With a background in corporate-commercial and securities law and accounting, Ludmer, of LudmerLaw, has developed templates to use in forensic investigations to determine income and to find hidden accounts and assets, and says the process is similar to solving a detailed puzzle.
“I understand accounting and I understand finance, and I have seen the games that people play,” he says. “The fields of forensic accounting and business valuation mesh very nicely with financial disputes in family law, insurance or commercial litigation when it comes to this sort of analysis. Once you focus on what it is you’re looking for, you have to have discipline, you have to think creatively, and you have to say, ‘They’ve said this, and if it’s true, what does it mean? If those assertions are true, I should be able to look at this other account and see certain things;’ and then you go and test that.”
Determining income in a support case is “generally a fairly straightforward exercise,” says Ludmer, but it becomes more complicated when suspicions exist around whether the payor is hiding income, accounts and other assets.
“When you get their tax returns and bank statements and you know they’re not being truthful, you have to put on your forensic hat and do an investigation to prove that their actual income is higher, and to uncover hidden accounts,” he says.
“The first thing you do is a lifestyle and net worth analysis. You’ll look at how they’re living and what they’re spending and it won’t mesh with their income. Unless you see capital assets coming down, debt going up or family help – or a combination of those three – they have to account for the fact that what’s being spent doesn’t mesh with what is being declared for tax purposes. You’ll start there, and it may explain at least part of the delta.”
If the issue isn’t solved by the first step, the investigation goes deeper, says Ludmer.
“From there, you assemble lots of different data points, and they all need to mesh perfectly. If they don’t, you’ve got the beginning of the trail of bread crumbs that you’re going to follow,” he says.
“No. 1 is their taxes. No. 2 is if they’ve published other statements as to their income (such as in other proceedings, in credit or insurance applications or in statements to third parties they wish to impress)."
All credits and debits in any accounts (asset, investment, savings or debt accounts) must be traced to the third-party payor or payee. Transfers and inter-bank deposits are often tips to the existence of other accounts. Payments made to third parties that cannot be traced back to specific entries in known accounts are sure signs of the existence of other undisclosed accounts, Ludmer explains.
In family law, you have family law financial statements that are mandatory and they give you a spending budget. When analyzing the declared budgets, at times it’s important to not only look out for certain expenditures, but also to survey what the individual isn’t budgeting for, says Ludmer.
“If I don’t see them paying their rent or condo fees or mortgage anywhere out of the accounts they’ve given me, and in their budget, I know there are other accounts,” he says. “I’m going to want to see the monthly car insurance payment, property taxes and food. If I don’t see enough being spent on food and restaurants, I know there’s another account.”
Withdrawn cash that’s unaccounted for is another tip off, he adds, as are partial payments.
"I also always ask for statements from any cash discounting services they may have used and will ask for those statements if I cannot account for where all known cheques are deposited," he says.
“If I see they took a trip to England, I need to see airfare and hotel and entertainment and cash withdrawls, not just one or two incidental charges," adds Ludmer.
“I need to understand the story behind every element of income and expense,” says Ludmer. “It’s about getting your head inside this person’s life until you think from their perspective.”
Third-party reports, accounting and statements must mesh with the target’s own financial records, or else there is another forensic red flag, Ludmer explains.
“You’ve got bank, credit card and investment accounting statements and you have third-party statements generated in the ordinary course of business (such as customers and suppliers and partners)," he says. "These need to fit like pieces of a puzzle."
There are several reports from the Canada Revenue Agency (CRA) the person being investigated can be asked to produce, including one that accounts for all of the individual’s debits and credits, says Ludmer.
“CRA keeps records for very long periods of time, and you can ask for a 15-year report," he says.
“Anybody can generate a tax return off of a program and sign it and say, ‘This is what I filed,’ but it may not be what they actually filed,” he says. “By seeing all the debits and credits, you’ll see the interactions between the CRA and the individual. They may provide you with the initial Notice of Assessment, but the CRA statement of account will detail reassessments that you would not have otherwise known of."
Third-party statements can also be a valuable tool, says Ludmer.
“If you provide various types of services on an individual contractor basis, the person paying you may have to file a form with the federal government – it’s part of their reporting, so the lawyer can ask for those forms to verify as many cash flows as possible.”
An often missed step in the process is asking for HST returns and statements of account, says Ludmer, noting they’re “the best indication of the gross revenues the individual has actually received, aside from cash revenues, which require other analyses.”
Ludmer says: “When most people are going to game the system, they’re not going to show any growth, so not only do I want to see HST returns, I’d want to see where the HST was paid from, and the HST statement of account from the CRA.”
When all the data is assembled together, says Ludmer, and if the inflows, outflows and other data from the various sources are incomplete or conflict, “I’ll know there’s another bank or investment account (or several) they haven’t given me.”
It’s also important to monitor how the individual is acting throughout the process, says Ludmer, since “people who are under financial pressure act a certain way. They curb discretionary expenditures. Creditors are chasing them. Their credit ratings fall. There may be litigation and executions. There’s a profile to someone who is actually under financial pressure as opposed to just asserting that they are.”
Ludmer says the process he follows mimics the way forensic accountants and CRA auditors are trained and is useful in many areas of law.
“You just deploy this process and you ask for answers and eventually it comes to light,” he says. “The type of people who cheat on child or spousal support think they can get away with it, so you have to ask the questions and when the answers don’t fit, it starts to unravel. It’s a fascinating exercise that’s also very difficult and time consuming.”
Ludmer says, “Most people follow too linear a process, asking for tax returns or bank statements, but don’t even know what to do with the data when they get it. They don’t realize they haven’t asked for enough and haven’t followed the hints in the materials they have received.”
This is an area where Ludmer’s combination of business, accounting and family law experience creates synergies for his clients.