Uncovering Hidden Assets in Divorce Proceedings
Likelihood, perpetrator, timing, formula, economic reality
By Nicholas L. Bourdeau
Excerpted from
The Determination of Income for Child Support
During the course of a divorce, claims of spouses
hiding assets are common. One or both spouses may claim that there was
significant worth in the marital estate and the other spouse has taken
it. They may also claim that the couple earned significant amounts of
money during the course of the marriage and those earnings are not
reflected in the value of the marital estate.
These claims may or may not have validity. The
emotions inherent in dissolutions do not tend to foster logic or reason.
However, it puts the divorce attorney in a position where some action
must be taken. If the attorney does not take action, then claims of
failing to exercise due diligence may follow. The action taken by
attorneys is usually to conduct some type of investigation themselves,
or to engage the services of a financial investigator or a combination
of the two. In either case, there are guidelines that investigators can
apply to facilitate the process.
Steps for Successful Investigation
The first step in seeking hidden assets is for
investigators to recognize an underlying and limiting factor: The
possibility of hidden assets has to exist before hidden assets can
exist. Simply put, and by example, if a couple made $50,000 during a
year and spent $50,000, no part of the $50,000 can be hidden. One
problem with these situations is that all too often the divorcing party,
and sometimes the attorney and the financial investigator begin work
under the sole assumption that hidden assets exist. This approach is, at
best, frustrating. It is frustrating for the individuals seeking the
assets because they may have no idea where to begin and may have little
proof on which to base their allegations. It may also be frustrating for
those attempting to defend against the allegations. They may not know
how to respond because they have been placed in the position of having
to prove a negative, “I’m not hiding assets; how do I show you something
I’m not doing?” Working under the assumption that hidden assets exist
may also lead to accusations of conducting fishing expeditions or
subjecting a spouse to undue burden in the discovery process. Another
problem is that, ultimately, hidden assets may not exist. If this is the
case, then both sides have wasted time and money attempting to solve an
imaginary problem. Illustrating the possibility of hidden assets gives
an investigation credibility and direction. Illustrating the
unlikelihood of hidden assets curtails expensive investigations and
discovery and also protects attorneys and investigators from accusations
of inadequate performance. Therefore, the investigator’s work should
always include a mindset that seeks an answer to the question, “Is it
possible that hidden assets exist?”
The next step in pursuit of hidden assets is for
the investigator to understand the environment in which he or she is
working. There are numerous ways that married couples handle their
finances. These range from either the husband or the wife controlling
everything, to the couple making every financial decision together. In
between there can be arrangements where the husband or the wife is given
a household allowance to manage the living expenses of the family. There
can also be agreements where the couple has three checking accounts:
his, hers, and joint, with the joint account being used to run the
household. No matter what system has been devised by the couple, the
investigator must have an understanding of its workings. This
understanding provides the investigator with some basic information such
as who had control of the assets and income of the couple. Essentially,
control equals opportunity. If one of the parties had exclusive control
of an asset or income stream, then the possibility that it might be
misdirected exists.
The investigation then moves from the general
financial operations of the couple to the specific. Investigators will
seek to educate themselves on what income was available to couples and
how they spent it. This education process should be shared with the
spouse making claims of hidden assets. In a large percentage of the
systems that might be devised by couples, one person will have more
knowledge of the couple’s finances than the other. For example, assume
that a husband and wife have developed a system whereby the wife handles
the finances of the couple. The husband’s paycheck is directly deposited
into the joint account of the couple and he is given an allowance of
$100 per week for lunches and miscellaneous expenses. The wife pays the
mortgage, the credit cards, groceries, retirement savings, and makes all
of the financial decisions. The husband, therefore, has very little idea
of how the couple spent their money or even how much it costs to live.
Claims of hidden assets are most often brought by the spouse who did not
have control of the couple’s assets. Educating this spouse on the
financial realities of the couple will, in many cases, make accusations
of hidden assets evaporate. In other cases it will fuel the accusations,
but provide investigators with a direction for pursuit of the missing
assets.
Finally, all assets have lives. They are purchased
(or traded for), insured, taxed, appraised, maintained, repaired, and
finally traded, sold, or scrapped. Each stage of their existence can
leave evidence as to their existence and perhaps value. This type of
evidence is typically referred to as a paper trail. Mentioning a paper
trail to anyone (client, attorney, or even some investigators) may
elicit images of massive investigations, teams of CPAs working in unison
and Congressional inquiry. This is usually not the case. Let’s take a
simple example. Let’s assume that a husband bought an unmounted diamond
with the intent of having the asset excluded from the marital estate.
The husband wrote a check for the diamond. At the time of purchase, the
jeweler provided a receipt. After the time of purchase, the husband
asked for an appraisal so that he could insure the piece in an insurance
rider. The husband then dropped the rock into his new safety deposit
box. The paper trail consists of the check written for the diamond, the
receipt from the jeweler, the appraisal, the insurance policy with
rider, and the payments for the safety deposit box. Each of these items,
if found, provides evidence of the existence of the asset. The “if
found” of course is the problem. Fortunately, most parents are not
criminals. This means that they are inherently unpracticed in the art of
deception. Consequently, picking up the ends of paper trails is often
not a challenge. However, getting the information necessary to perform a
competent investigation is often a problem. If an investigator
requests everything that may turn up a hidden asset, he or she will
undoubtedly end up facing accusations of conducting a fishing expedition
or indications that the discovery request is overly burdensome. Judges
often buy into the argument saying essentially, “If you can’t tell me
what you are after, you can’t have the information.” This, of course,
frustrates the investigative process. If the investigators knew exactly
what they were after, they wouldn’t have to ask for the information.
Therefore, this type of investigation entails building from what is
known, to that which is not; from the information that is available, to
that which is not; and sometimes, from the simple to the complex.
Where to Look for Hidden Assets
The Perpetrator
Most hidden asset cases will involve husbands
hiding assets from wives, not wives hiding assets from husbands. There
are two basic reasons for this tendency. First, even though our society
has made huge advances in the equalization of the sexes, there is still
a tendency for males to earn more than females. The person generating
the income normally exerts more control over the income. Therefore, the
person in control of the finances has the opportunity to keep them from
the person who does not have access. Consequently, men will be more
likely hide assets from women because of opportunity.
Another reason men will be more likely to hide
assets than women is the differences in the way men and women handle
problems. Generally, men are more aggressive than women. When a man has
a problem, he attacks it or otherwise tries to bring the situation under
his control. When control isn’t possible, he will seek to salvage what
he can. The salvaging may include taking what he can whether or not he
is entitled to it. When a woman has a problem, she analyses the
situation and seeks solutions. Therefore, women are more likely to put
everything on the table and then attempt to deal with it.
HEADS UP:
Exceptions to these sweeping generalizations abound. However, when faced
with parties making identical claims of hiding assets I understand the
tendencies described and play the odds in order to keep the
investigation focused. The wife will probably protect items of
sentimental value. There may be nothing more valuable to her than the
Christmas tree ornaments her mother spent her whole life amassing.
Alternatively, her husband is probably very 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
cannot act on his or her need to protect assets if the means to do so is
unavailable.
The Date of First Indication
Hiding assets during a divorce is a type of fraud.
Therefore, some of the basic rules that govern fraud investigations can
be used in the discovery of hidden assets. For example, frauds
perpetrated on an employer have a beginning that is usually small and
then escalates. Assume, for example, that an employee discovers a
duplicate paycheck she accidentally wrote to herself and that the
duplication is not caught by her employer. That initial, accidental
check is the starting point of the fraud which eventually escalated into
the employee duplicating all of her paychecks. Investigators
understand that there is a high probability that investigative efforts
focusing on periods prior to this check are unlikely to yield additional
fraudulent activities. Investigations into hidden assets have a similar
pattern which, for purposes of this discussion, is referred to as the
date of first indication. Essentially the concept proposes that there is
a date at which one or both of the parties were likely to have begun
hiding assets. That is, investigations after this date are likely to
produce worthwhile results while investigations focusing on time periods
before this date are not.
This date is usually the point that one or both of
the parties recognize that the marriage is unlikely to continue. The
date can be obvious, such as the date when an affair is discovered, or
the date of an argument where physical violence erupted. Of course, the
date can be more subtle, and the husband and wife normally do not reach
the conclusion that the marriage is over at the same time. However,
seeking changes in behavior on the part of either party will give
investigators clues as to when to begin the search.
Identifying and therefore limiting the
investigative time period is important. First, there are very few cases
in which clients will be happy to pay for the services of an
investigator without the production of results. Second, the discovery
associated with the investigation of extensive time periods becomes
onerous for the producing party. That party may protest (with
justification) that such discovery is overly burdensome and seek
protection from the court. If the court agrees, then the investigator
may lose valuable information to the sweeping protection of the court.
For example, assume that an investigator asks for credit card statements
and receipts from a husband for the last ten years. The husband protests
and the court agrees that the request is excessive protecting all of the
information from production. However, under the assumption that the
husband’s affair was discovered two years ago, he was likely to have
been hiding assets only since the date his marriage was in jeopardy.
Limiting the request for detailed documentation in the example may have
escaped the protection of the court. In addition, if expenditures are
discovered in the limited discovery that lead to hidden assets,
additional discovery requests for periods prior to the date of first
indication are given credibility.
The preceding discussion relates to the detailed
discovery that is often required in the establishment of income for
child support as well as the search for hidden assets. It does not apply
to summary documentation that is required for comparative purposes. The
prime example of summary documentation is balance sheets. These
documents, often consisting of no more than one or two sheets should be
sought for periods before and after the date of first indication. See
the Financial Statement section for further discussion.
The Formula
There is a formula that can be used in
illustrating the possibility of hidden assets or that may be used as the
basis for an accusation of missing assets:
+ Assets (including income)
-
Expenditures
= Hidden Assets
The first part of the equation requires that the
existence of an asset must be established. That is, in order to be
hidden an asset must first exist. For example, assume that a wife won
$10,000 in a state lottery according to a list of winners published in
the newspaper. The first part of the equation has been satisfied. That
is, there is evidence of a $10,000 asset.
The second part of the equation indicates that in
order to be hidden, the asset cannot have been spent. Continuing with
our example, assume that the bank statements of the couple had been
received in the normal course of discovery. A review of the bank
statements did not show a $10,000 deposit had been made to the couple’s
joint bank account. We know that an asset exists, and we know that the
couple did not spend it. Therefore, the asset existed under the control
of the wife and is missing.
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 as simplistic as the example
provided or encompass dozens of assets and numerous income streams. It
can be used to provide the basis for a continuing investigation. That
is, the formula may indicate assets are missing and that further work
should be performed. The formula can also be used to curtail an
investigation when it illustrates that hidden assets are unlikely.
Finally, the formula can be an end in itself. In our example, a court
may deem that the completion of the formula is enough to assess the wife
the $10,000 in the marital estate division. That is, the existence is
shown, expenditure is not, therefore, the wife is assumed to have the
asset.
Economic Reality
There is a correlation between the amount of money
an individual or a family earns and how much money they spend on their
standard of living. Simply put, the more money earned the more that is
spent to increase the standard of living. There are exceptions of
course, but couples must make extraordinary efforts to break this
pattern. For example, a couple can agree that all salary increases from
a particular date will be placed into savings for the children’s
education. They may succeed in this endeavor, but there will be
significant pressure on the couple to use the money for emergencies,
perceived emergencies, or other expenditures that can be rationalized as
being for the children. Therefore, investigators might expect that a
large proportion of hidden asset claims will be nothing more than a
skewed perception of the amount of money earned versus the amount of
money spent.
The other economic reality involves the nature of
the people involved and the environment. People seeking a divorce are
not usually career criminals. Therefore, their attempts to conceal
assets will probably not be sophisticated, elegant, or hard to detect.
They are likely to be simplistic, direct, and at times merely
desperate. Consequently, investigators pursuing the obvious will
probably have better results than those looking for (or expecting)
convoluted schemes. The environment is one of limited time and high
stress. Complex plans often take time and logical thinking to put into
play. A person under high stress with little time may not be able to
formulate schemes that will avoid detection. Again, looking for the
obvious first will increase the odds of finding hidden assets.
Nicholas L. Bourdeau has been practicing in the area of forensic
accounting since 1986. He has appeared in court over a 150 times on
issues associated with the valuation of marital estates, businesses,
child support, maintenance, pensions, fraud, and damages. He has been a
contract instructor for the State of
