Concealment: the Cornerstone of Fraud
Divorce can create feelings of sadness, anger, and betrayal – especially if one spouse had an affair or the divorce request came “out of the blue.” Those feelings can lead to an intense mistrust of your spouse, which may make you believe that your spouse is hiding assets or engaging in other financial misbehavior. Before we start to discuss fraud and divorce, you need to know that serious fraud only occurs in a very small number of cases. So if your spouse is a salaried employee, and you’ve been living a normal, middle-class life for the last 20 years, it is very unlikely that there’s a hidden offshore account full of cash waiting to be discovered. Now, let’s talk about how and why financial fraud could occur in a 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. 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. Concealment is the cornerstone of fraud.
During divorce, forensic (or investigative) accounting professionals can trace the paper-trail of 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 (see “Dissipation Issues,” below, for more on this topic).
A financial expert will review general records, including the couple’s tax returns, bank statements, credit-card statements, business ledgers, appraisals of properties owned, and retirement accounts. The more money a divorcing person has, the more places it can be squirreled away out of sight. Employees of companies may have deferred compensation plans, stock options, bonuses, expense accounts, or other fringe benefits that they “forget” to declare. Business owners have ample opportunities to hide both income and assets from the lawyer’s and spouse’s eyes – unless someone has the financial skills to comb through the records and make a professional judgment about the authenticity of the books, records, and tax returns.
For families that have built up a sizable nest egg, the hiding places can become more numerous – and they also might intentionally become more complicated. Shell corporations, unfunded trusts, life insurance vehicles, unknown safe deposit boxes, and hidden brokerage/online accounts are among just a few of the hiding places that can be uncovered through good financial detective work. Schemes vary depending on perceived opportunity and motive, but the ultimate goal is to defraud the other spouse of their entitlement.
Red Flags for Fraud
Evaluating changes in secrecy, lifestyle, and income can lead to important circumstantial clues that may lead one spouse to believe that fraud may be taking place. The most difficult element to prove in fraud cases – fraudulent intent – is usually proved circumstantially. It can be that “aha!” moment when faced with evidence that cannot be ignored any longer. Typical red flags include items such as:
- Change in the level of confidentiality between spouses.
- Mail being rerouted to an office or new mail being received.
- Unexplained changes in habitual behavior.
- Pattern changes due to addictions.
- Spending more time on the computer, closing the screen when the spouse walks in.
- Getting caught in lying or deceptive behavior.
- Concealing details of transactions from the spouse.
- Unusual and repeated cash withdrawals from bank accounts.
- Loaning or giving money to family and friends without spouse’s knowledge or consent.
The greater the number of red flags, the more likely that there is something fishy about the family’s finances. The longer a spouse has access to perpetrating a fraud, the easier it is to get away with it; the more time that passes, the more difficult it can be to access certain records or trace funds.
The 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:
- Perceived Opportunity. The person believes he/she can commit the indiscretion without being caught.
- 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.
- 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 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 in Divorce
A type of financial fraud specific to divorce is dissipation. Dissipation occurs when one spouse, essentially, wastes property or money without the knowledge or consent of the other spouse. 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
- Ruining personal items.
- Work tools left out to rust.
- Destroying or failing to maintain marital property.
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; this is something to discuss with an experienced lawyer.
Other Financial Fraud Issues
Aside from dissipation, other types of fraud can be discovered during divorce by investigating the family finances. There are cases of forgeries and questionable documents, tax fraud, loan fraud, and insurance fraud – but the majority of divorce fraud is centered within the framework of misappropriation of assets. Before launching an investigation, ask yourself whether there has been transparency and truthfulness about finances during your marriage and divorce. Did both of you take an active role in managing the money and taxes together, or did you allow your spouse to handle the finances during your marriage?
One of the easiest ways to prevent fraud in a marriage is to treat finances like businesses do: using a checks-and-balances system where both spouses see, understand, and review the finances. Holding family members accountable for missing assets eliminates the perceived opportunity and takes away the ability to commit fraud. Although this advice may come too late for you, deterrence and vigilance is the best way to stop financial fraud from starting in the first place.
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 focuses on forensic accounting for divorcing clients. www.priorityplanning.biz