Working PIby James S. Peet, PhD, CFE
Modern marriage, similar to marriage in the past, is often a matter of economics. Gone are the days of dowries or bride prices, but economics still plays a major role in marriage, particularly when it comes to divorce. Most divorces boil down to one or two things—financial decisions regarding assets and child custody. The latter of which also often has a financial decision to it.
In most marriages, there is usually one partner who is the financially dominant one, in that they basically control the assets. This is not necessarily bad, but in some cases, it can be detrimental, particularly to the non-financially dominant party in a high-conflict divorce. A high-conflict divorce (HCD) is one where conflict, deception, and abuse take precedence over negotiation and resolution. In a high-conflict divorce, one party is typically drawn toward conflict, not settlement. This creates a problem for all involved, including the investigative accountant/fraud investigator. It’s not just that the party will be combative, but he or she will usually hire an attorney who is similar in attitude, which creates further stress in the divorce and investigation.
The Red Flags of High-Conflict Divorce
Identifying a high-conflict divorce early on will make your role less stressful. You’ll want to check with your client, or the client’s attorney, to determine how many of the following HCD red flags are identifiable.
• A restraining order or emergency protection order is in place
• A high volume of antagonizing text messages and/or emails
• Physical, mental, emotional/psychological or financial abuse
• Going through several attorneys
Why a Financial Investigation?
Divorce is ultimately a financial decision regarding assets. Oftentimes, the non-financially dominant partner in the divorce is completely unaware that he or she needs a financial investigation. They have been kept in the financial closet for so long, they oftentimes don’t even know the true financial situation.
Many of these clients are women who have been the stay-at-home mom, taking care of hearth and home while the financially dominant husband brought home the bacon and controlled the finances, paying all bills, balancing checkbooks, funding investments, etc.
A financial investigation can help the non-financially dominant partner identify not only the known assets and the true value of those assets but also hidden assets and true income (which is most likely being manipulated).
Along with identifying assets, a good financial investigator can assist the client’s attorney in preparing document requests, developing interrogatories, and developing deposition and trial questions. The private investigator can also be instrumental in identifying perjury in responses to interrogatories and testimony. Finally, the financial investigator can help the non-financially dominant spouse obtain a fair settlement.
The Red Flags that Prompt an Investigation
Many fraud investigators can quote offhand many of the red flags that would prompt an investigation into occupational fraud, but there are many red flags of high-conflict divorce fraud that are unique to the field.
• Spouse is protective about the mail (or hiding it)
• Increased computer security (clearing history, changing passwords, changing bank passwords)
• Spouse is reading the client’s emails without permission
• Removing the client’s name from bank/credit card accounts
• Opening credit cards in the client’s name (have your client run a credit check on themselves)
• Rushing document signings (e.g., tax forms—”The CPA needs this signed now!”)
• Spouse uses a private mailbox
• Not sharing access code to home security box/safe
• Fairly recent (within two years) Cryptocurrency (Crypto) and FinTech accounts and gold purchases
• Gambling
• Expensive Toys (boats, motorcycles, cars, horses, guns, etc.)
• Loans to family and friends
• Sudden Income Deficit Syndrome (SIDS) in a business
• Paying an excessive amount of income tax
• Incorporating businesses or forming an LLC in Delaware or Nevada
SIDS is when business income plummets a year or two before the divorce. This is typically an attempt to funnel money elsewhere and to show there isn’t much money to split up, use for alimony, or pay child support.
Working With the Client
There are several things to consider when working with a client involved in a high-conflict divorce, the top two being the emotional and financial conditions. Emotionally, these clients have been put through the wringer, mainly when dealing with a narcissistic spouse.
They feel beaten down, have low self-esteem, and after years of gaslighting, may believe they are worthless. Financially, they can be in dire straits, having had little or no control over the family finances for years, and being left without any means of financial support. Knowing this up-front will help you help your client considerably. Be empathetic and understanding.
You’ll want your client to provide you with as much information as possible to begin the investigation. This will include all information on their spouse, all bank and credit card statements, all financial brokerage statements, copies of signed tax returns, any business records they can obtain, and a credit report on themselves.
Ask them to search the home for any hidden assets, cash, or statements. If they still live with their spouse, have them search the garbage if they can (usually after the spouse has gone to work). Dumpster diving, while illegal in some states, is perfectly legal if the owner of the property is doing it.
You’ll also want to have them obtain as many social media images as possible. Look for toys (boats, guns, cars, etc.), gambling posts, vacations, or any other event that might be useful for conducting the financial investigation. Keep in mind that you’ll likely have to do a lifestyle analysis of the spouse, and having social media images and postings might be beneficial here.
Working with the victims of high-conflict divorces can make you want to take sides. Don’t explain to the client that you will do your best to uncover the truth, but that you have to stay neutral, seeking only information regarding fraud. This is a good reason to refuse any contingent payments.
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Working With Other Professionals
You’ll likely be working closely with one or more other professionals during the investigation. Foremost among them will be the client’s attorney.
I usually reach out to the client’s attorney after contracting with the client (and after he or she notifies the attorney) to let them know what I do, can do, and what I expect from them. The attorneys are the ones who will be getting evidence for you, so be sure you let them know what you’ll need. Along with subpoenas, the attorney will also submit Interrogatories and Requests for Production.
Things you’ll want the attorney to request for Discovery or with the use of subpoenas include:
• All business accounting records (digital copies of the originals, not paper copies);
• Copies of all W-2s and 1099s;
• All tax returns (personal/business), preferably from the tax preparer;
• All bank, credit card, brokerage, and loan statements/casino records.
When requesting casino records, be sure to ask for player activity reports, tax forms, copies of checks issued to and by the casino, copies of all ATM transactions, and whether or not the casino is holding cash “on account” and, if so, how much.
You will want to work closely with the attorney when it comes to developing the Interrogatories, Requests for Production, and subpoenas. Sometimes, Interrogatories and Requests for Production only allow for a limited number of questions, so be prepared to limit your list to obtain what you consider the most important information.
If a business is involved, and you’re not a CPA with a business valuation specialty, you will want to obtain the business valuation report. Sometimes a digital expert is needed to extract data from computers. This is something you would want to refer to the attorney.
Asset Searches
You might have to identify or search assets not readily identified by the client or through Discovery. Open-source intelligence platforms allow the identification of businesses and real property.
In the US, under very limited purposes, one can hire a data broker to search for bank and brokerage accounts. Be very careful when working with data brokers, as the federal laws are very strict on who can access bank or brokerage information. This will likely require a court order (which can also include a court order for child support). I can’t emphasize enough how important it is not to violate the law if you go this route. Some assets are difficult to locate, such as crypto, foreign bank accounts, and cash. These expenditures can sometimes be identified through statements.
Along with a safe, some people utilize diversion safes. They can vary from cans of shaving cream to false electrical outlets to hollowed-out books. Cash can also be hidden in other places, such as in drop ceilings, books, CD or DVD cases, or even buried in backyards. One place to hide gold coins outside is typically in chain-link metal fence posts—that way a metal detector can’t find them. Look for string or fishing line extruding from the caps of those posts.
As the world of finance has moved into the digital realm, with payments increasingly being made online, it’s good to find out if the spouse has any online payment system accounts, such as PayPal or Venmo. These payment systems can be used to transfer and hide money.
Reviewing the Data/Evidence
You’ll likely get a large amount of data, some in digital format, and some in paper format. For bank statements and credit card statements, you’ll want to put the data in a searchable spreadsheet format, such as Excel. There are a number of software programs available that allow you to extract data from PDFs to put it into spreadsheets. I use BankScan due to cost and functionality.
Be on the lookout for large withdrawals or transfers, especially numbers ending in zero (e.g., $1,000.00 or $975.00), and any unusual activity. Unusual activity includes ATM transactions at Casinos and crypto ATMs, purchases at pawn shops, jewelry stores, gun stores, art studios, and lingerie stores.
The backs of canceled checks provide useful information, such as ghost companies or hidden bank accounts held by the spouse. Copies of bank statements and checks in the US are kept in digital format for seven years, so you’ll have some base years to work with to establish income and spending patterns.
When analyzing digital accounting systems for business records, run an audit trail function if the software has it. QuickBooks for desktop has this function, and it has limited functionality in the online version. Be on the lookout for altered or deleted transactions and even numbers. You’ll also want to look for ghost vendors and employees, along with falsified expenses. As with personal records, look for suspicious transactions or unusual activity masquerading as business expenses. I pay particular attention to transactions that may be used to purchase crypto or move money to hidden bank accounts.
Read the responses to Interrogatories and depositions. Compare what is said versus what you have in hand. If any evidence of perjury is found, notify the client’s attorney. Courts don’t look kindly upon perjurers.
Tracing
While most investigators involved in investigating fraud consider tracing to be following the money to and from illicit sources, in divorce cases, tracing is the process of determining separate versus community property. This is particularly important in those states that have community property laws. I’ve included some good resources on this at the end of the article.
Conclusion
When taking on a divorce financial investigation, determine if it’s a high-conflict divorce case by looking for the associated red flags. Be sure to understand the potential financial and emotional problems associated with it. Develop rapport and empathy with your client to be able to work effectively. Be upfront about expected costs and what you can do to help the client. Find out what they want, but remind them that you have to remain impartial in any investigation. Establish a good working relationship with the other professionals, helping them help you and making sure you’re all on the same page.
Tracing Resources
Overview of Characterization & Tracing in a Divorce by Michelle May O’Neil, read here, published on August 12, 2013.
The Basics of Tracing—the Ultimate Property Division Seminar 2011 by Greg Enos, read here.
About the Author
James S. Peet, PhD, CFE is the Principal Manager of Peet & Associates, LLC, a Washington State licensed PI firm specializing in financial investigations. He has been a PI since 2008, a Certified Fraud Examiner (CFE) since 2011, and spends his spare time fishing, traveling, and writing Science Fiction novels.
We’re always listening. Send your story submission/idea to the Editor: kendra@orep.org.
