Non-disclosure of assets upon divorce: is anywhere safe to hide?
In a world in which people now routinely own assets across multiple jurisdictions, and with the recent boom in ownership of digital assets, the disclosure process can be multi-faceted and raise a number of issues, with some spouses tempted to take advantage of the potentially untraceable nature of those assets.
During a divorce, the duty of each spouse to make full and frank disclosure of their financial position extends not only to their worldwide assets and trust interests, but beyond financial information to ‘all material facts’.
This could include, for example, immediate plans to remarry or imminent prospects of inheritance. All aspects of a divorcing couple’s life are open to investigation by the other spouse, and by the court, and the implications of trying to conceal a factor the court considers significant can be wide-ranging and serious.
The long arm of the law…
The negative outcomes which can flow from non-disclosure invariably outweigh any perceived benefits in all but the most extreme case. The English family court has wide powers to force disclosure (including against third parties). Proceedings to force disclosure will greatly increase legal costs for both parties and time will be lost in reaching an overall conclusion to the financial settlement.
The sanctions of non-disclosure are harsh; the court may impose costs penalties and, ultimately, imprisonment on parties who seek to conceal assets.
Adverse inferences can also be made against the alleged non-discloser. For example, if a court determines a spouse has been less than frank about their financial position, it can infer that certain assets exist, and attribute a value to them.
The court can then make an order based on the value of these inferences. In the recent billion dollar case of Akhmedova, the court found that the company holding the bulk of the $1.092bn wealth in the case was in effect a ‘piggy bank’ for the husband and its value was drawn into the marital pot, to then be divided.
In extreme cases of repeated non-disclosure, a judge can commit a party to prison for contempt of court. In the infamous case of Scott Young, he was sentenced to six months in prison on two separate occasions for his failure to provide full and frank disclosure. It seems that some parties would rather serve time in prison than share the true extent of their wealth.
As the family court retains jurisdiction over a marriage even after it has ended, material non-disclosure remains an issue after proceedings have drawn to a close. A court order – whether it was reached by consent or imposed by the court – can be set aside if it can be shown there was material non-disclosure at the time at which it was made which would have led to a different financial outcome had the true position been known at the time.
There is no time limit for this and the secretive party remains exposed to a further order from the court at any later stage.
Cryptocurrencies: a non-discloser’s dream?
The increase in people holding digital assets, such as cryptocurrencies has been recognised by divorce lawyers contemplating disclosure with a sense of rising apprehension.
Cryptocurrencies present a unique challenge as they are de-centralised. There is no server or central authority that can be compelled by a court to make disclosures of ownership. Digital currencies pay no dividends and take no physical form, as they only exist on a protected network in generally anonymised accounts (although transactions themselves are, conversely, publicly viewable, even if you cannot see who is behind the transactions). Therefore, to prove their existence can be nearly impossible, especially where they are not held with a cryptocurrency exchange.
Some cryptocurrencies are traded using an online exchange, making their existence much easier to prove, but if the digital wallet is transferred ‘offline’ it may take a digital forensics expert to prove its existence. This is a slow process and can cost thousands of pounds, with no guarantee any assets will be found.
It may be possible to trace the original purchase of a cryptocurrency through a debit in a party’s bank account. However, proving where those funds went can be almost impossible. A financial analyst may be able to trace the flow of the funds, but once they are within an anonymised network it is very challenging. If the currency was purchased more than a year ago, the debit may not even appear in documents that are disclosed, given the obligation to disclose bank statements in the past 12 months only in the first instance.
The need for vigilance
We are yet to see a case that deals with the non-disclosure of cryptocurrencies in England and Wales, though it is surely only a matter of time. When a court is faced with suspected non-disclosure of cryptocurrency assets, it seems likely it will approach this in the same manner as it would in any other case involving credible allegations of ‘missing money’: making adverse inferences about the true extent of the hidden financial resources, and, if appropriate, awarding a greater share or all of the visible assets to the party who hasn’t hidden assets.
Where a spouse is suspected of non-disclosure of assets held in other jurisdictions, the English court can make a global freezing order in respect of those assets to prevent them being further dissipated. However, in order to obtain a freezing order the spouse applying for the Order must demonstrate where the funds are held. If they haven’t been able to trace these assets, a freezing order will be of limited use.
Alternatively, it is open to a spouse at the end of the legal process in England to seek to enforce the English order abroad, by obtaining a ‘mirror order’ in the foreign jurisdiction where that spouse believes assets have been hidden. In order for this to have real weight, and given the expense of obtaining orders abroad, the court and the “innocent” party must be confident those assets exist in that jurisdiction.
To date, the English family court has proved relatively adept at offering creative solutions to spouses who fear that marital assets have been hidden, ranging from orders to freeze assets, to imprison, to pay the other party’s costs and inferring what has been hidden and taking that into account in the settlement.
To what extent are these powers sufficient in the face of the rise of cryptocurrencies? The slow rate at which laws catch up with modern technology leaves plenty of potential loopholes for secretive spouses tempted to take a chance of non-disclosure. They may plan their divorce in a strategic way many years prior to calling time on their marriage in the hope their efforts will succeed in hiding assets from their spouse. For family lawyers, and the clients they advise, it is a case of ‘watch this space’.
Amanda Sandys is senior associate and Christine Abbotts is associate in the family team at Forsters LLP