The release of the so-called Pandora Papers revealed that the world’s wealthiest people will go to great lengths to protect their assets from the taxman. No surprise there. But what’s come as a bit of shock to many is the revelation that a sparsely populated American state with fewer than a million people has become the new Switzerland when it comes to parking assets away from prying eyes.

South Dakota’s emergence as a financial center which caters to the world’s most powerful banks and wealthiest clients began many years ago. Credit for this goes to one very creative Republican governor and a team of crack lawyers.

Back in the 1970s, South Dakota’s economy looked a lot like it had since the New Deal. It was dominated by agriculture and meatpacking, with a sprinkling of medical and retail. But the state’s economy was in serious trouble by decade’s end, thanks to forces operating well beyond its borders.

The first of these was growing competition from new agricultural powerhouses like Brazil, which began putting downward pressure on the price of commodities like wheat. When President Jimmy Carter imposed an economic boycott of the Soviet Union after the invasion of Afghanistan in 1979, South Dakota farmers lost access to a hugely important market for their products.

Unfortunately, farmers had gone deeply into debt to finance the purchase of farm equipment. By decade’s end the agricultural sector of the economy was in free fall, with many small towns withering away. 

Some in the state moved to the handful of larger towns and cities, including Sioux Falls. Many young people simply moved away entirely. One development officer at the time quipped that “the two greatest exports of South Dakota, aside from agriculture, have been capital and kids.”

The governor who inherited this mess was a colorful character named William “Wild Bill” Janklow. A former juvenile delinquent who straightened out after joining the Marines, Janklow returned to South Dakota after his discharge. He became a sought-after lawyer and, eventually, the state’s attorney general. 

He ran for governor and won in 1978, just as the bottom fell out of the state’s economy. Four years later he would run for re-election, winning by the largest margin in South Dakota history. What happened in the intervening years has become the stuff of legend.

Much of Janklow’s success as governor rested on creative interpretations of otherwise obscure court cases relating to taxes, financial regulation and banking. Over the course of his many years in office — he would serve as governor from 1979 to 1987 and again from 1995 to 2003 — Janklow and his allies in the state legislature turned the state into a laboratory for financial deregulation and innovation.

This began with Janklow’s successful courtship of Citibank. In the late 1970s, most states had strict limits on the interest that credit card companies could charge customers. These “usury laws” had long been a staple of the country’s financial ecosystem. But as inflation raged out of control, banks and credit-card companies found themselves at a serious disadvantage.

Rather conveniently, the Supreme Court issued a unanimous decision in 1978 that would have profound implications for South Dakota and the credit card industry. As the historian Sean Vanatta has observed, the case turned on a key question: When a financial institution marketed credit cards, which state’s laws did it have to obey when it came to setting interest rates — the state where it was chartered? Or the state where it sold credit cards to consumers? The court ruled that it was the state where the bank was chartered.

The implications of this quickly dawned on big banks with credit-card operations. If they moved their credit business to a state with no usury laws, they could effectively export high interest rates to states with usury caps — and the latter couldn’t do a thing about it. Citibank was the first to seize on this implication. And South Dakota was ready for them.

The same year that Citibank began crafting a plan to move its credit card operations, South Dakota was working to abolish usury limits. This was originally undertaken at the behest of the state’s bankers frustrated by inflation eating away at the value of loans. The law passed in January 1980.

As soon as Citibank heard about the repeal, they contacted Janklow, who immediately realized the potential and crafted what became known as the “Citibank bill,” which formally invited the New York bank to set up shop in Sioux Falls. Not long afterward, Citibank moved its credit card operations to the state. 

The move stunned the financial services industry. One of the world’s biggest banks was moving a big chunk of its operations to…South Dakota?

Janklow now began to build on this first coup, turning his state into what one historian has called “Wall Street on the Prairie.” He launched numerous initiatives designed to make his state far more appealing to financial firms and to wealthy people eager to find a place where they could operate with limited oversight. Soon Janklow got the state legislature to pass a law that reduced the capitalization requirement for new banks to $5 million, prompting a growing number of out-of-state banks to set up shop.

More radical still was an “emergency” law passed in 1983 that permitted out-of-state bank holding companies to purchase state banks within South Dakota and then use these to sell insurance. This was an overt attempt to circumvent regulations governing bank holding companies, but Janklow was unapologetic. In an interview that year, he declared: “It’s my job to do anything to get investments and jobs and diversification in South Dakota.”

The Federal Reserve Board ultimately nixed his plans when Citicorp (Citibank’s parent) sought to take advantage of the new arrangement. No matter: Janklow was just getting started. 

Over the remainder of the decade, he and his allies in the legislature remade the state’s financial regulations in order to make South Dakota more appealing to both banks and their wealthiest clients. Their state was hardly the only one pursuing this strategy. But it consistently beat the competition to the punch.

Consider, for example, what happened with trust law in the state. Beginning with British common law centuries ago, trusts designed to facilitate the transfer of wealth from one generation to the next have been limited by something known as the “Rule Against Perpetuities.” This tradition makes it impossible for a trust to exist indefinitely. At some point, wealthy families have to pay taxes. But in 1979, a decision handed down in the U.S. Tax Court — Estate of Murphy v. Commissioner — effectively, if inadvertently, opened a back door to abolishing the rule against perpetuities.

It’s safe to say the architects of this ruling didn’t realize the implications of the decision. But the good tax lawyers working for Governor Janklow did. In 1983 the legislature passed a bill that codified this decision into a law that allowed the creation of dynastic, eternal trusts that can live forever.

So began an elaborate, ongoing revision of the state’s trust laws designed to lure wealthy clients to set up legal tax shelters in South Dakota. This wasn’t just a matter of a single piece of legislation. Instead, a comprehensive set of initiatives put the state in the vanguard of efforts to shelter and shield personal wealth. 

One academic assessment of the combined impact of these moves aptly described them as creating an “unparalleled landscape for families both domestic and international, to implement customized multi-generational planning with a flexibility and control not seen in the United States before.”

These changes included the creation in 1995 of PFTCs, or Private Family Trust Companies; and two years later, the creation of “directed” trusts, which made it possible for families to set up investment vehicles capable of asset allocations akin to the famed endowments of Harvard and Yale — something that ordinary, “delegated” trusts generally do not permit.

Janklow’s Task Force on Trust Administration Review and Reform, launched in 1997, spawned several additional innovations. Among these was the nation’s first “domestic trust protector” statute, which confers special powers on an individual (or committee) to direct the operations of the trust. This went hand in hand with the creation of a new legal entity known as an SPE, or Special Purpose Entity, which houses the trust protector.

Since that time, South Dakota has passed many additional laws that have made it a successor to secretive Switzerland. In the past decade alone, the amount of money parked in the state’s trusts has increased four times over. It now stands at over $360 billion.

Absent some dramatic change in federal law, that number is only going to increase in the future. Though “Wild Bill” Janklow died almost a decade ago, his legacy looks likely to last for many years — perhaps in perpetuity.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen Mihm, a professor of history at the University of Georgia, is a contributor to Bloomberg Opinion.

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