Month: January 2019

AccountingBlockchainForensic Accounting

Cryptocurrency and Forensic Accounting of Marital Assets

What are divorcing couples to do with digital property? How does one party even locate these assets? How do you know if the other party is hiding community property in cryptocurrency? Once located, how do you divide it?

Cryptocurrency is a hot topic in the news, particularly on a slow news day. The financial media especially loves to discuss cryptocurrency at two specific times: 1) when the price of Bitcoin is skyrocketing; 2) when the price of Bitcoin is crashing.

It is certainly of greater interest to those of us who pay attention to advances in technology. I was a little late to the game as I started learning about crypto in 2015. This was earlier than many, but far later than early adopters. When I look at historical charts, it would have been nice to have invested in 2015. Alas, I did nothing of the sort. Luckily, I didn’t invest when it went crazy in 2017. When armchair pundits started saying “it’s still cheap,” I had flashbacks of the dot-com bubble when people would say things like “normal economic principles no longer apply.” Turns out, normal economic principles did apply in both scenarios.

When Bitcoin increased in value to nearly $20,000 per coin in late 2017, it became a household name. Many folks jumped in to cryptocurrency investing in the hopes of striking it rich quick. Some succeeded. Others did not. As of this writing, Bitcoin is priced at $3,415.00 according to Coinbase (chart linked so you can see how it has changed by the time you read this post).

Even off of its highest values, Bitcoin, Ethereum, Litecoin, and other cryptocurrencies still have value. They are an investment vehicle like many others, although they have experienced some tremendous volatility.

For purposes of this article, we’re looking at them as an investment to be divided upon divorce. Or, as an investment intended to hide assets from a spouse.

What is Cryptocurrency?

Don’t worry, this is not a detailed explanation of cryptocurrency. There are about a million other articles online where you can find detailed analysis of the Blockchain (on which cryptocurrency is built). In fact, one of our internet technology experts wrote an article last year that provides some interesting insights on the Blockchain.

I’ll try for a quick description before I get into the analysis needed by forensic accounting expert witnesses.

According to Investopedia, in relevant part, “A cryptocurrency is a digital or virtual currency that uses cryptography for security. Many cryptocurrencies are decentralized systems based on blockchain technology, a distributed ledger enforced by a disparate network of computers.” The ledger is kept on various different computers around the world, so that there is no centralized computing system. Also, cryptocurrency is not (at least not yet) currency issued by a central government.

As such, cryptocurrencies like Bitcoin, were used to hide money from tax authorities and participate in illegal transactions online. Especially in the early days of the currency, before it was more commonly understood.

Although hiding from the tax man and participating in illegal activity is still occurring, many users are now investing in cryptocurrency as though it is any other security. However, because it is not kept in a standard bank, but rather a digital wallet, some are using the currency to try and hide assets from their spouse (or soon-to-be ex).

What to look for as a forensic accountant?

This article from the New York State Society of Certified Public Accountants (NYSSCPA), provides some excellent advice from an accounting perspective when having to find cryptocurrency in divorce litigation.

Most importantly, the NYSSCPA provides seven questions to ask the client in the client intake interview. The questions are as follows:

1. Is the spouse very tech savvy?
2. Has the spouse ever owned cryptocurrency?
3. If so, did he or she buy and sell on an exchange, or did he or she receive cryptocurrency for goods and services?
4. If so, how did the spouse store and transact in cryptocurrency?
5. Did the spouse use cryptocurrency as part of their trade or business?
6. Where does the spouse keep their important records? Does the client have access to them?
7. What electronic devices does the spouse own?
8. Does the client still have physical access to his or her spouse’s electronic devices, such as computers, phones, and tablets?

This is incredibly important for a forensic accounting expert. You are going to want to identify all the possible records and other forms of documentation that might lead you to assets hidden in cryptocurrency.

If the spouse is tech savvy, they may do a really good job of hiding their use of cryptocurrency exchanges, software wallets, and keys to access funds.

The NYSSCPA also points out other information gathering options for the forensic accountant. You are going to need access to bank statements, tax returns, the public Blockchain, a physical inspection of the marital home, and the spouses electronic devices.

The article also points out you may have to subpoena records from cryptocurrency exchanges. Many of them are not located in the United States and may not be helpful. The exchange mentioned above with the chart, Coinbase, is the most popular and is located in the United States. If the spouse is extra savvy, they may look for exchanges located offshore.

To get further insights on this topic, I normally bring in an expert witness. Today, however, I wanted to provide the readers with some insights from a practicing family law attorney.

Erin Levine, Esq. – Family Law Attorney and Legal Technology Entrepreneur

Erin Levine is a certified family law specialist with more than 14 yeas of experience practicing family law in the East Bay. She has her own law firm, Levine Family Law Group, where she offers full-scope representation, limited-scope representation, mediation, and more.

Additionally, Erin is the founder of Hello Divorce. Hello Divorce is a service that empowers you to conveniently manage the divorce process online with easy to follow, step-by-step guidance and affordable access to our top-notch lawyers. They break down the extremely complicated California divorce process into discrete, manageable steps. Hello Divorce is helping spouses to uncouple without the outrageous costs of the classic contested divorce.

Here are my questions to Erin and her responses:

Nick: As a family law lawyer, when do you employ a forensic accountant?

Erin: We use forensic accountants in about 10% of our divorce cases. Usually we hire a forensic expert to assist with valuing an asset(s), analyzing financials that the other party has provided, determining the separate or community interest in an asset such as a house or business, sorting out complex financial information, and/or determining “income available for support.”

Nick: Have you had the issue of a spouse hiding assets in cryptocurrency?

Erin: Kind of. We’ve had a couple people fail to provide information in the initial disclosure documents evidencing cryptocurrency. We have fortunately (so far) always been able to obtain that information in discovery or a request for further disclosures. What’s made it easier on me is that my client was aware that cryptocurrency existed and in the two cases where the other spouse didn’t initially disclose – we were aware that he had received crypto as part of his compensation package so it was possible to subpoena documentation. In another case, my forensic accountant determined by looking at joint tax returns that there was a significant asset not yet disclosed. That “asset” was determined to be cryptocurrency later in the divorce.

Nick: What usually indicates, to you and your forensic accountant, to start looking for hidden cryptocurrency assets?

Erin: Well the biggest change we’ve made to our in-house process is that we’ve added cryptocurrency to our financial intake process. In other words, we explain to our clients what it is and ask questions designed to help them determine whether or not their spouse has cryptocurrency in one form or another. There are certain professions and/or lifestyles that definitely put us on high alert and require us to look a little closer at a given case to see if there might be something more there. Fortunately, we haven’t had to hard of a time yet.

Nick: What steps can you take to account for the cryptocurrency (marital property)?

Erin: Well, if you are the “out” spouse – meaning, you do not have access to all of the property, debt and/or asset information that your spouse has, you should ask for it. In California, spouse’s owe each other a fiduciary duty to disclose all assets/debts and a duty of the highest good faith and fair dealing. In other words, if one spouse is hiding an asset from the other, and it is later found, the aggrieved spouse has a strong legal claim to recover 100% (not just half) of that asset. I believe many other states have similar laws. Whether you are in a marriage or currently dissolving it, you should make sure you have a copy of all estate planning documents including the initial intake form. I find that when spouse’s are not in “war,” they are much more candid about what they own. By taking the time to look through that early intake form or your previous tax returns, you may be able to discover cryptocurrency. If it’s not immediately apparent, follow the investment/cash. As an example, maybe your spouse sold stock in 2017. Trace those funds. Where did they go? Were they used to purchase a new home? Did they disappear? If so, you have a right to request information and/or subpoena documents to determine where that cash went.


 

A special thanks to my friend, Erin Levine, for her insights on this topic. Also, I want to thank Allen Rodriguez of ONE400 who gave me the idea for this blog post. This is just an entry into the cryptocurrency issue for divorce. We may be writing about this subject in the future.