Finding Financial Fraud

There are warning signs that your client or their spouse may have committed financial fraud within their marriage. The greater the number of red flags, the more likely that fraud has occurred.

By Peggy L. Tracy, Certified Fraud Examiner

During divorce, feelings of grief, rage, and betrayal can lead to an intense mistrust of the other spouse – which may make someone believe that their spouse is hiding assets or engaging in other financial misbehavior. How common is marital fraud? In “How to Take a Financial Pulse: Is that Deadbeat Really Broke?” (Fraud Magazine, Sept. 2011), Certified Fraud Examiner (CFE) and former FBI agent John Elliott stated: “The financials of 97% of the people I’ve investigated were untruthful in some respect.” Given those statistics, you owe it to your clients to learn how and why it might occur during divorce.

Hidden or missing assets and misrepresentation of family income are two common areas of money manipulation that, if left undiscovered, can lead to a disproportionate share of the assets going to one spouse. Concealment is the cornerstone of financial fraud, and a divorcing spouse may convince otherwise honest relatives and friends to assist with concealing marital assets by telling them that their ex is racking up debts or emptying bank accounts.

During divorce, forensic accounting professionals can trace funds through the various accounts of the marriage, determine the actual income of the family, verify claims of co-mingling marital and separate assets, or determine the validity of a potential claim for dissipation of marital assets.

High-net-worth marriages are especially prone to money manipulation for the simple reason that the monied spouse’s financial position gives him/her more choices and strategies to hide assets. Executives may have various contracts dealing with employment, deferred compensation, stock options, restricted stock, executive vacations, and death and disability plans, to name a few perks that go along with top management. Business owners and partners also have ample opportunities to hide both income and assets from the lawyers as well as their spouses – unless someone has the financial skills to discover all the hiding places for that particular partnership or corporation.

When the high-powered marriage of Jan Bobrow and former Ernst & Young Global chief executive Richard Bobrow broke up in 2002, Jan was awarded just over $14 million – or 60% of the couple’s net worth. Judge Steve Nation of Hamilton Superior Court, IN, issued an opinion that greatly increased the value of Mr. Bobrow’s partnership share of the firm. Because this case went to trial, we got an inside peek into how courts look at dissipation and employment perks for top management and partners. However, most of the notorious, high-profile cases settle before they go to trial and secrecy reigns.

Red Flags

The following is a partial list of red flags that could help you determine whether a fraud examination is warranted:

1. The story about the divorce and the family’s finances keeps changing.
2. You catch your client’s spouse in an outright lie.
3. Transparency is not a term in the spouse’s vocabulary.
4. Items that are requested repeatedly are not turned over in a timely fashion.
5. You receive documents with missing pages or months that might be incriminating.
6. You have direct evidence that your client’s spouse is concealing material facts.

The strongest red flag for marital fraud is that the other spouse will not turn over documents in a timely fashion – and when he/she finally provides them, potentially incriminating documents or pages are missing.

If you observe any of these six signs in your own client, you should proceed with caution if you decide to continue with the engagement – and expect opposing counsel to be hiring a forensic specialist to perform an investigation.

Puzzle Pieces

In most cases, the major breadwinner is the spouse most likely to engage in financial fraud. If you suspect the other spouse of committing marital fraud, you can hire a forensic accountant and/or CFE and subpoena the missing records; the financial expert can assemble the puzzle to see whether your suspicions were correct.

If you’re really not sure whether financial fraud has taken place, the expert can prepare a cost/benefit analysis showing whether it is worth the cost to pursue the alleged fraud. A financial expert can spend between 20 and 150 hours investigating a case, and there is no correlation between hours spent and financial remedy; the financial benefits can range from zero dollars to more than $1,000,000.

Sometimes, clients are simply mistaken because they’re unable to read brokerage statements or tax returns correctly – or they may have listened to a spouse boast about money that may never have existed in the first place.

The Financial Fraud Triangle

During the 1940s at Indiana University, Dr. Donald Cressey created the “Fraud Triangle” hypothesis to describe a new type of criminal: the white-collar fraudster. Similar to the idea of a three-legged stool (which cannot stand without all three legs), Dr. Cressey theorized that there are three elements that must be present for a person with no criminal history to commit fraud:

1. Perceived Opportunity. The person believes he/she can commit the indiscretion without being caught.
2. Pressure. This is the motive, usually of a social or financial nature. This is a problem the perpetrator believes he/she cannot share with anyone.
3. Rationalization. This takes place before the indiscretion. The rationalization is necessary so the individual can maintain his/her self-concept as an honest person caught in a bad set of circumstances.

Trusted persons can become trust violators at any point during the marriage: some start lying and cheating soon after the wedding, others don’t start until decades into the marriage, and, fortunately, others never go down this road. However, when someone sees him/herself as having a problem that he/she can’t share, then applies a rationalization to the thought of committing a dishonest act to secretly resolve the issue, he/she is on the path to immoral or illegal behavior.

Dissipation Issues

Dissipation occurs when one spouse essentially wastes marital assets without the knowledge or consent of the other. There are many legal definitions of what constitutes dissipation, but they all involve minimizing marital assets by hiding, depleting, or diverting them. Some examples include:

• Money spent on extramarital relationships (hotels, trips, gifts, etc.);
• Gambling losses;
• Transferring or “loaning” cash or property to others;
• Selling expensive assets for much less than they’re worth;
• Spending down business cash account;
• Excessive spending, including hobbies;
• Residence falling into foreclosure;
• Destroying or failing to maintain marital property;
• Leaving valuable work tools out to rust or be stolen.

If there has been an intentional dissipation of marital assets, the innocent spouse may be entitled to a larger share of the remaining marital property. In my experience, the more specific the dissipation item, the easier it becomes to prove; examples include someone paying for their extramarital partner’s college tuition, condo, or car.

Special Challenges

There are many special challenges lawyers and financial professionals face in working on cases that involve fraud. Many lawyers/professionals are not well-versed on what marital fraud looks like and how to proceed when confronted with evidence. In addition, marital financial schemes can become very complex: I have investigated the use of shell entities, trusts, wire transfers, and overseas accounts to attempt to move money out of the marriage.

Aside from dissipation, you can discover other types of fraud during divorce by reviewing key documents. There are forgeries and questionable documents, tax fraud, mortgage loan fraud, and insurance fraud – but the majority of divorce fraud is centered within the framework of misappropriation of assets.

Establishing the paper trail is key to possibly recovering assets or income. A clear paper trail will show you whether the asset is still in existence, or whether it has been depleted and is not recoverable. Think of it as peeling an onion: for every layer you uncover, there will be another layer underneath until you finally hit your target.

Peggy L. Tracy (CFP®, CDFA, CFE) is the owner of Priority Planning, LLC in Wheaton, IL. A Certified Fraud Examiner and Certified Divorce Financial Analyst®, she has conducted more than 100 marital fraud investigations. She focuses on forensic accounting for matrimonial lawyers and divorcing clients. www.priorityplanning.biz