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Friday, October 22, 2021

Pandora Papers: Suspect foreign money flows into booming American tax havens on promise of eternal secrecy

The investigation identified 206 US-based trusts linked to 41 countries holding combined assets worth more than $1 billion. Nearly 30 of the trusts held assets connected to people or companies accused of fraud, bribery or human rights abuses.

October 5, 2021 4:45:21 pm
The Pandora Papers expose how foreign political and corporate leaders or their family members moved money and other assets from long-established tax havens to US trust companies.

Written by Will Fitzgibbon, Salwan Georges and Debbie Cenziper

Across from a Holiday Inn, in a red-brick building with a welcome sign that reads “The Heart of America,” a little-known financial firm set up shop seven years ago and extended an invitation to the world’s elite.

Trident Trust promised to protect the fortunes and privacy of its new customers by relying on the laws of a state that had become a global destination for wealth. The company called it: “The South Dakota Advantage.”

Among those who answered the call: A Colombian textile magnate caught in a scheme to launder the proceeds of an international drug ring, an orange juice mogul who settled with authorities in Brazil for allegedly colluding to underpay local farmers and family members of the former president of a sugar producer in the Dominican Republic that has been accused of exploiting laborers and forcibly evicting families from their homes.

The US government has long condemned prominent offshore financial centers, where liberal rules and guarantees of discretion have drawn oligarchs, business tycoons and politicians.

But a burgeoning American trust industry is increasingly sheltering the assets of international millionaires and billionaires by promising levels of protection and secrecy that rival or surpass those offered in overseas tax havens. That shield, which is near-absolute, has insulated the industry from meaningful oversight and allowed it to forge new footholds in US states.

The Washington Post and the International Consortium of Investigative Journalists (ICIJ) gained an unprecedented look into the money flowing into trusts in the United States by examining a trove of more than 11.9 million confidential documents maintained by trust and corporate services providers around the world.

The records, known as the Pandora Papers, expose how foreign political and corporate leaders or their family members moved money and other assets from long-established tax havens to US trust companies.

The investigation identified 206 US-based trusts linked to 41 countries holding combined assets worth more than $1 billion. Nearly 30 of the trusts held assets connected to people or companies accused of fraud, bribery or human rights abuses in some of the world’s most vulnerable communities.

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The cache of confidential files, obtained by ICIJ and shared with more than 150 media partners, describe only some of the trusts in the United States but is the most significant set of records ever made public from inside America’s trust industry.

The trust documents come mostly from the Sioux Falls office of Trident Trust, a global provider of offshore services. In a written statement, Trident said it is committed to compliance with all applicable regulations and routinely cooperates with authorities. The company declined to answer questions about its clients.

Other states competing to lure wealth include Alaska, Delaware, Nevada and New Hampshire. In South Dakota, assets in trusts more than quadrupled over the past decade to $360 billion. One of the largest trust companies in the state, the South Dakota Trust Company, boasts a roster of international 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.

With little opposition, state legislators turned the proposals into laws – dozens since the late 1990s.

“Nobody understands any of them,” Gene Abdallah, Republican chairman of South Dakota’s Senate Judiciary Committee, quipped at a legislative session in 2007. He died in 2019.

Bret Afdahl, director of the South Dakota Division of Banking, said trust companies are required to confirm the identities of all customers and that foreign clients and assets receive additional scrutiny. The state seeks to audit trust companies at least once every two years and can penalize firms that do not meet standards, he said.

Critics say the oversight is limited, regulations are vague and trust secrecy is nearly impossible to breach.

“My concern is that … we become like Switzerland or Panama,” said former South Dakota state senator Craig Kennedy (D), one of a handful of lawmakers who questioned the growing industry. “I don’t know who the beneficiaries are, what kind of assets are being managed. People use banking and trust laws for inappropriate purposes. I can’t say that’s happening in South Dakota. But I don’t know.”

Like banks, trust companies are prohibited from knowingly accepting money generated by criminal activity. There is no evidence in the Pandora Papers documents that any of the foreigners with trusts in the United States sheltered criminal proceeds.

Financial experts, however, say the US trust industry should look beyond convictions – investigating and turning away clients whose wealth was amassed amid credible accusations of crimes or human rights abuses or through ties to corrupt regimes.

“It has become abundantly clear that our national interests are really dependent on keeping that kind of money out even if it’s not a financial crime,” said Josh Rudolph, a member of the National Security Council staff in the Obama and Trump administrations. “We fortify thugs and crooks, fail to uphold our values and fuel popular resentment against America.”

With little transparency in the industry, it’s nearly impossible to determine whose money is being managed by trust companies. While regulators in the past two decades focused on the banking industry’s roster of questionable customers, they largely left trust companies alone, free to grow client lists with customer-friendly offers that include tax protection for generations.

The Pandora Papers records do not provide much detail on what the trust companies knew about their clients when the trusts were established or what steps may have been taken to scrutinize the transactions.

In every case identified by The Post and ICIJ, details about criminal charges or other allegations were accessible through public records, media accounts, court documents and government reports. Most were posted on the internet at the time.

Guillermo Lasso, the newly-elected president of Ecuador, transferred assets to new trusts at Trident in Sioux Falls in 2017 amid international media reports that questioned his interests in a bank in Panama. He said he has complied with Ecuadorian law on offshore activities.

Human rights advocates had for many years publicly protested the mistreatment of sugar workers at Central Romana Corp. in the Dominican Republic when family members of the company’s former president finalized several trusts at Trident in Sioux Falls in 2019. The trusts contained shares of Central Romana and personal wealth worth $14 million, the records show.

Carlos Morales Troncoso led the massive sugar operation for about eight years and remained one the industry’s most vocal supporters after he became the Dominican Republic’s vice president and, later, ambassador to the United States and foreign minister.

Morales died in 2014. His four daughters, who are trust beneficiaries and dual US citizens, did not respond to questions about why the shares and other assets were moved to South Dakota from a trust company in the Bahamas. Through an attorney, they said they have never been involved in Central Romana operations, which have continued to draw international rebuke.

In 2016, the company sent armed guards and bulldozers to evict 60 families from makeshift houses built on the dusty edge of a sugar plantation in El Seibo, one of the poorest and most remote corners of the Dominican Republic. Human rights advocates and representatives of the United Nations have criticized the operation.

Yeidi Sierra, then 5 , was sleeping in house No. 10, with a dirt floor, no running water or electricity and a tin roof fashioned from scraps. As the houses fell, she grabbed a single black sandal and fled into the rain, watching the guards from under a mango tree where she once said her prayers and shared rice and beans with neighbors.

When there was nothing left but a twisted pile of metal, she discovered that her other shoe had been lost under the rubble.

“It was the only pair I had,” she recently recalled.

In a statement to The Post and ICIJ, Central Romana said it created more than 20,000 jobs, built more than 5,000 homes and donated land for housing projects and other facilities. The company said it works closely with a labor union to address wages and working conditions and denied that it illegally evicted the families, arguing the company has long defended its property from “illegal land invasion.”

Advocates for the evicted families say the houses were built on a service road not used in more than a half century, the land had no clear owner and that the forced removal no matter who owns the property violated international human rights standards.

“It’s blood and death and sugar,” said local friar Miguel Ángel Gullón Pérez.

Like ‘lava out of a volcano’

In 1995, while fishing for king salmon on Alaska’s Kenai Peninsula, New York lawyer Jonathan Blattmachr sketched out an idea that would position the United States to compete with the world’s tax havens: Insulating the assets of trusts from taxes and creditors.

Millions of Americans legally use trusts to manage wealth – money, property, companies, art – by entrusting a person or entity to hold and use the assets for trust beneficiaries, such as children or grandchildren.

Anglo-American jurisprudence for centuries limited the duration of trusts, but South Dakota helped lead the movement to change that in the 1980s, creating trusts that could be passed down for generations with little or nothing in tax obligations.

Blattmachr, an early proponent, recalled telling a trust officer in Delaware about the idea before the state created dynasty trusts in 1995.

After the change in Delaware, he said, “the business started flowing like lava out of a volcano.”

Fishing with his brother on the Alaska trip 25 years ago, Blattmachr proposed a second sweeping change in the law. He wanted to protect trusts from the claims of future creditors, a practice already in place in offshore financial centers such as the Cook Islands and Belize.

Within months, Alaska lawmakers overwhelmingly approved legislation drafted by Blattmachr, his brother and others.

“We were having an economically hard time in Alaska,” former state representative Al Vezey, a Republican who sponsored the bill, said in an interview. “A barrel of oil was worth less than one red salmon. As a legislature, we were scratching our heads about how to give our state a boost.”

High-level officials raised concerns, according to correspondence maintained in the state archive.

“The underlying policy question is whether or not we, as a state, want to endorse a system that can make it easier for a person to avoid payment of legitimate debts,” the commerce deputy commissioner wrote at the time. “Personally, I don’t think that’s a good idea.”

Then-Gov. Tony Knowles (D) agreed, saying parts of the legislation were more liberal than laws in Bermuda and the Cayman Islands. The bill, the governor noted, would potentially harm spouses and children by blocking support payments.

Knowles vetoed the legislation. One year later, the state legislature tried again, passing a similar measure.

“Make no mistake about one thing: This bill is aimed at one type of trust that the out-of-state lawyer who is behind this bill wants to create for his wealthy clients,” Lawrence Waggoner, a University of Michigan law professor and noted trust scholar, wrote to the state. “This is perhaps the most pernicious bill that I have seen.”

This time, the governor signed the bill, saying lawmakers had addressed his concerns.

“After vetoing an original trust bill because of lack of protection for spouses and children, I signed a corrected version the following year,” Knowles said in an interview with The Post and ICIJ. “It had broad public and business and legislative support. I have not heard of any abuse of this bill in Alaska for the last 25 years.”

The groundbreaking law spurred other states – locked in competition to grow the industry – to advance trust legislation that would draw customers from around the world.

“This subject for me is about as exciting as watching paint dry, but I understand the position that our state holds in the trust business,” South Dakota state Sen. Craig Tieszen (R) said during one 2016 legislative hearing.

The architects of the industry benefited from the changes.

In 1997, before the new trust law was enacted in Alaska, Jonathan Blattmachr, his brother and others helped launch one of the most prominent trust companies in the state. Now called Peak Trust Co., the firm has since expanded to Nevada.

Blattmachr said he gave his shares of the company to his brother and sister-in-law early on and no longer has an ownership stake in the firm. His brother, Douglas, declined to comment.

In New Hampshire, business leader Paul Montrone successfully helped advocate for landmark trust legislation in 2006. A year earlier, a newly formed limited liability company managed by his son had commissioned a study that found the industry could add as many as 2,100 jobs and produce as much as $3.7 million in annual revenue for the state.

Montrone went on in 2007 to co-found Perspecta Trust, which advertised wealth strategies to “ultra-high net worth individuals and families around the world.”

A study prepared for the New Hampshire Trust Council and shared with lawmakers in 2019 reported an estimated 225 to 275 people were working in the state’s trust industry. “Negligible,” the state’s banking commissioner, Gerald Little, said of the financial benefit to the state in an email to a lawmaker.

In a written statement, Montrone said he wanted to help boost New Hampshire’s economy “by making it a world-class trust jurisdiction” and that after Perspecta Trust merged last year with another firm, he stepped away from any official role.

Glenn Perlow, the company’s general counsel and president of the state’s trust council, said the industry now oversees $600 billion in assets.

“The modernization of New Hampshire’s trust laws has had a meaningful, positive impact on our state’s economy, bringing new job opportunities at above-average wages and the economic activity they generate,” he said.

In South Dakota, attorney Pierce H McDowell III in 2002 co-founded the South Dakota Trust Co., located in a Sioux Falls office building near an axe-throwing social club.

McDowell was a founding member of a working group known as the Governor’s Task Force on Trust Administration Review and Reform, which routinely proposed laws to advance the state’s industry.

McDowell declined to comment on his role, referring to a company statement that noted, “South Dakota has worked very hard to build a robust financial sector that includes the state’s bank and trust companies … an industry that provides many benefits (jobs, general tax revenue, supervision fees, and philanthropy).”

A father’s struggle

While the industry prospered, Christopher Pallanck went to court.

In 2017, the single father of two learned he would no longer receive child support payments from Trident in Sioux Falls, which oversaw a trust for his ex-wife, Cleopatra Cameron. The oil heiress struggled for years with addiction, and a California court in 2010 had awarded Pallanck full custody of their young children and later ordered Cameron to pay $8,500 a month in support, according to court records and interviews.

Pallanck, in court records, said the trust’s assets exceeded $8 million.

The trust was originally established in California, where creditors can place demands on trust assets. In 2012, Cameron moved the trust to South Dakota and, in 2016, to Trident.

Trident and a New Mexico firm acting as trust protector opted to end child support payments. In sealed court documents, obtained by The Post and ICIJ, Trident argued that South Dakota law prevented the payments and that Pallanck was “not a good steward of his children’s finances.” The trust provides $1,500 a month for general expenses, Pallanck said.

In 2019, after he went to court to enforce the California child support order, the South Dakota Supreme Court sided with Trident. “Our Legislature has placed formidable barriers between creditor claims and trust funds,” the court wrote in a unanimous opinion.

Pallanck, who works at a telecommunications laboratory, recalled telling his children, then 12 and 14, about the decision in their two-bedroom rental apartment in Santa Barbara, where he sleeps on a single bed in the living room.

”Not only was there the emotional and physical abandonment, but now there was also the financial aspect of it,” he said. “The trust and their mom make it very difficult for these kids to know they are loved.”

The Santa Barbara District Attorney’s Office last year filed criminal charges against Cameron for failing to provide support. She pleaded not guilty; prosecutors ultimately dropped the case.

In an interview, Cameron said she always intended to provide for her children, but that she and Trident Trust did not believe Pallanck could manage the money. She said she opted to move the trust to South Dakota because of “all the privacy laws” and to avoid paying taxes in California.

“There’s never not been child support for my kids,” Cameron said. “After Trident … started looking into everything, they were like, ‘What in the world? We’re not going to give him another dollar.’ I can’t fault them for that … It was very refreshing.”

Trident declined to answer questions about the case, saying it does not discuss its clients with the media.

Pallanck, 50, said there is little more he can do except to focus on his son and daughter.

“What do they do when no one is looking? They cry,” he said.

Money moves to the heartland

Trident, whose owners have not been publicly disclosed, not only drew business from Americans like Cameron but also from customers around the world.

Trident opened its Sioux Falls office in 2014, advertising services for clients from the United States and “international high net worth community.”

Among its first clients: José “Pepe” Douer Ambar, a clothing magnate in Colombia who had a trust with $100 million in assets at Trident’s office in the British Virgin Islands.

Douer had a well-publicized past: He agreed to forfeit $20 million to the US government in 2004 after a global investigation uncovered a vast enterprise to sell drugs in the United States and launder the proceeds. According to US investigators, drug traffickers sold US dollars to middlemen brokers, who swapped the money for pesos with businessmen in Colombia, including Douer.

To avoid prosecution, Douer settled with the US government. He died last year.

When the South Dakota trusts were established, a Google search for the words “Douer Ambar” and “Colombia” yielded a US government summary of the case, as well as a story by the BBC with the headline, “Colombian drugs cash ring broken.”

His family declined to comment. In 2013, records in the Pandora Papers show, Douer’s lawyer told Trident in the British Virgin Islands that his client’s involvement in the case was an “unfortunate experience” brought on by a broker whom Douer had trusted. The records do not make clear whether Trident in Sioux Falls was made aware of the correspondence. In 2016, Trident took on a new client: Federico Kong Vielman, a member of one of the most prominent families in Guatemala. Kong Vielman’s trust held $13.5 million in assets, generated in part from an inheritance and his family firm’s sale of household products, the Pandora Papers documents show.

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