This was not a system that was created to open the door for money laundering. We need to be careful about what we're accusing people of, but also honest about the unintended consequences.

Lori Walsh:

It's a competitive market. It's about wealth and asset protection. It's about privacy. But yet there are potentially ill-gotten gains, to use President Joe Biden's words, that are finding their way here. Who are the gatekeepers for this?

Casey Michel:

Yeah, I mean, Lori, I think you made a great point just now. These systems were not set up purposely to launder kleptocratic or oligarchic money. These systems, whether it's South Dakota, whether it's states like Delaware or Wyoming that have these shell companies, they were set up for other Americans; other Western figures and networks to take advantage of secrecy protection, and provide protections for their wealth.

Casey Michel:

Now it just so happens that, especially by the early and mid-1990s, when you had these new post-Communist post-Soviet regimes emerge and post-colonial regimes elsewhere, you have this rising class of oligarchs realizing they could also take advantage of Delaware shell companies, of Wyoming shell companies, or of South Dakota trusts.

Casey Michel:

The systems were already in place when these figures emerge, and when they really began, again, brutalizing their populations and stealing from local populations and offshoring all of that money; or so much of that money; into places like South Dakota.

Casey Michel:

I mean, the gatekeepers in the U.S., the gatekeepers in the West are kind of a broad swath. You have real estate agents, you have private equity managers, you have lawyers, you have accountants; you have a whole range of so-called enablers in places like the U.S.

Casey Michel:

In South Dakota, though, in particular, there's two classes of professionals. One is the trust industry itself. These are the actual trust providers, trust managers that are setting up and that are monitoring these trusts.

Casey Michel:

Again, these trusts are really the perfect financial secrecy vehicle for anyone, no matter the source of their money.

Casey Michel:

They could be a scion of a great American company, or they could be the son of a dictator. And they can come to South Dakota and go to these trust providers. Well, I guess they don't have to come to South Dakota. They just call someone and they can set it up for them.

Casey Michel:

So you have the trust providers acting as one gatekeeper in South Dakota. The other one is the lawyers. Again, this is part of a broader story across the U.S., but lawyers in South Dakota are really the best friends that these oligarchs and these kleptocrats can have.

Casey Michel:

Again, in addition to all these other clients, because the lawyers in South Dakota, they know how to structure these things. They know where the loopholes are. They know where the lack of oversight is.

Casey Michel:

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.

Casey Michel:

Again, South Dakota, it's the trust industry. And it's the lawyers within that, that act as the enablers and the gatekeepers for all of these crooked and corrupt figures coming to the state.

Lori Walsh:

So President Biden, in his new strategy on countering corruption, talked about a plan that identifies gaps that make us vulnerable for money-laundering schemes. That's not the same thing as saying there are actual South Dakota lawyers who are intentionally enabling kleptocrats to hide their money in South Dakota.

Lori Walsh:

Do we have evidence that's happening in a way that a lawyer could be held accountable for?

Casey Michel:

Right now there's nothing to be held accountable for, Lori, because-

Lori Walsh:

Because it's legal.

Casey Michel:

... it's perfectly legal. That's exactly why. Someone, I don't know where the quote comes from, but the scandal isn't what's illegal. The scandal is what's perfectly permissible, perfectly legal. And has been for years and years and decades and decades.

Casey Michel:

Which is, again, one of these things that's allowed in a state like South Dakota, in addition to other states; places like Delaware, places like Wyoming to become these offshore empires of their own.

Casey Michel:

And to attract all that illicit or questionable or dirty money from places like Russia, from places like China, from places like Venezuela. All these anti-American regimes and figures are still coming to the United States, still coming to places like South Dakota to hide and to launder their money while nonetheless controlling it.

Lori Walsh:

I'm just going to be very direct about this question, Casey. Because if you talk to lawyers here or trust fund managers here, they'll say, "Look, the majority of our clients are South Dakota ranchers, farmers who are trying to keep their farms. Doctors who have come to this place that is a huge international medical center as well. We're certainly not intentionally working with some oligarch from Russia or Ukraine or anywhere else."

Lori Walsh:

Are you suggesting that they know that they're working with people who have gotten their money off the backs of human trafficking, and are intentionally taking it and protecting it?

Casey Michel:

It's certainly possible that they are. I mean, I have no reason to think that they would turn away the kind of oligarchic money coming into the state. I mean, this is a story we have seen over and over and over for years.

Casey Michel:

Again, in places like Delaware, in places like London, even in places like Vancouver, down in Australia; across the West, oligarchs are looking for places to hide their money, to launder their money while nonetheless controlling it.

Casey Michel:

And they know full well there is no kind of legal architecture that forces those in places like, for instance, South Dakota, to even ask where that money comes from, let alone not be able to service it, let alone not be able to set up the kind of trusts that these figures provide.

Casey Michel:

I have no doubt that you have Joe Plumber or whomever it might be on the ranch or in the dentist's office or wherever it is, in South Dakota and other American states also coming to the state of South Dakota to work with their trust, to set those up and take advantage of it.

Casey Michel:

The problem is they're using the exact same systems. They're using the exact same structures that any oligarch, any corporate regime–linked figure, any human trafficker, arms trafficker, wildlife trafficker is also looking for.

Casey Michel:

I'm not saying that South Dakota trust providers are searching them out. I am saying that there's every reason, there's every incentive for these figures from around the world to come to South Dakota, to take advantage of the trust industry.

Lori Walsh:

What sort of federal regulations are being proposed? What kind of transparency solutions would address the gaps?

Casey Michel:

The primary one being proposed right now — this is a bill that was filed in Congress last year and seeing renewed interest in just the past week, because of the Russian invasion — it's called the Enablers Act. And Congress being Congress, it's an acronym for a long convoluted name that spells out "enablers."

Casey Michel:

But what this bill effectively does is place very basic anti money–laundering protections, very basic anti money–laundering requirements on a whole range of some of these figures we were just talking about; these so-called enablers in the U.S.

Casey Michel:

Again, these are the real estate agents; these are private equity managers; these are arts and auction house owners, as well as trust providers. And as well as lawyers.

Casey Michel:

I know, Lori, you mentioned earlier the White House late last year issued the U.S.'s very first anti-corruption strategy document. This was frankly a watershed document. I mean, obviously it's all rhetoric right now. We still to see what the policy looks like.

Casey Michel:

But this is the first of its kind. We've never seen anything like this in American history, where you have a White House administration come forward and say, "We know which industries in the U.S. have been allowing these illicit financial networks to thrive. And now we're going to clamp down on them. We know what needs to be done. We know what kind of regulations we need."

Casey Michel:

It didn't formally endorse this Enablers Act, but it did it in all but name. Again, what that would do is simply require those trust providers, those lawyers, if they are setting up these trusts, if they are setting up these financial networks that we know oligarchs around the world are taking advantage of ... it's simply a matter of asking where that money comes from.

Casey Michel:

It is basic due diligence into whose money they're handling, what services are they providing and for whom? Is it a Kremlin oligarch? Is it someone out of Beijing who's linked to the Chinese Communist Party? Is it someone who's linked to President Maduro down in Venezuela?

Casey Michel:

We don't know. I mean, that's the problem right now, Lori. We simply do not know who is behind these hundreds and hundreds of billions of dollars stampeding to the state.

Casey Michel:

I know I mentioned a moment ago the Pandora Papers: that was a fraction of 1% that we learned about. Within that, we saw corrupt politicians, human rights abusers, environmental destroyers. I mean, I have no reason to think that those are anomalous. I have every reason to think that is the canary in the coal mine for the state of South Dakota.

Lori Walsh:

Let's talk about sanction evasion, and the sanctions that have already been put in place on supporters of Vladimir Putin. If money is already in a private trust or a dynasty trust, is it accessible to the (sanctioning authorities)? Can it be used? Is it frozen right now? What do we know about what's happening already to some of that money?

Casey Michel:

Yeah. Lori, that's actually a great question. I was talking about this yesterday with another [inaudible 00:12:19]. I mean, the short answer is no one's really quite sure.

Casey Michel:

Because we've never gone through a process in which, on the one hand, we've seen so many sanction issues so quickly. Then on the other hand, a state like South Dakota, and especially the perpetual dynasty trust, provide the anonymity, the veil of secrecy, that even the federal government can't pierce.

Casey Michel:

One of the things I've been talking about is it's all fine and good to be expanding sanctions. And certainly all these oligarchs deserve to be sanctioned. But you're talking about going out and seizing mansions, you're talking about going out and seizing yachts. That's fine, but we still don't have any idea about where all these oligarchs have put their money, have hidden their money, and have kept their money.

Casey Michel:

But what's interesting is within that, that would lead me to believe that if that money's already in South Dakota, they have no reason to pull it out, for a few reasons. One, if they pull it out, they risk the federal government being made aware that it was there in the first place.

Casey Michel:

But on the other hand, if they pull it out, Lori, as I'm sure your listeners are familiar, the ruble is crashing right now.

Lori Walsh:

Mm-hmm (affirmative).

Casey Michel:

The Russian currency is becoming effectively worthless. Meaning their wealth is only in the U.S. dollars they hold in South Dakota. So you see this, again, incentive structure pushing in the direction of them. If their money's already here, I don't necessarily know why they would pull it out. They would risk being found out. And then beyond that, it might be worthless if they bring it back into rubles itself.

Casey Michel:

Now, obviously the catch of that being the federal government has made very clear noise about lifting that veil of secrecy in South Dakota, as well as elsewhere. So oligarchs might be in a little bit of a catch-22 right now about what to do.

Lori Walsh:

Let's talk about the federal task force Klepto-Capture and the effort to go after money and find it with this huge federal law enforcement effort: wild goose chase, or something they should be worried about?

Casey Michel:

Well, I would put it this way. I think it's fantastic that we have a new task force. I think it's long overdue and I'm very excited to see what they turn up. In a certain sense, it's a drop in the bucket.

Casey Michel:

We know that these programs, these task forces that we've seen elsewhere; while they're all fine and good, and while they do have success stories; they're going up against a much larger phenomenon.

Casey Michel:

I'm not talking about just the oligarchs themselves. I'm talking about this entire services industry that has profited from the inflow of oligarchic or questionable or dirty money into places like the United States and into places like South Dakota that take advantage of, and that profit from not asking any questions about where any of this money comes from.

Casey Michel:

And providing all the anonymity, all of the financial secrecy protections that these oligarchs, these arms traffickers, human traffickers, et cetera, need.

Casey Michel:

Again, it's great that we have this new task force. It's great that all these sanctions are coming into play. But at the end of the day, what we need is new policies, new transparency.

Casey Michel:

Then beyond that, new funding and actual enforcement for these task forces, for these new policies, to make sure that folks in South Dakota are not serving as a home for all of this money linked to President Putin; linked to Xi Jinping, linked to other anti-American forces and figures; other oligarchs around the world.

Casey Michel:

Because right now we just don't know. We have no idea. And all of this, again, continues to happen legally day in and day out.

Lori Walsh:

I've lived in South Dakota for a long time. You've been covering this story for a long time. I can tell you that there is almost zero appetite in our state legislature to make any changes, to increase transparency of the South Dakota trust industry.

Lori Walsh:

Are you seeing a federal appetite that you think might force South Dakota to change its tune?

Casey Michel:

Yeah, Lori, I mean, again, this is a familiar story in other states: places like Delaware, places like Wyoming; or frankly other international jurisdictions. I think that the British Virgin Islands or the Cayman Islands.

Casey Michel:

I mean, these reforms never come from the local legislators. I mean, the political science term is South Dakota has become a "captured state." That is to say the state legislature has become effectively betrothed to, captured by the trust industry. And understandably so. None of this is necessarily surprising.

Casey Michel:

I mean, the state has been profiting. The industry has been profiting, and there's been no pressure from anywhere else for any kind of reforms. Unfortunately, there hasn't been enough bottom-up pressure from constituents. And there certainly hasn't been enough top-down pressure from the federal government ... at least up until recently.

Casey Michel:

Because Lori, you're absolutely right. Things are changing in Washington. Things are changing out of the White House. Things are changing out of Congress.

Casey Michel:

The bill that I just mentioned a moment ago, this so-called Enablers Act, this is a bipartisan bill. We've got Democrats and Republicans both realizing that the state of South Dakota; specifically, the trust industry; has transformed into something unrecognizable. And something that, frankly, now threatens American national security.

Casey Michel:

So there's not going to be any reforms taking place in Pierre; all the reforms are going to come from Washington. And it's going to be up to South Dakota legislators and the trust industry itself, whether or not to go along with them.

Lori Walsh:

Senator John Thune is a leader in the GOP from South Dakota; President Joe Biden's from Delaware. The decisions are being made by some pretty high-up individuals with homes in places where this has been invented; or at least, polished until it shone.

Casey Michel:

Yeah. Yeah. You're exactly right, Lori. I mean, I'm still trying to wrap my mind around the irony of the first president from the state of Delaware actually making more progress on this than any other previous administration. I don't know if I'll ever understand that.

Lori Walsh:

Casey Michel is the author of American Kleptocracy: How the U.S. Created the World's Greatest Money-Laundering Scheme in History. As you can imagine, his book and his time are both much in demand right now.

Lori Walsh:

Casey, we appreciate you taking so much time for the people of South Dakota. Thanks so much.

Casey Michel:

Yeah, Lori, of course. Happy to be here.