The combination of old-school investigative techniques (forensic accounting) and data mining expertise may help to build a viable investigative business model. It is widely known that the Silent Generation and the Baby Boomer Generation hold the majority of the wealth in the United States. When those generations pass on, the next generation of individuals (Generation X and Millennials) and the Internal Revenue Service are waiting to get their share of the inheritance.
Edmond Martin, CFE, TCI, a licensed Texas Private Investigator (PI) and Forensic Accountant and Jason Slick, PI, CFE, mathematician and computer scientist, have associated to build a financial investigative technology that aids clients in divorce tracing, income tax, estate, and other complex financial matters. Through Sage Investigations, LLC this investigative model has a national reach.
For PIs the normal business model requires the PI to spend days in their vehicles, recording notes of observation, taking still photos and video of a subject cheating on his / her spouse or observing the custodian of a child in a child custody matter and reporting the activities to an attorney for the client. The new model of Forensic Accounting (FA Model) goes beyond the PI model with the creation of DIO, short for Diogenes (The Greek philosopher, who with his lantern in Athens, Greece searched for an honest man). DIO is a financial investigative database program that analyzes big data, consisting of bank account and brokerage account transactions, credit cards, points of sale registers, and other financial data. DIO with the use of algorithms examines and reports on separate vs. community property by tracing funds within and between accounts to arrive at the proper balances in the financial assets of the client. It can be valuable to the plaintiff or the defendant. DIO goes beyond the standard accounting software and is even more robust than the system used by the IRS today. DIO traces financial transactions between bank and brokerage accounts and categorizes each transaction. When funds are transferred between accounts they maintain their proper categorization attributable to the separate and community property rules. It also traces other assets purchased from the bank or brokerage accounts for use in the final summary for the settlement computation.
For potential clients with substantial wealth seeking a divorce, it is important to have a firm starting point to document separate property before the marriage. This starting point must be well documented with physical evidence, which makes it an urgent matter to obtaining bank and brokerage records and avoiding the loss of data as a result of established retention periods (generally, seven years for bank records and three years for brokerage statements). There are a number of sources on the internet for retention periods, including the following link: http://www.riskinbox.com/wp-content/uploads/2014/04/AdvisX-Record-Retention-Schedule-Banks-2014-02-19.pdf.
The normal scenario: A wife is married to her husband for many years and leaves her wealthy when he passes away. She was not financially sophisticated and was never involved in their personal financial affairs. After his death, she uses the services of an estate planning lawyer and financial planner. She invests her wealth in income producing financial instruments, bank and brokerage accounts, and real estate. For her children, she creates a trust to which she bestows funds. A few years later, she is lonely and her friends encourage her to start dating. She meets a man that she thinks would comfort her and they marry. With the advice of counsel, she is smart enough to obtain a prenuptial agreement. At first, she does not realize the importance of keeping income earned from separate property (community income) detached from her separate property assets. Therefore, she allows community income to be comingled with her separate property assets. This comingling requires a complex tracing and allocation of asset balances into separate and community balances. Without the tracing, her new husband has a channel to attempt to access her separate property assets in the divorce settlement. Later, she learns that the interest income from her financial assets should be transferred upon payment to their community account for them to live on. Dividends from separate property assets are trickier because they are generally reinvested and require complex tracing and allocation between the separate and community.
The couple enjoyed married life and then a few years later, she realized he did not care for her, did not contribute financially to the marital estate, and spent her money and wanted more access to her separate property. She was smart and maintained all her financial records and provided them for the complex tracing to her forensic accountant for tracing, categorization, and authentication.
The most important documentation in these cases is a firm starting point to trace the receipt of funds generated by the separate property assets into and out of financial accounts and real assets. This is where the lantern of Diogenes comes in handy, DIO technology has custom algorithms and the ability to accurately allocate separate and community income according to state law. If the client cannot prove that an asset is separate property, it is assumed by law to be a community asset. It is very important for high net worth individuals that they protect their separate assets from “gold diggers” and hire an experienced forensic accountant.
Proper litigation support will provide authentication of the important transactions and buttresses them with documentary evidence. It is necessary for the client to have access to the “four-legged stool,” including:
- Documentation of the sources of income through proper records.
- Income tax returns for review and comparison to the available financial statements or for comparison to the books of the family-owned business or proceeds of financial transactions. It also allows the preparation of a business valuation for the family-owned business.
- Monthly statements for financial accounts, deposit slips, and cancelled checks must be reviewed for leads to hidden accounts or other assets.
- An asset search for all known assets, cars, motorcycles, boats, real estate and other bank accounts. It is helpful to have the names of relatives to determine if assets were purchased in their name with community funds.
These divorce matters are very complicated financial transactions and require in-depth and full financial investigation that most investigators will not attempt. The consequences of divorce go beyond the PI model to the FA model. Sage Investigations, LLC and its associates are not the normal PI firm. They specialize in forensic accounting and proving or disproving complex financial matters. As an IRS Special Agent, Edmond Martin has over 50+ years of experience in financial investigations to include: Ponzi schemes, advanced fee schemes, embezzlements of all shapes and size, oil and gas related fraud, shareholder derivative lawsuits, money laundering, and income tax schemes of all levels. Martin has used direct and indirect methods of proof to establish unreported income and fraud. Martin’s knowledge and methods are “Old School,” but with the use of computer technology, his methods have been modernized and with the addition of Jason Slick, a brilliant computer scientist and fraud investigator, the financial investigative DIO model created by Sage Investigations is unsurpassed and is very beneficial to their clients. The Sage website is www.sageinvestigations.com and Martin and Slick can be contacted at email: firstname.lastname@example.org or call 512-659-3179. Let Sage “shed light on the truth” for your client.