Finding hidden assets in divorce cases
During the course of a divorce, claims of spouses hiding assets are common. One or both spouses might claim that there was significant worth in the marital estate and that the other spouse has taken it. They also might claim that the couple earned substantial amounts of money during the course of the marriage and those earnings are not reflected in the value of the marital estate.
These claims might or might not have validity. The emotions inherent in marital dissolutions don’t tend to foster logic or reason. Therefore, the investigator’s mindset always should seek an answer to the question, “Is it possible that hidden assets exist?”
Most hidden asset cases will involve husbands hiding assets from wives, not wives hiding assets from husbands. Exceptions to these sweeping generalizations abound. However, when faced with parties making identical claims of hiding assets, I understand the tendencies and play the odds in order to keep the investigation focused. The wife probably will protect items of sentimental value. There might be nothing more valuable to her than the Christmas tree ornaments her mother spent her whole life amassing. Alternatively, her husband probably is sentimental about the $5,000 cash hidden in the glove compartment of his car. In addition, and contrary to the generalizations, the gender bias described is trumped by control and the opportunity it creates. That is, a husband or wife can’t act on his or her need to protect assets if the means to do so is unavailable.
There is a formula that can be used in illustrating the possibility of hidden assets or that might be used as the basis for an accusation of missing assets:
+ Assets (including income)
= Hidden Assets
The first part of the equation requires that the existence of an asset be established. That is, in order to be hidden, an asset first must exist. The second part of the equation indicates that in order to be hidden, the asset can’t have been spent.
The formula also applies to the income or earnings generated by a couple. The income of the parties is determined, the expenditures of the parties are determined, and the difference either confirms or denies the possibility of hidden assets.
The formula can be used to provide the basis for a continuing investigation. That is, the formula might indicate assets are missing and that further work should be performed. The formula also can be used to curtail an investigation when it illustrates that hidden assets are unlikely. Finally, the formula can be an end in itself. That is, if the existence is shown, but expenditure isn’t, the controlling party is assumed to have the asset.
Marital Estate Disclosures
Analysis starts with comparisons of the marital estate disclosure to information that is available. For example, the first comparison that often is performed is the comparison of one spouse’s disclosure to the other spouse’s. Simply put, if the disclosures of assets and liabilities don’t match, there might be an indication of a missing asset or an error.
After the disparities in assets and liabilities are addressed, the investigator turns to valuation issues. As indicated, it isn’t unusual to find several different standards of value applied in martial estate disclosures. The investigator’s job is to restate each value to fair market value. Real estate and businesses normally require the participation of expert appraisers. Significant collections of jewelry, guns, antiques, coins, stamps, art and other items also might require the participation of appraisers. Values of automobiles and other vehicles can be found online by referencing one or several of the resource sites available. Significant differences in vehicle values or custom vehicles can require the participation of an appraiser. Household goods normally don’t retain significant value, therefore the cost of an appraisal should be weighed in relation to the expected value of the household goods.
The reason the adjustment to fair market value is necessary is to limit the risk of assets being hidden in plain sight. For example, a husband might list the value of his business at $200,000, which is the book value of the operation. However, an expert business appraiser might determine that the fair market value of the business is $550,000 because of the amount of money the business earns. The existence of the business has been properly disclosed. The book value also has been disclosed, but the standard of value that the court might apply is fair market value.
In many marital estates, as well as businesses, leveraging or borrowing is a significant component of operations. In order to grant loans, banks usually require a balance sheet and income statement. The bank might request personal financial statements (see Page 67) or have its own balance sheet and income statement forms that it requires to be completed. In requesting a balance sheet, the bank is seeking assets to secure the loan, or at least an overall financial picture that will be favorable to getting the loan paid back. The income statement is requested to ensure that there is a cash flow adequate to service the loan repayment.
These statements occasionally are overlooked in initial discovery, but they can provide essential information in valuing marital estates. This is because loan applicants are highly motivated to secure the loan requested. This means that they are likely to disclose all of their assets to paint the most favorable financial picture possible. They also will not be shy in assigning values to assets. In our business example above, it’s highly likely that the business owner would enter the value of the business at $550,000, rather than $200,000. These statements, therefore, are an effective counterpoint to the asset disclosures made during the course of a divorce. The assets in the disclosures might be understated or undervalued, but since the motivation in the statements presented to the bank is the opposite, all assets normally will be presented and their values actually might be overstated.
Financial Statement Review
Once the balance sheets have been obtained, there are several standard procedures that normally are performed. First, the statements are compared to themselves. That is, the balance sheets are summarized in columns — one column for each year.
The assets then are traced from year to year. If an asset disappears, it could be an indication that the asset is being hidden, it has been sold or it has been traded. In any case, an explanation for the missing asset should be sought. The equity of each year then is reviewed. That is, the net worth of the subject is traced from year to year. A decrease in net worth over time can be a symptom of missing assets or debt incurred in an attempt to reduce the value of the marital estate. A sudden decrease in equity, especially after the date of first indication, is an obvious red flag that should be pursued and thoroughly investigated.
The next step is to compare the balance sheet, typically the most current, to the marital disclosures. Discrepancies in the presence of assets and liabilities, and their values are noted and explanations sought.
Financial institutions can possess a wealth of information for investigators. The strategy of following the money in seeking hidden assets actually can begin and end at the subject’s financial institution. Banks normally are very knowledgeable about their legal rights and the rights of their clients. They also are very conscious of the liability they can incur if they damage, or appear to have damaged, one of their patrons. Consequently, a subpoena often is the only way to get information directly from a bank.
Banks normally will have standard procedures that they will require before releasing information related to one of their customers. The key is to understand the standard procedure and the simplest way to understand the procedure is to ask. For example, in a large banking system, the procedure might be that the subpoena is served on the personal banker of the subject. The bank employee then faxes the subpoena to the corporate legal department. The legal department then calls the branch and approves the release of the information specified in the subpoena.
There are a couple of issues in this particular scenario that are relevant. The first is that the subpoena is being served on the personal banker of the subject. This is the best type of situation. The further the subpoena gets from the individual with first-hand knowledge of the subject, the less valuable it becomes. The second is that the bank only will release the information that the subpoena requires it to release and nothing more. If it releases more, it risks getting sued by the customer.
The historical subpoena duces tecum requires that a person show up, typically at a deposition, and bring with him or her certain records relevant to the question at hand. This might have been practical when the relationship between a bank and a patron was recorded in a single-paper ledger. However, in an electronic and paperless banking system, what exactly is a banker supposed to produce at his or her deposition? The answer is that the investigator really doesn’t know what is needed at the beginning of an investigation. What the investigator needs first is a representation from the bank of the relationship between the bank and the subject. The investigator simply can’t ask effective questions without understanding the services a bank is providing.
For example, a representation of services provided to a subject was obtained from a bank. One of the services discovered was a loan to the subject. The loan had not been disclosed. The knowledge of the loan allows the investigator to ask relevant questions. What was the loan for? (It might be an undisclosed asset.) How much was the loan for? (The value of the loan might be equivalent to the value of the asset not disclosed.) When was it received? (If the timing was after the date of first indication, the loan might have been prompted by the divorce process.) What is being used to secure it? (The security might be an asset that was purchased or secured by another asset that might not have been disclosed.)
The question becomes, if the investigator had not known about the existence of the loan, could the subpoena have been written in such a way as to get the investigator the answers to the previous questions? The answer is, of course, maybe. It depends on the wording of the subpoena and, perhaps, the skill and/or demeanor of the attorney responding to the subpoena. For example, the level of cooperation of the attorney signing off on providing the information can range anywhere from, “I don’t see it that way” or “no,” to telling you or the attorney you are working for exactly how to phrase the request to get the information you need in a timely manner.
Therefore, in those cases where it’s necessary to get information directly from a financial institution, moving from general information (what services are provided) to specific information (e.g., details of a loan transaction) often is more effective than a broad, single subpoena. This might require multiple inquires, but asking for specific information using simply stated questions normally will produce better results than a 16-page inquiry written in legalese.
Tip: I am very aware of what I want from a bank when I am seeking hidden assets. I want to sit down with the subject’s personal banker and have him or her push a button on a bank computer that will bring up the entire relationship between the subject and the bank. This will include all savings and checking accounts with identifying numbers, loan agreements, lines of credit and the presence of a safety deposit box. Then I want the personal banker to go to the subject’s file and copy all financial representations that the subject has made to the bank in the last five years. This whole process usually takes less than an hour. Unfortunately, normally due to the paranoia of opposing counsel, I am not given the opportunity to sit down with the banker often enough.
Attorneys, however, usually do a respectable job of seeking to discover the fiscal relationships between banks and divorcing parties. For example, they usually ask for disclosure of all checking and savings accounts, certificates of deposit, safety deposit boxes and so on. In addition, including the request, “submit copies of all financial representations made to any lending or financial institution in the last five years for the purpose of obtaining or retaining debt” normally isn’t a problem, but actually getting the representations is a problem. This is because the subject has exaggerated, fabricated or otherwise misstated the information in order to secure financing.
However, I recognize that there is a relationship between the bank and the subject, and normally the subject doesn’t want that relationship damaged. Consequently, the mere suggestion of interference often is enough to produce remarkable results. For example, simply suggesting that it might be necessary for me to get into a financial institution has produced positive results on numerous occasions. If that doesn’t work, telling the subject that it will be necessary to subpoena his or her personal banker might be enough to get the necessary information.
The last (and usually unnecessary) resort is to actually begin the process of issuing subpoenas and getting into the financial institution. Once the bank becomes aware of these activities, the resistance to providing the information held by the bank normally evaporates. I believe that this is because of a heart-to-heart talk the bank has with the subject.
Individuals who own vulnerable assets such as houses, vehicles and art are likely to insure them. And while a spouse might consider it worth the risk not to insure an asset in order to make sure it’s hidden, many will not. Therefore, insurance policies can give an indication of the existence of properties that bear further inquiry.
Investigators should consider that insurance companies are at least as knowledgeable as banks as to their rights and their clients’ rights. However, banks are not sued on a regular basis; insurance companies are. Consequently, insurance companies will be more highly tuned to the risk of liability in any given situation. This means that even simple requests for information from an investigator can be thwarted.
This isn’t true of inquiries that might be made by the spouse of the subject. If the spouse’s name is on the policy, then the insurance company usually will assume that the spouse has the right to review the policy and determine the nature of the assets being protected.
In those cases where a spouse is excluded from review, or when it’s suspected that policies are being held only in the subject’s name, a subpoena might be required. However, similar to the situation in dealing with banks, a business relationship exists between the insurance company and the insured. The threat of a subpoena can do as much or more than the actual presentation. The insured doesn’t want to put his or her relationship with the insurance company in jeopardy. And, as with banks, if the insurance company obtains knowledge that it might become embroiled in a domestic dispute, it also might have a heart-to-heart talk with its client. Insurance companies are as loyal to their clients as confidentiality laws and exposure to liability make them. They usually are neither loyal to the point of defending their clients if they are doing something that is illegal or against public policy (hiding assets from a spouse), nor loyal to the point of incurring substantive costs for a battle which is, in reality, not theirs.
Tip: Presenting a request for information through a subpoena duces tecum can be expedited in a number of ways. First, for the reasons indicated above, insurance companies are slightly paranoid. If I believe that it will be necessary to get a subpoena, I will talk to the agent first to reassure him or her that it isn’t the company that is under investigation. Then I will have the agent call the legal department and find out the process. That is, who the subpoena should be directed to, contact information and so forth. This gives the agent an opportunity to reassure the legal department that the company isn’t the target of the subpoena, only one of its insured. The effect of this reassurance sometimes is remarkable. In one case, the attorney at the insurance company asked to talk to me and told me in specific terms what the subpoena should contain in order to get the information I needed. Essentially, the attorney was telling me how to protect her company from liability and (I suspect) how to keep her, personally, out of the line of fire.
It clearly should be understood by investigators that revealing the name of the subject in conducting this type of groundwork is hazardous. A relationship exists between the insurance company and the subject. If the investigator damages that relationship, then the possibility of exposure to liability exists.
Other Places to Look for Assets
Art Storage Facilities. In addition to being inherently valuable, works of art can be environmentally sensitive. That is, some art, such as paintings, can require specific temperature and humidity ranges in order to retain their value. Some art owners seek out these facilities to store their collections when they are on vacation or change residences for major portions of the year. Use of these facilities in the past can provide a productive line of inquiry during a divorce.
Relatives. Family ties can provide the means for concealing assets during a divorce. Parents will protect children, children will protect parents and siblings will protect each other. The resolve of the protectors will vary from case to case, but investigators should realize that there is a relationship between the parties much like that of a bank and a customer. The divorcing party usually doesn’t want his or her relationship with a family member damaged. In most cases, they want to protect the relationship more than they want to protect the asset. Therefore, a threat of steeping a relative in the legal process can do more to have a subject reveal an asset than the actual pursuit of a relative. While relatives additionally might agree to hide an asset, they very quickly might draw a new line when it becomes obvious that they are about to become embroiled in the legal process.
Friends. Similar to family members, the emotional bonds between friends can provide a means of hiding assets. However, unlike family bonds, these relationships tend to be more fragile. That is, pressure of any type can break the resolve of an abettor. Unfortunately, this category also includes new significant others. New boyfriends or girlfriends might have loyalties that are ridiculously out of proportion to the realities of a new relationship; however, the physiological factors of new love also provide a certain level of volatility. Pressure, or even threatened pressure, on the relationship easily can break the combined front of the new couple.
Pawn Shops. Individuals who historically have dealt with pawn shops might continue to deal with them during the course of a divorce. Trading assets for a pawn ticket and cash can provide a quick means of securing assets from an inquiring spouse. Investigators should not be lulled into viewing these businesses as the stereotypically back alley, small potatoes operations that only are open after dark. While some pawn shops fit that profile, others are set up to take pawns on vehicles, planes or even real property. Pawns entailing hundreds of thousands of dollars are possible.
Casinos. Many gambling establishments accept fund transfers from their clientele. That is, a player might simply instruct his or her bank to send funds to the casino that will presumably be used for gambling. The casino holds the money until the player shows up and then issues chips or other gambling credit. When the player has had enough, he or she then can instruct the casino to wire the remaining funds back to his or her account. However, there is nothing prohibiting the spouse who transferred the funds from telling the casino that there has been a change of plan and to send the money back. Therefore, the hiding spouse can show where the money went and claim that it was lost. This same procedure can be accomplished using cash. The cash is deposited with the casino and then later retrieved by means of a wire transfer. However, this process looks a lot like money laundering practices utilized by drug dealers, and casinos have procedures in place to detect and defend against this type of activity. Consequently, spouses who attempt this scheme to hide assets can find themselves on the receiving end of unsubtle questions from the casino or federal authorities.
As you can see, there are numerous ways that spouses can hide their assets and, therefore, many places that an investigator should check. However, personal assets are just the tip of the iceberg. Be sure to see the second part of this article in the January/February 2009 issue, which will cover tips for discovering business assets.
Nicholas L. Bourdeau has been practicing in the area of forensic accounting since 1986, and has appeared in court over 150 times on issues associated with the valuation of marital estates, businesses, child support, maintenance, pensions, fraud and damages. He is the author of “The Determination of Income for Child Support” (www.jamespublishing.com or (800) 440-4780), from which this article is excerpted.