At last week’s press conference following the guilty plea of the state’s former EB-5 czar Joop Bollen, I asked Attorney General Marty Jackley if the state had investigated any other private entities like Bollen’s that hold indemnification funds for the state to ensure that other state contractors were leaving such funds intact and not using them as personal ATMs. A.G. Jackley said such funds are “common legal practice” but spoke of no other investigations, emphasized his complete non-involvement in drafting the agreement creating the fund Bollen managed for the Governor’s Office of Economic Development, and recommended taking any questions on the topic to the Legislature and the Governor.
I checked with Auditor General and the Bureau of Finance and Management.
In response to my question—”Do other private entities hold similar funds that in which the state has a secured interest?”—Auditor General Guindon said he is “not aware of the existence of any other indemnification accounts similar to the one held by SDRC Inc.”
The Bureau of Finance and Management replied that any such funds must be reported in the state’s Comprehensive Annual Finance Report, and the only such fund reported in the 2017 CAFR is the SDRC Indemnification Fund One Account:
In its dealings with former state employee Bollen, the state—the Governor’s Office of Economic Development under Governor Mike Rounds, whose GOED signed the contract, and Governor Dennis Daugaard, whose administration let that contract continue until the feds made them nervous—appears to have taken a unique risk that it takes with no other private entity, leaving state money in a private account over which it could not exercise direct oversight.
Bollen may not have absconded with any funds—as his attorney reminded the judge last week, Bollen replaced the funds he “borrowed” from the state within days—but the state did allow itself to lose money needlessly. As I noted in September, the state required Bollen to collect fees from EB-5 investors for the state. The GOED–SDRC Inc. contract required Bollen to hold those funds so they would not show up on the state’s books. However, by leaving those funds in Bollen’s hands, GOED left those funds subject to federal income tax liability. I don’t have the SDRC Inc. tax returns handy (O! would that I could get my hands on them!), but if those state fees collected and held by SDRC Inc. were taxed at 35%, then on the $2.6 million shown in the SDRC Inc. indemnification fund as of June 30, 2016, the state gave up $1.4 million in federal taxes.
$1.4 million—that’s a high price to pay just to keep public money out of public sight. Given that no other state agency appears to engage in such a costly practice, we should continue to ask why the Rounds/Daugaard GOED was so eager to take that risk.