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South Dakota's trust laws in spotlight on Capitol Hill

The House Ways and Means Subcommittee on Oversight held a 90-minute hearing on Wednesday, Dec. 8, to scrutinize the growing trend of U.S. states, including South Dakota, setting up domestic tax havens for super-rich.

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WASHINGTON, D.C. — South Dakota's lax trust laws returned to a national spotlight this week, this time on Capitol Hill, as Democrats on the House Ways and Means Subcommittee on Oversight called for greater transparency into opaque financial records that they allege could be hiding illegal tax evaders or the finances of international conmen.

At the start of the hearing on Wednesday, Dec. 8, committee chair Bill Pascrell, D-N.J., invoked Jersey rocker Bruce Springsteen's 1978 song, "Badlands," observing, "There's trouble in the heartland."

"South Dakota is home to a stunning 81 of the 106 trusts located in the United States," said Pascrell, pledging to review "how and why the wealthy and powerful are hiding their assets in South Dakota."

While South Dakota's trust laws have long been the source of scrutiny both in and out of the state, this fall's reporting of the Pandora Papers , a leak of financial documents to journalists, revealed that some foreign investors with ties to criminal activity or wage theft have trusts in South Dakota.

Wednesday's lead witness, Beverly Moran, an emeritus law professor from Vanderbilt, noted that South Dakota is one of three states — along with Delaware and Wyoming — to allow for rare, so-called noncharitable purpose trusts. Moran argued these trusts are effectively shielded in secrecy as they possess no "beneficial owners" to report to regulators.

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"The Pandora Papers focus our attention on noncharitable purpose trusts as tax avoidance vehicles," said Moran.

Many Republicans on the committee lambasted Pascrell's line of questioning, rooted in the publication of what they note is legally private financial data. Pennsylvania Rep. Lloyd Smucker faulted Pascrell for not holding a separate congressional hearing on the leak of those records — which he called "unbelievable."

"It's a war on trusts, apparently," remarked Smucker. "I don't need [overdue scrutiny] to tell whether the farmers and the small business owners in my district are legitimate because they're using a legal trust mechanism."

At the 90-minute hearing's conclusion, focus reverted to domestic tax havens, including South Dakota. Delegate Stacey Plaskett, a Democrat representing the Virgin Islands, observed that states she called intermediaries, including many in the Caribbean, often are blamed for tax incentives while others places, such as Chicago and New York, escape such scolding.

"What is the detriment that may occur to places like South Dakota and others when they are in fact tax havens?" asked Plaskett. "And why does most of the attention come to places like the Cayman Islands and not [to] the states that are operating under these types of regimes, as well?"

Daniel Hemel, a professor at the University of Chicago Law School, responded that a lot of attention was paid to the Caribbean, Latin America, and Africa — where the "average skin tone is darker" than in the largest U.S. cities, suggesting a subtle racism also undergirded negative associations with "offshore" tax incentives. He noted, as an example, that the illicitly shielded cash still ends up "sloshing around in the capital markets" in New York or Chicago.

Mounting what he called "a defense of South Dakota," Hemel pointed out that the Pandora Papers also distracted Americans "from the fact that most of this money is ending up on the U.S. Stock Exchange or NASDAQ." He noted while that intermediary states and offshore tax havens are treated like a "scapegoat," they are also replaceable.

As reported by South Dakota Public Broadcasting , Gov. Kristi Noem had been invited by the committee to testify about the tax laws but declined, citing "prior commitments."

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In 1997, then-Gov. Bill Janklow established a governor's task force on trusts, which annually brings legislation to Pierre to update South Dakota's trust-friendly law and rarely faces opposition .

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The South Dakota Trust Co. office in South Dakota on South Phillips Avenue in downtown Sioux Falls, South Dakota. Jeremy Fugleberg / Forum News Service

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