Red Flags of Fraud in Divorce

This article was originally printed in the ABA Section of Family Law eNewsletter, January 2014.

The vast majority of family law cases are settled without trials. However, a client should not enter into a voluntary settlement if there are significant concerns about the truth of the financial disclosures and indications that assets or income may be hidden. The first step in determining whether a forensic accountant is needed to evaluate the finances of the parties is the identification of “red flags” of fraud. A red flag is simply a warning sign or an unusual item or circumstance.

Attorneys often use their instinct to determine when a forensic accountant is needed in a family law case. If something does not feel right, it probably should be investigated.  A client is often suspicious of the spouse even before they are separated. The spouse may even be known to manipulate the money.

Beyond using intuition to determine if something is wrong, there are plenty of warning signs that indicate the finances should be evaluated carefully. These red flags by themselves do not mean that money has disappeared or the finances are being manipulated. But they are signs that an investigation is warranted. Because divorce is so adversarial, it is likely that one or both of the spouses will conceal or manipulate financial facts.

Behavioral Red Flags

Evaluate the behavior of the spouse, both at home and at work. Is there secrecy or extreme control surrounding financial matters? Some general behavioral red flags include:

  • Excessive control exerted over financial matters, such as control of all bank information, statements, and online access
  • Details of transactions being concealed from the spouse
  • Large expenditures or asset purchases without the knowledge of the spouse
  • Being secretive about financial or other matters
  • A history of deception
  • Asking or coercing a spouse to sign unusual financial or legal documents
  • Using a post office box or other private address to receive mail (which cannot be accessed by the spouse)

Documentation Red Flags

The process of producing financial documents in a family law matter is often contentious, particularly in cases with larger income and asset values. The documentation can be voluminous, so it can take a great amount of time and effort to comply with discovery requests. Some of the more common discovery issues that can constitute red flags include:

  • Variations between the financial disclosure form and supporting documentation
  • Incomplete and/or unsigned financial disclosures
  • Deleted computerized financial, particularly QuickBooks or Quicken files or detailed spreadsheets Altered or destroyed financial documentation Backdated or falsely dated documents
  • Refusal to produce relevant financial documents
  • Piecemeal production of financial documents, especially in a confusing or redundant manner
  • Deliberate attempts to delay or derail the financial portion of discovery
  • Intentional confusion of financial records and paper trails of money

Personal Financial Red Flags

More specifically, there are a number of financial red flags that can point to the concealment of assets or income in the months or years leading up to a divorce:

  • High volume of cash transactions, possibly aimed at avoiding a paper trail of the money
  • Failure to deposit full paycheck or other known sources of funds
  • Stockpiles of cash or other valuable assets
  • Purposeful commingling of personal and business finances so as to obscure the financial picture
  • “Loaning” money to friends or family members to reduce cash in the marital estate
  • Undisclosed accounts, particularly if they have current activity and/or substantial balances
  • Valuable assets hidden during the marriage – If a party has discovered throughout the marriage that the spouse was hiding valuable assets, it is likely that there are additional assets the party does not know about.
  • Investment values have decreased dramatically
  • Inflating or fabricating debts
  • Depleting marital property, while leaving separate property untouched
  • Assets known to exist during the marriage have disappeared after the separation with no paper trail
  • Personal income has allegedly decreased, but expenses have not decreased accordingly

One commonly occurring financial red flag is the substantial withdrawal of cash from a bank account, often multiple times. The spouse may also get cash into his or her hands by not depositing a full paycheck or other check, or through withdrawals at ATMs. The cash could be used to fund non-marital expenses (such as an affair or secret business venture), purchase hidden assets, or add funds to undisclosed accounts. Cash may also be used to purchase cashier’s checks or money orders that are hidden until the divorce is finalized.

The discovery of a number of the above red flags should be a catalyst for a financial investigation in a divorce. The greater the number of red flags discovered, the more important it will be to carefully analyze the finances to look for hidden income, hidden assets, or other irregularities that could affect the division of assets or payment of support.

Tracy L. Coenen, CPA, CFF, is a forensic accountant and fraud investigator with Sequence Inc. in Chicago and Milwaukee. She specializes in cases of embezzlement, financial statement fraud, white collar crime, securities fraud, and family law. She can be reached at 312.498.3661 or tracy@sequenceinc.com.

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3 Comments

  • Toni says:
    10 February 2014

    Hi, I’ve been legally divorced since 2004, and fighting to get every dime of child support that the court ruled I should get.
    Just took him back to court for contempt, got a new agreement and wage assignment, which worked until he left his (yet another) teaching job in June 2013.
    But then he declared bankruptcy (he was making almost $6000 per month, but was about $30,000 in the hole from gambling). Right after the bankruptcy went through he pulled his whole teachers retirement monies out, in one chunk, effectively skating around the wage assignment those funds would be subject to.
    I have opened a new case with the CA dept of child support services, but wonder if he hasn’t done something downright illegal here? Can I ask your opinion?

  • 10 years says:
    25 May 2014

    Well, its been 10 years and you are watching his drama as if it were a daytime soap opera. Since we don’t have debtor’s prisons, is the result any different than if he simply became a homeless guy? What if he escaped to Thailand, or ended his life? “Hasn’t done something downright illegal”? What if he is ending his above the line economic existence? They used to say a “watchpot never boils”. Would it be better to consider him deceased and to focus on more profitable enterprise than to speculate on his downward spiral?

  • Tracy Coenen says:
    25 May 2014

    10 years – I think the option does not have to be at one extreme or the other. It is fine to pursue support of the children and spouse as the court has ordered, but at sometime realizing that maybe there is nothing to get from him/her (if that is truly the case). I have seen plenty of exes do everything in their power to hide their earnings and shirk their responsibilities to their family. It’s a matter of keeping them accountable.

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