SIOUX FALLS, S.D. (KELO) – A South Dakota-chartered trust company has been fined by the U.S. Department of Treasury.
The Kingdom Trust Company, which was established in 2010 with a listed address in Sioux Falls, has been fined $1.5 million after the Financial Crimes Enforcement Network (FinCEN) completed a civil enforcement investigation. FinCEN announced the fine in a news release.
A 32-page report says The Kingdom Trust Company violated the Bank Secrecy Act and its regulations. The report says Kingdom Trust is headquartered in Sioux Falls, but has a trust services office in Murrary, Kentucky where most of its 80 employees work. You can view the report below.
State law requires trust companies to have a South Dakota resident as a trust officer or key employee. A trust company also must have office space in South Dakota, and a majority of its board must meet at least twice annually in South Dakota.
During the time period of Feb. 15, 2016 to March 15, 2021, federal investigators say “one single employee was responsible for conducting daily reviews of all the prior day’s transactions to identify any potentially suspicious transactions” for Kingdom Trust.
“FinCEN has identified hundreds of suspicious transactions for which Kingdom Trust failed to timely and accurately file a SAR (suspicious activity reports),” the report said.
Federal investigators say Kingdom Trust admitted willfully it failed to accurately and timely report hundreds of transactions.
“Kingdom Trust had virtually no process to identify and report suspicious transactions, resulting in it processing over $4 billion in international wires with essentially no controls,” FinCEN’s Acting Director Himamauli Das said in a release. “This enforcement action is an important statement that we will not tolerate trust companies with weak compliance programs that fail to identify and report suspicious activities, particularly with respect to high-risk customers whose businesses pose an elevated risk of money laundering.”
Timothy Kuhman is the registered agent for The Kingdom Trust Company which has a status of “good standing” with the Business Filings Division under the Secretary of State’s office. The Kingdom Trust Company’s 2022 annual report to the Secretary of State’s office was filed Oct. 21, 2022 and the next annual report is due Dec. 1, 2023. The Secretary of State’s role is ministerial in collecting annual reports for businesses.
KELOLAND News reached out to The Kingdom Trust Company, the South Dakota Department of Labor and Regulation and the Secretary of State’s office regarding the federal fine against The Kingdom Trust Company. Any response will be added to this story.
Bret Afdahl, Division of Banking Director, sent KELOLAND News an emailed statement about how the state regulates trust companies.
“The South Dakota Division of Banking conducts regular examinations of each trust company chartered in South Dakota. Each examination includes a review of Bank Secrecy Act and Anti-Money Laundering compliance programs,” Afdahl said. “The Division has an information sharing agreement in place with FinCEN and regularly shares information with them. Primary enforcement authority for the Bank Secrecy Act rests with FinCEN. The Division considers any publicly available and confidential information as it examines and rates each company and as it considers supervisory actions.”
Tom Simmons, a law professor at the University of South Dakota’s Knudson School of Law and member of the South Dakota Task Force on Trust Administration. He said the investigation and fine is good for the trust industry in South Dakota by proving there is oversight on trust companies.
“There’s a sense, because a trust is kind of an opaque idea, that if you put money in a trust that it kind of disappears from regulatory oversight or taxation. That’s far, far from the case,” Simmons said. “You’re not only just following these regulations, you’re seeing those of your competitors who aren’t charged with it. I think that that really helps build a culture of compliance.”
Tom Deadrick, Deputy Secretary of State, told KELOLAND News in an email “good standing” with the Secretary of State’s office applies to required statutory filings and fees.
He said “good standing” is not affected by litigation or fines and “good standing” will remain as long as the required documentation and fees are timely filed.
South Dakota’s trust industry and state regulators
The news release from FinCEN said it used collaboration and assistance from the Department of Justice and Federal Bureau of Investigation. At the state level, South Dakota has its own trust regulators.
Trust companies handle hundreds or thousands of trusts. Sioux Falls lawyer Terry Prendergast told the South Dakota Trust Association conference people who shield their wealth through financial trusts in South Dakota aren’t tax evaders. Prendergast said trusts are “nothing more” than a way to defer paying taxes until some future date. The federal IRS has complex regulations on how trust income must be reported each year.
The South Dakota Division of Banking regulates trust companies and as of Nov. 17, 2022, there’s more than 100 licensed trust companies in South Dakota and more than $600 billion in assets. That’s more than 100 times the entire $6 billion state budget for South Dakota in 2023.
At its latest meeting in Dec. 2022, the South Dakota Banking Commission reported the state had 16 people on its trust examination staff.
KELOLAND’s Bob Mercer has reported how state law allows financial trusts to operate in near-total privacy in South Dakota. Mercer pointed out regulators in South Dakota can look at a trust’s records, but the same regulators can’t legally tell the public about what they found. South Dakota law also requires that financial trusts pay for state regulators to keep an eye on them.
South Dakota Department of Labor and Regulation deputy cabinet secretary Dawn Dovre told Mercer it has been more than a decade since the Division of Banking last issued a cease and desist order against a trust company.
“As with our banks, we have a small number of trust companies rated ‘needs improvement’ or ‘less than satisfactory’ at any given time,” Dovre said in an email. “When these situations arise, we work with the board of such company to adopt a resolution to address the identified weaknesses. If a board resolution is not sufficient to resolve the issues timely, we will enter into a memorandum of understanding (MOU) which will identify steps to be taken with timelines for progress. If the issues are not addressed through the use of an MOU, we can issue a Cease & Desist Order (C&D) ordering the company to take additional action with very specific deadlines.”