Suspicious minds: undisclosed assets and strategic divorces

With the UK being the jurisdiction of choice for many wealthy individuals seeking large financial settlements, the temptation to hide or block discovery of assets is a real risk when considering high-value matrimonial estates.

In divorce, the issue of title and failure to
disclose assets was a key feature of 2013 with the well-reported cases of Prest, Thursfield and Young, illustrating that the courts were quite prepared
not only to address these issues but to take a robust stance.

Forensic accountants are often approached in matrimonial matters to consider business or share valuation issues. But recently the suspicion of hidden or undervalued assets has increasingly come to the fore.

As a general rule, investigations of this nature can be challenging, costly and have no guarantee of success. However, just as governance or risk assessment and management is ‘the new black’
for our financial services regulators, there is much that you can do to assess whether your client is potentially disadvantaged by hidden or undervalued assets.

When assessing the risk in these cases, it is
worth considering whether you are dealing
with an individual that has strong international business or personal links, is involved with a web
of businesses and joint ventures, is likely to have benefitted from tax mitigation or planning advice, may have received financial planning/retirement advice, or who is likely to have ‘planned’ the
divorce proceedings.

The latter point is increasingly prevalent. Individuals, mindful of where they are financially at risk and the limitations of the enquiries that can be made in divorce proceedings, will seek to shelter or hide assets over a year before serving papers in a ‘planned’ divorce. The usual offshore hideaways will feature such as the Channel Islands, Liechtenstein, Switzerland, Cayman, BVI, Cyprus and Gibraltar, together with the usual legal vehicles – trusts or investment funds.

Other tell-tale signs will include the disposal
of assets at a loss – perhaps to a related party –
and, of course, the almost universally acknowledged likelihood that once divorce proceedings are contemplated there will be a decline in the financial performance of business interests that had previously done well.

If your preliminary assessment of risk is positive then disclosed documentation may help to clarify the position. When reviewing tax returns, what is not shown can be just as important as what
is declared.

If an individual must have significant earnings to sustain their lifestyle and satisfy existing financial commitments, but limited or no tax is paid, then it is clear that tax planning measures have been implemented. Similarly, if known business interests are not reflected in the return, where are they disclosed for tax purposes?

With the changes to pension fund access recently announced in the Budget, pension fund splitting and the potential liquidity afforded by enhanced access to pension funds has assumed
an increased importance when considering settlement options where a party is asset rich
but cash poor.

Other checks that can be considered include
the following:

• Credit history. It will not be possible to access the credit history of another individual, but if any joint accounts are held, your client can view their own credit history to ascertain if any credit checks by a third party as part of a loan or borrowing application process have been made. The reason for these enquiries can then be pursued.

• Companies House. Search for directorships or company secretary positions held by an individual and compare this with the disclosures made.

• Credit card statements. These should be reviewed as evidence of lifestyle – is this supported by the level of disclosed earnings? Also, consider whether there is evidence of travel to any of the jurisdictions referenced above as possible locations for offshore funds.

• Land Registry search. This can be implemented for a corporate entity to check for property owned by businesses with which an individual is involved.

• Bank borrowing. In addition to all loan applications made to banks or financial institutions where an individual has an interest, request copies of any annual net worth updates completed for the financial institution as part of annual borrowing review procedures. This may reveal assets or business interests not disclosed elsewhere.

• Pension contributions. These will be disclosed on the tax return and should be considered in the light of disclosed pension funds/assets. Does the level of contributions that are made support the value of any disclosed pension fund? If not, clarification is required of the source of all pension funds.

• Financial statements. The accounts of any business in which an individual has a significant interest as either a major shareholder or office holder should be considered carefully. In particular the detailed notes setting out specifics of any transactions with related parties will be of interest in identifying connected individuals or business entities.;

• Internet and social media. These can reveal a surprising amount about the business affairs, reported prospects and activities of an individual,particularly where there has been recent trade or other press coverage regarding business activities. Business partners or fellow directors may well have commented in a press or trade magazine article upon how well placed the business is – a position which is in sharp contrast to the failing prospects claimed by a divorcing spouse.

By way of emphasis, social media sites such
as Facebook, LinkedIn or Twitter can yield a surprisingly significant amount of information regarding the business associates and interests, personal relationships and even travel undertaken by an individual, all of which may provide useful information leading to further enquiries.

Business scrutiny

Some businesses are more prone to manipulation than others. Cash-rich businesses, such as those in the entertainment or hotel sector, are particularly vulnerable, as are those with a significant internet customer base. Similarly, a decline in profitability occasioned by reduced turnover accompanied by the maintenance of expenditure levels or the sudden appearance of substantial management or consultant charges should give rise to concern.

In the current climate it is property that often features in any wealth inventory. If held in a business entity, the accounting policy that is adopted when valuing property may well reveal that the value of property shown in the accounts has been estimated by the director(s). This is quite normal but, in the current climate, serious consideration should be given to obtaining a professional valuation.

Form E

Given the increasing number of pension and investment products, together with the enhanced sophistication of individuals in managing
their business affairs, it is clearly time that the disclosures currently required by form E should be revisited, together with the potential penalties for failure to disclose material assets or the manipulation of the value of the matrimonial estate. The latter might most effectively be achieved not only by the potential for a custodial sentence, but also by way of stated financial penalty or consequence.

The current disclosure requirements of form E provide a level of comfort, but there is a need to enhance these to respond to the prevailing financial climate. At present, details and copy statements have to be provided for all accounts held during the previous 12 months.

However, the ‘planned’ divorce will often originate from a period that is outside of this
range. The time covered by this requirement should be extended so that it matches that
of business interests where accounts covering
the last two financial years are required.

There is also only limited scope within the existing form E to consider undervalue transactions; that is to say, transactions or gifts involving friends, relatives or a new partner that may be reversed once a financial settlement in connection with divorce proceedings has been
put in place.

In this respect, transactions entered into by business entities with related parties will be disclosed by way of note to the accounts and
might be separately reviewed as part of an overall review of business accounts. But in addition an individual should be required to set out details
of all transactions they have entered into with connected or related persons over the previous two years.

Offshore regimes

Tax planning is usually the driver for the formation of offshore business structures and investments. This should be reflected in the questions raised by form E with a generic requirement to disclose the details of and related professional correspondence associated with any tax planning arrangements that have been put in place. This is a much broader remit than the one in place.

Details of all credit and store cards held over
the previous two years together with associated statements should also be provided and not just those currently held.

In the face of international terrorism, and a recognition of the global nature of business (including the associated fiscal obligations), there is increasing pressure for improved openness that has had limited success.

However, in most of these jurisdictions, there is a general dearth of publicly available information. This has given rise to a substantial industry primarily comprising former law enforcement and security officers who will investigate the business affairs and interests of an individual in a particular offshore jurisdiction using confidential sources of information that are not available to the public.

The thrust of any amendment to the current disclosure requirements, as set out in form E, must be to encourage a more principles-based approach (rather than a definitive position) that fully explores what financial arrangements are in place. The onus needs to shift from the enquirer asking the right questions to the responding individual, justifying why disclosure was not
made in the first place. SJ