What lesson does the Brexit vote hold for anyone conducting or contemplating fact investigation?

Don’t let confirmation bias muddy your thinking.

One of the key “Investigator’s Enemies” identified in my book, The Art of Fact Investigation, confirmation bias is what many of us tend to do when looking into an issue: we find what we expect (or want) to find.

Avoiding Confirmation Bias
Avoiding Confirmation Bias

The big money in last week’s British referendum was in favor of remaining within the European Union. It wasn’t just that large banks, corporations and the people who work there supported “Remain,” but that these people bet more heavily on their preferred outcome than those betting on Brexit.

The result? Even though opinion polls consistently pegged the race as very close, bookmakers in the UK put the odds of a Brexit victory at as little as 10 percent, according to the Wall Street Journal.

How could this be? For the simple reason that bookies like to balance their bets. Even though all voters in the U.K. got evenly weighted votes, bookies don’t evenly weight all bets. If you want to bet $400,000 on Remain and someone else bets $100 on Brexit, the odds will go heavily toward the Remain camp – whatever the polls say.

That may be what happened last week. So much money went against Brexit that those making — or in sympathy — with that outcome started to believe the odds and not the opinion polls.

How would this kind of skewed thinking work in an investigation?

Since all the information we have gathered about Mr. Jones is that he is a “New York guy,” we will not spend serious time looking outside New York to see whether he may have a litigation history or any commercial presence outside the city. We then could miss the apartment he quietly bought for himself in Miami two years ago, along with the companies he runs out of that apartment.

With confirmation bias, we might dismiss the idea of a Florida base because if he had such a thing, someone would have found it by now.

As with Brexit, we would assume that all of the “smart money’ was on one outcome (Brexit/New York) that we expect we will find.

Instead, a little smart inquiring (perhaps a database search nationwide on Jones, or a look at bet sizes for Brexit) would make us more informed and less beholden to our prejudices.

All people hold some form of prejudice when they begin an investigation. You need to have some pre-existing idea of where to look, since you can never look everywhere for everything. What we aim for is the judicious balance between inspired guessing and submitting to confirmation bias.

A reader of my new book, The Art of Fact Investigation, suggested that for the next edition there should be a chapter about legal ways to “hide from snoopers, private and public sector. I am probably not the only one who was thinking as I read the book on what I could do to keep my life more private in general in this day and age, other than staying off Facebook and Twitter.”

Our firm believes in showing exactly how we get the information we get (plenty of examples in the book as well as on our two blogs). Therefore, we offer here free of charge a few pointers on how databases collect information about you and what kinds of things you can do to stay off them.

  1. Buy a house through a limited liability company that is not named in connection with you or anyone in your family. Base it not at your house or office but at the office of a trusted lawyer. Deeds and mortgages in the U.S. are public, so any home bought in your name will pop up, often on the internet free of charge if you live in a county that puts all such information on line. Some counties do, some don’t.
  2. When you move into the house and you want to register for discount cards at your local drugstore or grocery store, don’t. If you don’t mind lying, give them a different name and a made-up phone number. Those stores sell the information people submit to the databases. If you put your real name and number down, you will get calls the same day asking if you need contracting or other help with your new home. As long as you have the card with you or remember the phone number you used, you will still get your discounts.
  3. If possible, put utilities in a name different from yours. Gas and electric company information gets into databases.
  4. Buy a cell phone with cash and replenish it as you go.
  5. Be very careful about who gets your cell number. As in #2 above, if you order a pizza while visiting someone else’s house and provide your cell phone number to the pizzeria, the databases may associate your number and that address.
  6. Avoid borrowing money. This is a big one, but credit reporting agencies are allowed to sell some information to databases that relates to where you live. The databases won’t disclose how much you’ve borrowed and from whom without your approval, but will make use of “header” information that can reveal home addresses, numbers and associated businesses.
  7. Try not to sue people. We had a case in which someone hiding assets and claiming to be broke sued a neighbor. We were able to trace his car that had allegedly been damaged by the neighbor, and found that the car’s owner was a relative who jumped to the top of our list of people who could have been holding our man’s money for him.

In summary, unless you use cash and live an extremely quiet life as a renter, it is difficult to hide completely from the electronic information gathering available today. On the other hand, we report to clients on a regular basis that a particular person owns a home, has never been to court and has nothing of note about him in any database or newspaper.

We then recommend interviewing former colleagues and others who would know more about him.

Once you get to this stage, our advice is: be nice to others and they will probably say nice things about you too.

A story in today’s Wall Street Journal about “Why the Virtual Reality Hype is About to Come Crashing Down” makes the simple point that computers haven’t caught up to all the permutations of real life to make a “virtual reality” headset experience resemble a genuine experience.

A short demo is one thing, but life goes on after the short demo is finished.

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“The dirty little secret about [virtual reality] is that the hardware has run ahead of the content,” says the Journal.

My view is that catching up to real life is something that it is hard to see computers doing anytime soon, a point made in my recently published book, The Art of Fact Investigation: Creative Thinking in the Age of Information Overload.

The book makes the case that figuring out problems related to human behavior requires guesswork and the flexibility to change course when one series of guesses appears to be the wrong way forward. Computers are wonderfully flexible and free of emotional bias, but are completely unimaginative.

While computers can sort easily through data people enter onto their hard drives, they have a much harder time saying, “Here is something you should expect to find but do not.” Example: risk management programs failed to note the suspicious fact that Bernard Madoff’s alleged billions under management were audited by a tiny accounting firm in a suburban shopping mall. The computers did not say (because they were not programmed ahead of time to say), “I should be seeing a Big-Four auditor here but I don’t see it.”

But what about all the hype about “Big Data” and our ability to predict things based on billions or individual cases only a computer can keep track of?

The problem is that in some kinds of investigations (who is this particular person? What is the probable reaction of this particular company to litigation?) we don’t demand an answer about what other people or companies have done in the past.

Big data aggregates lots of individual results, but sometimes when the stakes are high, we want to disaggregate and find out what this particular person did at work eight years ago to prompt a departure left off a resume, or what this particular company’s board is like when faced with a lawsuit.

You won’t find those answers in any magical database. If you are lucky and smart, you will find some clues that will help you put together a probable story.

If that sounds less than the neat and tidy solution you were hoping for, who said real life was neat and tidy?

When is a big financial story an unsurprising financial story? When it turns out that people from corrupt and repressive countries are sneaking their money offshore to keep it hidden.panama papers icij.jpg

The world today is tearing into a huge leak of Panamanian legal documents unearthed by a German newspaper and shared via the International Consortium of Investigative Journalists.

These have caused a political scandal in Iceland, among other places, because according to the report the prime minister of that country turned out (via a secret offshore company set up in Panama) to be a creditor to several Icelandic banks. That’s ordinarily not a problem (other than not being able to get your money back in the case of Iceland at that time). But it is certainly awkward if you happen to be negotiating on behalf of the government against the creditors (i.e., against yourself).

There are also figures in the United Kingdom said to have used offshore companies.

Those were the big news-making events, even though people from 51 countries (plus the Palestinian Authority) were reported to be using Panamanian companies set up by a particular law firm.

The reason the people from U.K. and Iceland led the news with this leak? Our money is on the theory that they are the only ones from countries in the report that are the among the world’s 20 least corrupt countries, according to the latest Transparency International Corruption Perceptions Index.

About half the countries that make it into the Panama Papers rank as less corrupt than the median Transparency International corruption ranking for 2015. But that still means only that they are perceived to be less corrupt than China, Colombia and Liberia.

A better proxy for where to expect offshore activity among the powerful may be the Freedom in the World rankings from Freedom House. Iceland and the U.K. are rated as “free,” but just 18 of the 51 countries represented in the Panama papers were also seen to have enough political rights and civil liberties to merit the “free” rating. The rest of the countries represented in the Panama Papers were “partly free,” “not free,” or “the worst of the worst” (Saudi Arabia, Syria and Sudan).

While the Panama Papers is careful to underline that the mere use of an offshore company may be completely legal, the ICIJ and everyone else knows that offshore companies can also be used to hide stolen money or to evade creditors.

It’s the evasion from creditors that usually gets our firm involved, but we have the following advice to all but the highest net worth clients:

  • It can be expensive to set up a complex offshore regime, so unless you are looking for money in the millions, it may not be worth the similar charges to 1) find the money and 2) go to court in a tax haven to get it back.
  • For Americans, we advise looking “offshore” in the United States first.

In the U. S. it’s very cheap and easy to establish a limited liability company that can be hard for creditors to find. This company can hold cash, real estate and other assets just as easily as an offshore one can. We have written about these repeatedly on our other blog, The Divorce Asset Hunter.

If you pay an incorporator to set up a Delaware company  and have that company based at the office of a friendly lawyer ( and not at any address linked to you) it can be very difficult to track such a company back to its beneficial owner. Cracking it with a court order is a lot easier and cheaper than going to court in the Caribbean, but just finding these companies set up by someone who knows what he’s doing can take a lot of work.

It may not have the glamor of Panama, the Cook Islands or the Caribbean, but for someone looking to hide $500,000, a U.S. LLC with an innocuous name can get the job done.

A fascinating piece in today’s Wall Street Journal about a Japanese collector of North Korean garbage got me thinking about the value not just of garbage in a normal investigation, but to take a minute and to ask, ‘What is garbage?the value of garbarge.jpg

First, the article: Stuffed into a rented room near Tokyo are all kinds of cigarette packages that indicate class divisions in a supposedly classless society; ration books from a country that has suffered numerous recent famines; even an old phone book that cost $2,000 on the black market. A Korean-speaking history professor in Japan has collected it all, mostly from trips to the part of China that borders on North Korea.

Our clients sometimes ask us how we gather information when public records, databases and interviews don’t get us everything we need. One option we sometimes discuss (but very rarely get hired to do because of the expense) is to go through the garbage of people related to the investigation.

Picking up someone’s garbage is a complicated endeavor, in addition to the unpleasant task of physically sorting through it. Not only do you have to figure out where it gets left and when, but you need to make sure that you have the right to collect it at all. If it’s on private property, you are trespassing and stealing if you take it. Even if abandoned on public property, some states may still frown on the idea of taking it.

Appreciating the value of garbage can help an investigation that goes nowhere near a trash can.

Garbage is something that was once considered important to its owner but no longer is. But just because the owner doesn’t care about it doesn’t mean the rest of us cannot find use for it. That’s easy to see if you spot some nice piece of Danish furniture put out on the curb, but it applies to information too.

Think about a summer cottage purchased years ago by a married couple. Along the way the marriage sours and the husband begins to skim money out of the family business into a secret company he founds. The couple sells the cottage as the children grow up and move away, and then divorce proceedings commence.

When the wife approaches us with the suspicion that her husband has hidden assets, we take a look at his entire profile of both today and years past. We search the names of companies linked to the address of the former cottage and find a company was once based there but now has an updated address.

That is probably the one hiding the company assets, and that is garbage picking: an address no longer of use to the husband, but linked forever to the company he once founded and which is still very important to him.

The current fight between Apple and the U.S. Department of Justice, which is trying to execute a search warrant in a criminal matter, has been framed by Apple and its defenders as a battle over privacy.

Apple is not arguing that the information sought should never be seen by the government. The company handed over all the information asked for in the warrant that had already been stored on Apple’s own servers, some of which is presumably still on the phone. Where Apple wants to draw the line is the privacy of its customers who don’t back up their phones on the cloud.

It’s not enough to say you want privacy, because privacy means so many things to different people across not just national borders but even within countries.

Mortgage recording means I can figure out how much you owe your bank. Your series of LLC’s you thought would keep your beneficial ownership a secret comes unraveled when you borrow money because banks want to see who’s at the end of the chain before they lend. When they lend, the rest of us can take a peek. Yet, some countries keep mortgage information private.

Do you have the right to make private the details of your divorce? If you live in New York you do. Because those records are sealed. In other states, how much you pay your former spouse in alimony and support is wide open for everyone to see. You might as well make your tax returns public.

Speaking of tax returns, those most confidential of documents: some European countries thought to be superior guardians of privacy put everyone’s income on the internet.

Some people don’t want information on their phone made less secure because the government could get a look at health information. Health information is private, except when you have national health insurance as does most of Europe and Canada. Then, your information is between you, your doctor, and the government. Some people would still call that privacy, but it’s not as private as if it were locked on an encrypted Apple phone.

As an opinion piece in the New York Times said today, nobody appointed Apple to be the definer of privacy. That’s something governments do when they draft constitutions and statutes that their courts interpret.

There is much less than meets the eye in new Treasury Department rules aimed at tracking “secret buyers of luxury property,” as the New York Times put it this morningfincen rules on luxury property.jpg.

When you look at the new rules here, you see that it will fall to title insurance companies in two U.S. cities (Miami and New York) to report the beneficial ownership of corporate entities that pay more than $3 million in cash for a property.

This blog takes no position on whether there should be more vigilance about who is buying real estate in the U.S. What is clear is that these rules will do little to shed any light on the matter.

If I were a very rich person from Russia, China, Brazil or anywhere else, here are the obvious and inexpensive workarounds I would consider:

  1. Forgo title insurance. If you have $12 million to spend on a condo you will seldom visit, you will do without title insurance – a policy usually required by banks in exchange for taking your mortgage. Oligarchs need get mortgages. Any doubts about good title can be solved by a competent lawyer who can do the same work as the title searcher, minus underwriting the work with an insurance policy. In any case, many of the properties the government is targeting are new construction where title is much less of an issue.
  2. Set up a foreign holding company to control the U.S. company buying the property. Have a lawyer in the foreign jurisdiction control that foreign company as the beneficial owner. Once the sale of the U.S. property goes through, transfer the shares of the foreign company to a trust controlled by the rich foreigner. Even if title insurance reported the initial beneficial owner, they would not be able to track subsequent ownership changes overseas of the foreign holding company.
  3. Buy a place in Hawaii, Palm Beach, or Connecticut. The rules are backward looking. These people buying the properties are not. If they can buy with a corporation or LLC no questions asked somewhere other than New York or Miami, they will do so.
  4. Instead of buying a place for $4 million in Manhattan, buy two for $2 million. When you have millions and billions to spare, who cares about transaction costs of an extra conveyance?

There is a sad piece in the Wall Street Journal today about the demise of librarians and university programs in library science, In the Age of Google, Librarians Get Shelved. computer investigation.jpg

People trained to run computers do not have the training to gather facts the way librarians do. I count as a loss the presence of libraries with I.T. help desks instead of librarians  

Not that a good professional investigator is the same as a reference librarian. Part of what we do is to pick up a phone or travel to interview people to get information that is not written down.

Still, most of the time the first step is to do a lot of reading of documents, and we ask ourselves some of the same questions a good reference librarian would ask. And while it’s true that Google searching reduces the need for elementary help on different kinds of research, we are firm believers that Google does not replace the connections made by an alert human mind. The main reasons are:

  1. Google is a business and promotes links that make money rather than links that may be useful to you. Sometimes that works if your interests are aligned with Google’s, and sometimes it doesn’t.
  2. Much of the world’s information is not on Google. Most court documents in the U.S., for instance, have never been scanned and made available on the internet. Of those that have been scanned, many are not keyword searchable via Google: you have to know from Google on which sites to do your keyword search.
  3. No database is good at talking to other databases. If major hospitals in the U.S. can’t get their dozen different computer systems to talk to one another, how is the entire world supposed to get sufficient information into the right format for Google to be able to spit it out in a fraction of a second?

The mistake librarians made was to call what they did a science. Fact investigation is as much art as science for the simple reason that you can’t look everywhere and read everything you find. There are dozens or hundreds of educated guesses involved in good investigation, as I write in my forthcoming book The Art of Fact Investigation, reviewed by Kirkus here.

Pity the librarians who can’t get work, but pity too the people who think that Google is all the help they need to get sufficient information for any but the most mundane inquiries.

It has emerged that the woman who with her husband shot 14 people to death in San Bernardino, California had posted her support of violent jihad on social media even before immigrating to the United States.social media terrorism.jpg

As reported in the New York Times over the weekend, U.S. government officials not only missed these postings in checking into the background of Tashfeen Malik, but “there is a debate” inside the Department of Homeland Security about whether it is even appropriate to review social media as part of background checks.

To someone who uses social media every day in order to build a fuller picture of people we look at, this attitude is incomprehensible.

Looking at someone’s public social media is by definition not an invasion of privacy: We are not discussing reviewing confidential email traffic, but instead postings that were intended to be public whether under a pseudonym or not.

Not that prospective immigrants to the U.S. have much of a claim to privacy rights. Even U.S. citizens are subject to searches at the border that would be declared unconstitutional under the 4th Amendment if they were conducted inside the country.

But even for citizens inside the country, social media with a few restrictions is completely fair game and is an indispensable tool for any investigator. The younger the subject, the more we depend on social media to identify, locate and profile people.

The main limits on social media use for lawyers are these: we may not “friend” people under false pretenses, and in some jurisdictions using an agent to “friend” people without having the agent disclose the real reason for the friend request can be deemed unethical.

But for anything on a social media page accessible to anyone else with an account, social media postings are as confidential as a published article, a website or blog without password protection, or the contents of a speech made on a street corner. If Facebook changes its rules and a comment that was once private becomes public, it is the job of the account holder to reclassify the postings they wish to keep private. That goes for U.S. citizens as well as people seeking the privilege of travel or immigration to the U.S.

The New York Times story implies that the reason some officials shy away from social media checks is that these take too long, and that some in the government are considering social media backgrounds for people from high-risk countries.

Good idea, if years late.

One former Homeland Security official told the Times that “We run people against watch lists and that’s how we decided if they get extra screening.”

Fine, but where do we think the compilers of watch lists get their information? If they are not using social media, they are probably missing a ton of good intelligence, right there in the open.

We write (and tell our clients) consistently about how difficult it is to obtain the bank account information of litigation opponents without first getting a court order.  There are people out there who will charge you to trick banks into divulging this information, but they break the law when they do this.hawala money laundering.jpg

If you are ever tempted to hire one of these people, see if they can tell you how they obtain the information because you would like to submit the methodology to legal analysis. They may well hang up on you.

Still, we do get our hands on account information some of the time. Either our clients have legal access to it (they are joint account holders, for instance) or they have gone to the trouble of getting a court order.

On our other blog this week, The Divorce Asset Hunter, we thought it would be useful to begin an occasional series about what happens we do, legally, get access to bank accounts. We explained this week the idea that an account may answer a lot of questions, or may just open the door to another set of puzzles to solve.

Today’s installment deals with a time-tested way to move money around the world secretly, known in South Asia as Hawala or Hundi, and in China by the term “flying money” among many.

The Hawala system is one of money transfers based entirely on trusted non-bank networks that may use the banking system as a portion of the transfer process. It may consist of entirely legal or illegal transactions. It may work like this:

Mr. A in Asia wants to send $10,000 to Mr B in Baltimore. Mr. A gives the local equivalent of $10,000 in currency, gold, diamonds or something else to a member of a Hawala network in his city in Asia. That person contacts another member of the network in Baltimore, who makes an entry that he needs to deliver $10,000 (minus small fees for the network members on both ends) to Mr. B. Mr. B gets his money, and the only documentation is a book entry within the network, and perhaps an email or text message.

These systems need to settle up. If the network member sends more to the member in Baltimore than the Baltimore member sends the other way, reconciliation can happen through the banking system, through intermediaries in places such as Dubai, or in trade transactions that can involve mispriced invoices.

In a simple example, if the Baltimore member of the network buys $30,000 of jewelry from the member in Asia, he can receive an invoice for $40,000. His overpayment of $10,000 will settle the imbalance resulting in the transaction between Mr. A and Mr. B.

The kinds of businesses that participate in Hawala networks (as opposed to the people who make use of the networks) are often those that routinely engage in foreign trade (travel agents, import-export agents, foreign exchange bureaus, and used car dealers who ship older vehicles overseas.) In examining bank account information of these and other businesses, there are several indicators that suggest a higher likelihood that the account holder is part of a Hawala network. These include repeated small deposits from a variety of local individuals in round numbers and fewer large transfers to parties in a known Hawala center, such as London or Dubai.

For example, Mr. D is small jewelry dealer in New York. He receives deposits in similar round amounts of $1,000 or $2,000 from a variety of individuals, and then pays out one much larger amount to an account in Geneva. There’s plenty of jewelry sold in Switzerland, but not the kind usually on view in Geneva. More probing would be in order.

Sometimes for the purposes of negotiation during a divorce or another kind of dispute, it’s not even necessary to unravel the whole Hawala network. The idea that illicit transfers may be uncovered may be enough to induce the other side to settle quickly. Nobody likes the IRS to get involved in their affairs any more than it already is. A Hawala arrangement may be legal, but it may conceal income that has not been declared.