Domestic Shell Companies & An Asset Search

Posted on September 30, 2007 by Fred Abrams
An asset search covering a number of countries is sometimes necessary if monies the subject of a divorce, bankruptcy, or debt collection proceeding are hidden in a money laundering circuit.  This can be true because  "Large-scale money laundering schemes invariably contain cross-border elements", as is recognized by the Financial Action Task Force-- an international organization against money laundering and terrorist  financing.  Domestic companies without active business or significant assets, ("shell companies"), however should also be considered part of the money laundering landscape.  According to the Financial Action Task Force's June 23, 2006 summary of its Mutual Evaluation Report, ownership information about these kinds of companies in Nevada and Delaware "...may not, in most instances, be adequate, accurate or available on a timely basis.  This is a vulnerability for the U.S. AML/CFT [anti-money laundering/counter-terrorist financing] system." 


The Internal Revenue Service also recognizes in its 2007 Dirty Dozen Tax Scams, that: " Domestic shell corporations and other entities are being formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity."  Meanwhile, a Financial Crimes Enforcement Network November 9, 2006 advisory demonstrates that it too is aware of the misuse of shell companies to hide assets/launder money.  Besides its November advisory, the Financial Crimes Enforcement Network issued a November 2006 report explaining that Delaware, Nevada, Oregon, and Wyoming may be "...attractive to those persons seeking to hide illicit activity within the framework of shell corporations."  That same report also mentions that only Alabama, Alaska, Arizona, and Kansas require a limited liability company to supply ownership information while, (depending on the structure of a limited liability company), 47 other U.S. jurisdictions do not.


The misuse of shell companies is however not just confined to money laundering.  For example, in Dempster v. Overview Equities, Inc., 2004 slip op. 01149 ; 4 A.D.3d 495; 773 N.Y.S.2d 71 (2d Dept 2004) a divorcing husband fraudulently transferred the title of a residence to his newly created company in Delaware, which was most likely a shell corporation.  The husband made the property transfer to his Delaware corporation without valid consideration within weeks of the equitable distribution hearing in his divorce.  Given all of the foregoing, extra diligence should be exercised during an asset search in order to determine whether a divorcing spouse, judgment debtor, etc. has misused a shell company to hide assets.


Copyright 2007 Fred L. Abrams
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Asset Search Tips For Divorce & Child Support Cases

Posted on September 23, 2007 by Fred Abrams
For thirty years the ex-husband in Janet O. v. James O., slip op. 51985 (Sup. Ct. N.Y. County, October 17, 2006) had not made one single child or spousal maintenance support payment.  By living in places like Barbados, the Dominican Republic, and Mexico he had successfully protected his assets from any enforcement proceedings on behalf of his ex-wife or their three sons.  After the divorce, the ex-husband remarried and adopted his new wife's two daughters; meanwhile his ex-wife and three sons were relegated to a life of hardship, poverty, and public assistance.  One of their sons even had to quit college to become a construction worker to support the ex-wife.  Likely to have little practical effect on the absconding ex-husband were: the seizure of New York bank accounts, income tax refunds and lottery winnings; the denial of new and renewed passports; driving license restrictions; and the referral of cases for criminal prosecution as mentioned by New York City's Office of Child Support Enforcement and pursuant to N.Y. Dom. Rel. §§ 244; 244 (a) - (d); & 245 or N.Y. Civ. Prac. L & R §§ 5241 & 5242.  Given the ex-husband's default for decades, the Janet O. Court did however indicate it would seek the ex-husband's extradition.


Letters Rogatory
Although it was not financially feasible for the above ex-wife, a Request for Legal Assistance / Letter Rogatory might have helped her situation many years ago.  Such legal assistance requests can often be effective against a divorcing spouse or non-custodial parent who has hidden assets in a foreign country.  By prosecuting a request for legal assistance, evidence of assets may be elicited for a local valuation / equitable distribution hearing or for a forced collection proceeding abroad.  When a request for legal assistance is granted by a foreign court, it may direct a bank or other witness in its jurisdiction to respond to written questions about assets.  As the changed / sanitized legal assistance request to the District Court of Amsterdam however partly demonstrates, some foreign courts direct that an oral examination of a witness instead be taken.  A request for legal assistance may also have to be translated from English into another language used by a foreign court.  Many times a legal assistance request is prosecuted through the The Hague Convention, Taking of Evidence (1970) No. 20, as a  "letter of request".  Furthermore, a New York Court may issue such a request  to a foreign court as mentioned by Fed. R. Civ. P. 28 (b);  Fed. R. Civ. P. 4(f)(2)(B); and/or the N.Y. Civ. Prac. L & R:
Rule 3108. Written questions; when permitted. A deposition may be taken on written questions when the examining party and the deponent so stipulate or when the testimony is to be taken without the state. A commission or letters rogatory may be issued where necessary or convenient for the taking of a deposition outside of the state.




Suing Non-Parties
Suing a non-party to a pending divorce or child support case may also become a critically important part of an asset search or recovery.  Non-parties hiding assets can be: business entities; family members; attorneys; financial advisers; etc.  A non-party can sometimes abuse trusts; bank accounts; or shell companies to hide assets as the nominee of a divorcing spouse or non-custodial parent.  Legal authority for suing a non-party for fraudulently hiding assets, (and/or pursuant to New York State's version of the Fraudulent Conveyance Act codified at N.Y. Debt. & Cred. Law  §§270-281), is provided by cases like Bloomfield v. Bloomfield, 721 N.Y.S. 2d 15 (1st Dept 2001). Joining those hiding marital assets, (as "necessary parties"), to a pending divorce case may also be  possible pursuant to Schmidt v. Schmidt, 99 A.D.2d 775 (2d Dept 1984) and Solomon v. Solomon, 136 A.D. 2d 697 (2d Dept 1988).


Suing a non-party can too be necessary to prevent the dissipation or transfer of marital assets, as demonstrated by Panish v. Panish, slip op 50881(N.Y. Sup. Ct. Suffolk County, April 15, 2005).  Furthermore, if a non-party hiding assets is not sued at the time of a divorce, then the right to recover an asset might be permanently lost.  Such was the case in Jackson v. Brinkman, 2006 slip op 50015; 814 N.Y.S.2d 561(Sup. Ct. Kings County, January 6, 2006), where an ex-husband alleged that title to a marital residence had been fraudulently conveyed to his former mother-in-law.  The Court in Jackson, ultimately found that the ex-husband was barred on res judicata grounds from seeking a recovery because he had neglected to sue his former mother-in-law as part of his earlier divorce.


Copyright 2007 Fred L. Abrams
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Money Laundering, Marital Assets & Divorce

Posted on September 14, 2007 by Fred Abrams
Money laundering circuits sometimes operate in the U.S. through domestic bank accounts used as laundering links. Internal Revenue Service publications are full of examples of mostly domestic money laundering investigations.  It is also true that money laundering circuits washing vast sums of money will typically do so through offshore bank accounts located in tax havens like Switzerland, Luxembourg, the Cayman Islands, etc.  Such was the case of one divorcing husband, (the depiction of whom is altered below for privacy reasons), who laundered his U.S. money between Switzerland and Germany.

Prior to the valuation / equitable distribution hearing in his divorce case, the husband alleged that he had a liability of $29 million owed to a prime bank in Germany because of an arm's-length business loan.  An investigation however revealed that his loan was back-to-back , (i.e. a fully collateralized loan in which the borrower and the lender are one and the same).  The husband had first secretly deposited $30 million into a Swiss bank account and next used that same $30 million to collateralize a Swiss bank guarantee for $29 million.  By then using that Swiss bank guarantee as full collateral, the husband persuaded a German bank to issue a personal bank loan to him for $29 million to be disbursed in Germany.


After the loan principal was disbursed to him in Germany, the husband intentionally failed to repay his $29 million debt due and owing to the German bank.  The husband's loan default meant that the German bank would collect $29 million transferred from Switzerland pursuant to the Swiss bank guarantee which had served as loan collateral.  As the diagram below suggests, the loan default in Germany was actually the very means used to wash the money the husband had earlier deposited in Switzerland:


                               

The husband's financial transfers shown above had no economic benefit, as is usually the case where a back-to-back loan is used to hide assets.  Back-to-back loans however are not only sometimes used to conceal marital assets part of a divorce. They can also regrettably be used in a tax fraud to hide assets and income; by a debtor hiding assets from a creditor; or as a means to disguise monies which are the proceeds of a white-collar or other crime.

Copyright 2007-2008 Fred L. Abrams
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Terrorist Financing, Money Laundering & Financial Intelligence Units

Posted on September 7, 2007 by Fred Abrams
The Financial Intelligence Units of the 106 different jurisdictions in the Egmont Group, exchange information worldwide to track terrorist financing and fight crimes like money laundering.  Their exchange of information occurs pursuant to the Egmont Group's Principles for Information Exchange (June 2001) and Best Practices for the Exchange of Information (updated June 2004).  Sometimes Financial Intelligence Units ("FIU's") share information from a suspicious activity or suspicious transaction report filed by a bank or other entity.  This can happen especially because FIU's are the repository of the suspicious activity/transaction reports filed in their respective jurisdictions.  


As the World Bank's 2004 report "Financial Intelligence Units: An Overview" mentions, various jurisdictions define suspicious activity differently.  In the United States however, there are extensive rules about filing a Suspicious Activity Report.  Banks in the United States for example, are required by both 31U.S.C. §5318 (g) and 31 C.F.R Part 103.18 to file a Suspicious Activity Report with the FIU known as the Financial Crimes Enforcement Network.  As 31 C.F.R. Part 103.18 explains, a bank is generally required to file a Suspicious Activity Report within thirty days of a transaction which amounts to at least $5000 and: involves funds derived from crime; or disguises criminal activity; or evades reporting requirements; or has no apparent lawful purpose.  According to Guidance on Preparing A Complete & Sufficient Suspicious Activity Report Narrative, remembering the five "W's", (i.e. who, what, where, when, & why), is particularly helpful when supplying information in a Suspicious Activity Report to a FIU.
  

FIU's also study the methods used to launder money and then develop laundering "typologies" about them.  One such typology, Egmont Group Case Ref: 06058, shows how information about two suspicious trusts collected by the FIU of one country was passed on as a tip to a different country.  Yet another typology, Egmont Group Case Ref: 06063, demonstrates how a FIU analyzed wire transfers from Europe in order to spot two suspected members of a terrorist group involved in the 9/11 tragedy.  Finally, FIU typologies are used by law enforcement and regulators to track emerging criminal trends and develop countermeasures to financial crimes like money laundering. 


Copyright 2007 Fred L. Abrams
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