The Washington PostDemocracy Dies in Darkness

When South Dakota became the new Cayman Islands for banks and finance

One bank’s desperation and a state’s economic needs undermined regulations protecting consumers

The state Capitol in Pierre, S.D. (Erin Bormett/Sioux Falls Argus Leader/AP)

Last week, Washington Post reporters exposed how global elites have used opaque trusts to shield wealth from tax authorities and the critical public. The story’s surprising detail was not the overt tax avoidance — activity we have come to expect. Rather, it was the setting: Sioux Falls, S.D.

When did the Mount Rushmore State, better known for bike rallies than banking, become an “offshore” haven for laundering ill-gotten fortunes? And why do U.S. authorities tolerate it?

The answer to the first question begins with a surprise meeting between executives from New York-based Citibank and South Dakota Gov. William Janklow (R) in February 1980. The bankers were there to talk about credit cards. Janklow was all ears.

The meeting set in motion a process that would leave most consumers helpless as individual states bolstered their economies by freeing banks from regulations regardless of the broader consequences for the public.

Banks had entered the credit card business slowly through the 1950s, then en masse in the mid-1960s. At that time, bankers built nationwide card networks, which we now know as Visa and Mastercard, to connect their local card plans into far-reaching credit systems. By the 1970s, bank cards surpassed retail cards, issued by firms like J.C. Penney, Sears and Montgomery Ward, as Americans’ primary tool for convenient consumer credit.

State law governed these products. And thanks to the burgeoning grass-roots consumer movement and its allies in state legislatures, most states enacted rate restrictions on credit card accounts to protect the public.

Citibank pursued the card business aggressively. Already the leading card issuer in the New York region, the bank launched the first truly nationwide card solicitation campaign in 1977. Citi enrolled millions of new customers in a few short years. Federal law prohibited interstate branch banking, a constraint Congress only fully lifted in 1994, meaning Citibank could not build domestic branches outside New York.

Instead, Citibank executives envisioned a nationwide consumer bank delivered through cards, rather than traditional branches. The move, while ambitious, was poorly timed.

Because Citibank was based in New York, state laws regulated all Citibank credit card accounts. And New York capped the interest rate that banks could charge at 18 percent (and only 12 percent on balances above $500) — no matter where the cardholder happened to live.

When Citibank initiated its nationwide campaign, it could live with these rates. In October 1979, however, the world changed. Then-Federal Reserve Chairman Paul Volcker launched an aggressive monetary experiment to wring inflation out of the economy. Market interest rates skyrocketed. So did Citibank’s cost of funds. Yet the price the bank could charge its credit card customers remained fixed. Every time a cardholder used their card, the bank lost money.

“If you are lending money at 12 percent and paying 20 percent,” Citibank chief executive Walter B. Wriston lamented, “you don’t have to be Einstein to realize you’re out of business.” Wriston appealed to New York politicians for help. The legislature refused to budge.

The bank was in a fix. It could only escape the rate cap by leaving New York for a less restrictive state. And it could only do that if that state’s legislature invited Citi in. And so, in February 1980, Citibank lawyers knocked on Janklow’s door. South Dakota was one of the few states without an interest rate cap. The state’s legislature was in session. They could act fast.

Citi executives found a receptive audience. In 1980, South Dakota was in dire shape. The state had long suffered from the decline of family farming. Its non-farm workers were the lowest-paid in the nation. Young people fled the state. Looking back, Janklow recalled, “The economy was, at that time, dead.”

Citibank offered just what the state needed, new industry, good jobs and tax revenue. In March 1980, South Dakota’s legislature passed the “Citibank bill” inviting the company to open a subsidiary in the state with nearly unanimous approval — allowing it to shift its card-issuing business to the Mount Rushmore State.

Once in South Dakota, Citibank’s first move was to raise its interest rates. Citi cardholder rates rose from between 12 percent and 18 percent, depending on the consumer’s balance, to 19.8 percent for all balances, plus a $20 annual fee.

This move reshaped the banking and credit card industry. Citibank and South Dakota undermined the ability of every other state to regulate credit card interest rates. Banks could now either move to South Dakota or threaten to, forcing most states to raise or eliminate interest rate ceilings, ending a critical consumer protection against excessive interest and long-term debt.

Moreover, South Dakota taught other states how to trade regulatory leniency for onshore banking jobs. They learned quickly. Delaware, a state ravaged by industrial decline, adopted virtually identical legislation the following year. Lobbying for the “Financial Center Development Act,” Delaware Gov. Pierre “Pete” du Pont promised the state would become “the Luxembourg of the United States.”

Credit cards were only the beginning. To lure in new firms and ensure that recently arrived banks stayed in place, South Dakota policymakers found and widened every regulatory gap. They rebranded the state “the Frontier of Modern Banking.”

It is no coincidence then that the firm recently examined by Post reporters, Trident Trust, is located in the same building as the Sioux Falls Chamber of Commerce. Opaque finance and local development are inseparable in South Dakota.

That is why South Dakota is the new Cayman Islands (minus the salubrious climate). Why have federal policymakers tolerated this behavior?

Two reasons stand out. First, in the 1980s and 1990s, federal policymakers embraced deregulation more quickly than their state-level counterparts or the wider public. By approving banks’ relocation efforts, federal officials encouraged inventive states like South Dakota to scrap regulations. Then, in the 1990s, federal regulators like the Comptroller of the Currency developed an aggressive federal preemption doctrine to shield nationally chartered banks from state consumer protection laws. Federal policymakers and their state partners had successfully engineered a nationwide deregulatory movement despite a lack of political support for it.

Second, the structure of American political institutions, especially the inordinate power small states like South Dakota and Delaware enjoy in the Senate, protected state prerogatives in financial regulation, even as they harmed other states’ — and now the world’s — citizens.

President Biden, for one, made his Senate career defending Delaware’s banks.

Yet explaining why federal officials supported blatant regulatory circumvention before the 2008 financial crisis, and in the more recent light of the recent Pandora Papers revelations, does not explain why they still do it. Certainly, finance as development, with the capacity to juice the economy, still has a strong hold on the political imagination.

Yet this lack of regulation enables a few small states to dictate terms and affect the lives of Americans living everywhere else, and even now people from outside the United States. While this might provide benefits for the economies of these individual states, the losers far outnumber the winners.