The true cost of divorce: The growing problem of hidden assets
After a high profile seven-year battle, a 20 million pound award to Scott and Michelle Young, from her husband who said he was nearly 30 million in debt, has put issues of non-disclosure and asset hiding in large-scale divorce cases into the public eye. Awards on divorce have become so high – on the basis of a 50-50 asset split – that there’s a huge incentive for the spouse with greater personal wealth to try to keep it under wraps.
When tens or even hundreds of millions are at stake, the temptation can be intense. In consequence, divorce law has become a highly sophisticated corporate and financial discipline as lawyers and experts try to crack their way through to the truth – in a complex game of hide and seek.
In my experience, most suspected instances of hiding assets have their origins in cutting edge tax planning which have soared in the past decade. Many of those potentially involved in such schemes will inevitably suffer relationship breakdown in the coming years and I believe we will see a sharp increase in the number of cases alleging non-disclosure and asset hiding.
Those husbands (and it normally is husbands) who have been involved in such schemes have typically used one or more of the following mechanisms.
1. Hiding it offshore
It’s not a new approach but it remains difficult to track down money held in foreign bank accounts, particularly in countries that have historically had very strict bank secrecy laws such as Switzerland and Liechtenstein. The balance is, however, shifting towards openness as both of these countries have recently cooperated with foreign tax authorities.
2. Creating a web of companies
Complex corporate structures have been in the news recently as big corporations use them to optimise their global tax position. Countries such as Luxembourg, Ireland and the Cayman Islands appear frequently in these structures. Such structures are not, however, limited to big corporations and I have seen a number of individuals deploying them. Even if these are uncovered during divorce proceedings it can take a considerable amount of forensic analysis to understand the true value of these enterprises and enforcing a payout remains an issue with husbands hiding behind the corporate veil (see below).
3. “Hiding behind” the corporate veil
The recent Supreme Court case of Petrodel v Prest examined whether UK properties held through a Nigerian company (Petrodel) owned by Michael Prest could be forcibly transferred to his former wife Yasmin Prest to satisfy her divorce financial claims. The Supreme Court ruled that they should be transferred (overturning the Appeal Court finding that they were protected by the “corporate veil”) but the findings were case-specific and I expect many more cases to emerge in this area over the coming years.
Even if assets are held in trust they can still be regarded as accessible assets for the purposes of divorce settlements. I have seen increasingly sophisticated trust structures, originally designed for tax planning purposes, becoming hotly disputed in big money divorce cases. Putting the trusts in well-known foreign tax havens, such as the Cayman Islands and the British Virgin Islands adds spice.
5. Giving assets away/dubious debts
Putting assets (companies, properties, etc.) into the name of relatives, girlfriends or business associates is a common tactic. Another is creating dubious debts: to parents, to the family company, to friends. Fortunately the courts have the power to reverse transactions that have been designed to thwart legitimate divorce claims, so giving your fortune away to your son the day after your wife finds out you’ve been having an affair is unlikely to be effective.
Everyone knows you’re supposed to be transparent to the court. However, if those are not get away without punishment, even when they’re found out, that’s meaningless in practical terms. It makes a lack of transparency to the Court a one-way bet – it starts looking like the only smart thing to do.
However, in recent months the courts have been getting more robust at dealing with non-disclosing husbands: putting Scott Young in prison for three months and handing former Ford tycoon David Thursfield a two year jail sentence for non-disclosure. Despite Mr Thursfield’s reported intention to appeal this prison sentence, this finally shows the family justice system is starting to have some teeth. In my view we need a lot more punishment of non-disclosers so that they fear the consequences. Only then will we be able to get a fair deal for both parties on divorce.
Dr Stephen Bence works for family lawyers firm Vardags
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