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 “[l]arge-scale money laundering schemes invariably contain cross-border elements,” as mentioned by the Financial Action Task Force’s webpage.

Domestic companies without active business or significant assets, (“shell companies”), should also be considered part of the money laundering landscape. According to a Financial Action Task Force June 23, 2006 summary, the beneficial ownership of 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: “[d]omestic 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 not just confined to money laundering. To cite just one 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.

Copyright 2007-2019 Fred L. Abrams

Money laundering circuits sometimes operate in the U.S. through domestic bank accounts used as “laundering links”.  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 martial assets / U.S. money between Switzerland and Germany.

Prior to the 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 link chart below suggests, the loan default in Germany was actually the very means used to wash the money the husband had earlier deposited in Switzerland:

(Click On The Link Chart To Enlarge)

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 are however not only sometimes used to conceal marital assets during 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 2007-2025 Fred L. Abrams

The Financial Intelligence Units of 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.

(Edited January 8, 2010)
Copyright 2007 Fred L. Abrams

When fraudulent transfers are used to hide assets the subject of a debt collection, divorce, or bankruptcy case, the Court looks for badges of fraud.  As explained in Wall Street Associates v. Brodsky, 257 A.D.2d 526, 529 (1st Dept 1999), the badges of  fraud for fraudulent asset transfers or conveyances are:

  • A Close Relationship Between The Parties
  • A Transfer Outside The Ordinary Scope Of Business
  • Inadequate Consideration
  • Knowledge Of A Creditor’s Claim
  • Retention Of Control Of The Property

For example, in AMP Servs. Ltd. v. Walanpatrias Found. a.k.a. Doraw, 2006 slip op. 7985 ; 34 A.D.3d 231; 824 N.Y.S.2d 37 (1st Dept,  2006), the Appellate Division upheld an injunction against a debtor dodging a debt collection proceeding.  In applying New York Debtor and Creditor Law, the Appellate Division ruled that the debtor could not transfer a stock portfolio offshore to Europe because there were badges of fraud as mentioned by Wall Street Associates, 257 A.D.2d 526.

In another Appellate Division case, 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 transferred his residence to a Delaware corporation just before his valuation/equitable distribution hearing.  Since the Delaware corporation had filed for bankruptcy, the residence was eventually sold by the bankruptcy court as a corporate asset.  The husband in Dempster had also diminished his net worth by alleging he had a $1,473,362.74 debt because of two confessions of judgments from construction loans.

Since the the above transfer happened just two weeks before the valuation hearing, the Appellate Division found it “replete with badges of fraud“.  The Appellate Division further stated that the Delaware corporation had been created only two days before the residence was transferred to it and that the corporation had operated from the very same address as the husband’s other businesses.  According to the Appellate Division, the husband’s residential transfer and construction loans also violated New York Debtor and Creditor Law because they had occurred without any monies ever being paid, (i.e. without “fair consideration”).

In Allan J. Bentkofsky, Trustee v. Ralph J. Malandra, et. al., United States Bankruptcy Court, N.D.N.Y.,  Adv. Pro. No. 00-80221, the Court also found there were badges of fraud when a husband and wife transferred their residence to their children.  Despite the transfer, the husband and wife continued to live at the residence because they had retained a life estate interest.  Since the couple had filed a Chapter 7 bankruptcy petition, the Bankruptcy Court analyzed the residential transfer only to discover that it had occurred without any payment of money/was without “fair consideration”.  The couple had also made the transfer at a time they had been insolvent.  Given these facts, the Court found there were badges of fraud and set aside the transfer as it violated New York Debtor and Creditor Law.

Finally, badges of fraud can sometimes be used in debt collection, divorce, or bankruptcy cases to demonstrate that an opposing party has hidden assets or removed property with “actual intent” to defraud.  Robert M. Morgenthau v. A.J. Travis Ltd., 708 N.Y.S.2d 827, 842 (N.Y. Sup. Ct. 2000); Wall Street Associates, 257 A.D.2d at 529.  The badges can also become important in court because a concurrence of several badges always makes a strong case for fraud. Gafco Inc. v. H.D.S. Mercantile, 47 Misc. 2d 661, 665 (N.Y. Civ. Ct. 1965).

(Last edited October 12, 2011)

Copyright 2007-2017 Fred L. Abrams

In its “Abusive Trust Tax Evasion Schemes – Facts“, the Internal Revenue Service estimates that trusts will account for much of the $4.8 trillion to be inherited or transferred between the generations by 2015.  According to that same publication’s Talking Points, trusts are now sometimes fraudulently used: 

  • To depreciate personal assets (such as a home);
  • To deduct personal expenses;
  • To split income over multiple entities, often filed in multiple locations;
  • To underreport income;
  • To avoid filing returns;
  • To wire income overseas and fail to report it; and
  • To attempt to protect transactions through bank secrecy laws in tax haven countries.

Insurance salesman Denny Patridge’s June 30, 2005 conviction for tax evasion, wire fraud, and money laundering, is one example of how trusts can be used to hide assets and commit tax fraud.  At page four of its Enforcement Results, the Department of Justice’s Tax Division mentions that Patridge was fined $100,000 and sentenced to sixty months because he had used: a trust to conceal assets; a false lien on his home; nominee bank accounts; and offshore accounts in Belize and Antigua.

Unlike Mr. Patridge’s scheme, some abusive trusts are entirely based on domestic financial transactions.  Such was the case of Marvin Swanson, sued in February 2004, by  the U.S. Justice Department for offering asset protection/tax evasion services.  According to the November 15, 2006 permanent injunction issued pursuant to 26 U.S.C. § 7402 against him, Mr. Swanson had sold phony trusts called “unincorporated business trust organizations” through his manual and website.  As the November 15, 2006 injunction explains, Mr. Swanson had established corporations in Nevada in order to provide his clients with anonymity and hide their assets from the Internal Revenue Service.
  

The January 11, 2007, Complaint for an injunction against Victor Carlysle Sullivan alleges that Mr. Sullivan as a CPA had an asset protection service that hid monies first through a domestic trust known as the Tuxedo Trust and then in two offshore trusts called Blackshear and Bulldog.  Also according to the Complaint, Mr. Sullivan had cost the U.S. Government an estimated $5 – $10 million by underreporting the taxes of at least 53 of his clients in his sham-trust scheme started in 1998.  On March 22, 2007, Mr. Sullivan did however agree to his Stipulated Permanent Injunction, which bars further illegal conduct and essentially obligated him to provide the Government with his client list for the past ten years.   

Given all of the above, the Internal Revenue Service has ranked trust misuse as eighth in its 2007 Top Dirty Dozen Tax Scams.  To educate the public about abusive trusts, It also published “Should Your Financial Portfolio Include Too Good To Be True Trusts?“.  Furthermore, when the medical community was  targeted by asset protection service providers, the Internal Revenue Service published a February 2002 bulletin to especially address the issue.  Fraudulent trusts however, are not just limited to tax evasion as they can also play a role in schemes to hide assets during a divorce, bankruptcy, debt collection proceeding, etc.

Copyright 2007-2026 Fred L. Abrams

 
According to the Washington Post, U.S. Army Major John Cockerham, his sister, and wife were all recently arrested for hiding the proceeds of the largest bribery case in Iraq by money laundering.  As the Washington Post further mentioned, Major Cockerham allegedly received $9.6 million in bribe money, (and was awaiting another 5.4 million), for giving favorable contracts to military contractors.  The Washington Post also reported the following allegations: (1) that  Major Cockerham’s wife had admitted that she had deposited $800,000 of the bribe money into a Kuwaiti bank; (2) that a company known as TransOrient had, (through the persons of Mr. Ajmal and Mr. Ismail of Detroit), deposited $300,000 into a Jordanian bank as bribe money;  (3) and that investigators had in December 2006 found ledgers relevant to the bribery scheme which implicated Major Cockerham, his sister, and wife.

Based on information in the complaint and Special Agent’s affidavit from the criminal prosecution, Major Cockerham and his wife each face up to twenty years and a $500,000 fine if convicted of money laundering pursuant to 18 U.S.C. §1956 (h).  The conspiracy and fraud charge, (pursuant to 18 U.S.C. § 371), is additionally punishable by  a maximum of up to five years and a fine of $250,000.  The 18 U.S.C. § 201 bribery charge against Major Cockerham also carries a penalty of up to fifteen years and a fine of $250,000.

The Special Agent’s affidavit also claims that in December 2006, both Major Cockerham and his wife admitted that Mrs. Cockerham had deposited over $1 million of the bribe money in safe deposit boxes in Kuwait and Dubai.  Furthermore, the scheme to hide assets allegedly included the following shell companies: Worldwide Trading Co.; D & J Trading; Abdullah American Trading; and Triad United.  Offshore bank accounts were also allegedly established at: Abu Dhabi Commercial Bank, the Commercial Bank of Kuwait, Union National Bank in Dubai, the Sharjah Islamic Bank, and the now defunct First Curacao International Bank, N.V.  According to that same special agent, seized documents demonstrated that Major Cockerham had even opened offshore bank accounts in the Cayman Islands at Butterfield Bank (Cayman) Ltd. and the First Caribbean International Bank (Cayman) Ltd.

Assuming for the limited purposes of this blog post that all of the above is true, we can understand how the government reached its conclusion that Major Cockerham was hiding assets in a money laundering circuit.  For example, although the Cayman Islands amended anti-money laundering laws on June 1, 2007, it remains committed to a tradition of bank secrecy laws.  Major Cockerham’s bank accounts in the Cayman Islands, (along with the offshore bank accounts or safe deposit boxes in Jordan, Kuwait, Dubai, Abu Dhabi, and the Dutch Antilles), suggest he was hiding assets.  His use of: offshore bank accounts; safe deposit boxes; shell corporations; and nominees like his wife would further suggest the existence of laundering links part of a money laundering circuit.  By using laundering links to make financial transfers, Major Cockerham could have easily concealed his true beneficial ownership of any bribe money.  The above criminal complaint however is not evidence of Major Cockerham’s guilt; so we must therefore still presume that Major Cockerham, his wife, and any others arrested are innocent.

Copyright 2007 Fred L. Abrams

To avoid detection, those who commit insurance fraud typically hide assets.  In August 2001 for instance, a father and son in Florida were charged with money laundering after fraudulently billing over forty health and insurance auto companies more than $1million dollars.  As part of their scheme, monies paid by insurance companies for blood tests were converted to cash via a Florida Bank of America account. This account had been opened in the name of a phony Miami medical laboratory (Biolab Clinical Inc.), which was actually just a rented mailbox.

More recently, a Westchester New York dentist and his wife were arrested for money laundering in connection with a $2.8 million Medicaid fraud.  The N.Y.S. Attorney General’s July 30, 2007 press release claimed that the two had submitted fraudulent Medicaid bills for dental cleanings, x-rays, and oral surgeries, and then made "…. financial transactions and fil[ed] false financial disclosure statements in an effort to hide assets from the courts."  According to the Attorney General, there was also an attempt to use the name of  the couple’s 18 year old son on an account at a foreign based bank with $828,817 deposited in it.

Because assets can be hidden in a wide variety of ways during an insurance fraud, I asked Stan Tice for a briefing.  Stan consults with the insurance industry about detecting and investigating insurance fraud through his New York  based  private investigation  firm.  Furthermore, he had: lectured annually about insurance fraud at New York’s College of Insurance, served as a deputy director of the Insurance Frauds Bureau for New York’s Insurance Department, and had even worked for New Jersey’s Insurance Department where he was the founding director of its former Insurance Frauds Prevention Division.

During my briefing, Stan mentioned how one policyholder had hidden his collection of Hummel & Lladr? figurines and then filed a property/casualty insurance claim for them, alleging a loss in the  hundreds of thousands.  According to the policyholder, debris from the figurines demonstrated that they had been accidentally destroyed.  Stan however submitted these remains to a forensic lab for testing– only to discover that they could not have originated from the policyholder’s figurine collection.  Because of Stan’s efforts, the policyholder was eventually criminally prosecuted for fraud and attempted grand larceny.

Given the fact that the insurance industry’s National Insurance Crime Bureau advises that 10% or more of all property/casualty claims are fraudulent, I wanted Stan’s opinion.  Stan then advised that since the above statistic was limited to just property/casualty claims, that the actual number of all fraudulent claims was likely astronomical.  This of course means that our insurance premiums are not going to be reduced any time soon.

Copyright 2007 Fred L. Abrams

A divorcing spouse seeking hidden marital assets; a creditor pursuing the payment of a debt; or an IRS revenue officer collecting a delinquent tax; may sometimes be looking for assets hidden by those offering offshore asset protection services.

According to Equity Development Group’s “Why Go Offshore” link-page, placing bank accounts offshore protects them from “predatory attorneys”, ex-spouses, disgruntled employees, etc.  Another asset protection service, (Offshore Services Inc. of Belize), alleges that “A Belize Offshore Trust” offers tax reduction, protection from lawsuits and other benefits.  The website of Dominion Investments (Nassau) Ltd. similarly offered “international tax planning, asset protection, and other wealth preservation techniques” until the arrest of its proprietor during a federal undercover sting operation for money laundering.

As the Internal Revenue Service’s Offshore Credit Card Program recognizes, an asset protection scheme can be as basic as first parking monies in an offshore bank account and then using a credit or debit card drawn on that same account in order to make domestic purchases.  Offshore asset protection schemes involving tax evasion are referred to as Abusive Offshore Tax Avoidance Schemes by the Internal Revenue Service.  According to the Internal Revenue Service, such schemes typically involve:

  1. Foreign trusts
  2. Foreign corporations
  3. Foreign (offshore) partnerships, LLCs and LLPs
  4. International Business Companies (IBCs)
  5. Offshore private annuities
  6. Private banking (U.S. and offshore)
  7. Personal investment companies
  8. Captive insurance companies
  9. Offshore bank accounts and credit cards
  10. Related-party loans

Perhaps the most important thing to remember is that a good legal strategy can be an effective countermeasure to all of the foregoing; and many times lead to the recovery of assets hidden offshore.

Edited February 25, 2015

Copyright 2007-2015 Fred L. Abrams