The Ethical Investigator

Whether one spouse hides money from the other during a portion of their marriage (and the Wall Street Journal reported this week that 58% of spouses say they do), the serious attempt to track it down will almost always come in the time leading up to a divorce.

Divorces can be long and painful journeys, and despite the marvel of the internet, so can asset searches – especially when the other side knows you’ll be looking.

Clicking your way to assets becomes a little easier when you get to the stage of electronic discovery, as the article claims. Proper (legal) access to a computer, smartphone or Facebook account can work wonders. But the idea that a spouse or her accountant can dispense with paper records, do a little Googling and come up with major assets a lot of the time is just plain wrong.

Sometimes, you can get lucky. An accountant uncovered real estate owned by a the other side by using Google, according to the article, and the web also yielded information that the husband had sold his supposedly valueless company for millions.

We’ve written before about the limits of Google here, where we point out that if you Google yourself, you will probably find less than one percent of the information that you know about yourself. Why should your spouse’s secrets tumble onto the Google results screen when yours and those of most people you know will not?

Google is also deficient as a main search tool because “good” results for Google may not be good results for you. Google is a business, not a non-profit catalogue of the world’s information. If an obscure financial asset held by a brand new limited liability company controlled by your husband is like gold for you, Google may not get excited enough to tell you about it before page 10 or page 100 because nobody’s linked to it yet and it contains no lucrative terms to sell in Adwords. We went into this and other Google matters here.

The sad truth for people hunting for assets is that it’s often hard work that involves looking through paper. Of course, as the article mentions, there are all kinds of ways to tap into computers, phone lines and bank accounts. The trouble is, a lot of that kind of thing is illegal. Go into court with illegally-obtained evidence, and you often come out a loser.

The main reason electronic searches won’t be enough to uncover assets? Those assets are recorded only on paper. At best, in most of the more than 3,000 counties in this country, you can find abstracts of deeds, mortgages, court documents and security agreements on line, but to read them you need to retrieve paper in physical form.

What kind of thing is on paper that’s not on the web? For starters:

• Co-defendants. Your husband is sued in Pennsylvania, but not on the electronic abstract are the names of his co-defendants. One of those could be his LLC through which he owns property you don’t know about.
• Collateral. When you borrow money in a securitized loan, the collateral gets recorded in writing. Sometimes you can see these UCC Article 9 security agreements on line, and sometimes you can’t.
• Other adversaries who could help you. Looking at other people who have tangled with your spouse can help with information gathering because those people may know more about his business than you do.  

Finally, one critical tool is missing from the article on the electronic tool kit investigators now carry: it saves tremendous time, lets you conduct research from your office the way computers do, and even allows for lightning-quick follow-up. It’s called the telephone.

We don’t recommend using it until you’ve done all your research (lest you tip off your spouse that you’re getting close and give him the chance to move the assets). However, used properly, the phone can be the asset-hunter’s best friend. 

It’s always nice to be able to know who has loaned people money. It helps in asset searches, of course, but we also like to call bankers in after-fraud investigations. Now getting to the identity of those lenders is about to get harder.

Secured creditors have to put their customers on the public record. Such lending on real estate is called a mortgage, and on other kinds of property a “UCC-9” security agreement (known long ago as a chattel mortgage).

Who’s loaned money to whom is useful information if you’re a lender’s competitor, but it’s also great information in an asset search. You often need to contact other creditors to swap information, or else in litigation to figure out whether the person you are investigating may have perpetrated a fraud. What they told their lenders can be critically important.

Lenders have in the past tried to file under trade names (also known as DBA’s, for “doing business as,”) but those are also a matter of public record if not always findable on line. You can make up a name on a financing statement, but that gets awkward when it’s time to go to court and enforce a security interest.

The Company Corporation in Delaware thinks it has come up with a good solution that it’s recently started marketing: under UCC Article 9, lenders can submit the name of an authorized representative and have them listed in place of the lender, just the way people forming Delaware corporations can hide their identity by hiring an incorporator and registered agent. CSC offers that kind of service for Delaware corporations, and now says it’s the first to go into cloaking the identities of UCC creditors.

Now, instead of looking up who loaned money to a debtor, fact finders may have to determine who the representative of the lender is and then send in questions via that representative to uncover the identity of the lender. Who will answer? It could be the lender, but the lender won’t be under any obligation to respond. Or, depending on the agreement between the representative and the lender, you could be forced to deal with an intermediary representative instead of going right to the bank or finance company in question.

Just one more reason that data dumps by computer – never enough in conducting any kind of thorough investigation – fall short of the mark. Now even a search for a lender that used to be findable by computer or by an entry-level clerk may need the hand of someone experienced enough to be able to ask the right questions in the right way just to get the right person to come to the phone. 

An enraging story by the Associated Press spells it out: computers used by background checkers mix up two people with the same name. Blameless woman gets tagged with a criminal record that isn’t hers, can’t get work and ends up homeless.

We’ve written about the danger in relying on the “intelligence” of computers here, and the limitations of Google here. The message in these as well as the AP story about the ruined lives of background checks gone wrong are the same: there is no substitute for having an intelligent person conduct your research.

We saw such a problem earlier this year: a client called and said he wanted to hire (let’s call him) Robert M. Johnson for a high-paying job. Robert M. Johnson is an accomplished professional with a great resume and wonderful references. How then to explain the criminal record for fraud turned up by one of the databases? Robert M. Johnson the candidate said, “I’ve never been convicted of any crime. You’ve got the wrong person.”

Turned out he was right and the database was wrong. How could we tell?

1. We looked up the criminal case in question. While the AP story is correct that more and more criminal records are on line, the cases themselves – the critical documents – often are not and in any case need careful reading. We looked at the sentencing report in this case and found that the criminal Robert M. Johnson was sentenced to serve his time in a particular southern state to be close to “home and family.”

2. We then found that the Robert M. Johnson up for the job had no ties whatsoever to this southern state. His parents didn’t live there, he had never lived there, his Social Security number was not issued there, and he was working in Connecticut while the criminal Robert Johnson was committing his crimes down south.

This seems like simple work, but the databases were incapable of making the mundane connections that distinguished two very different men with the same common name. Why would this be?

To start with, not all databases come up with the same information. One may know where a person has worked for the last ten years, while another will have no information about employment. Still, the employment-light database will do a great job associating a person with companies he may own or on whose boards he serves. Both kinds of information are vital, but no machine can yet put them together to draw a complete picture.

Complete pictures come when the human mind gets involved, and even then, databases can only take you so far. We’ve written here about that too, and how interviewing is sometimes the only way to get the information you’re looking for.

But interviews or not, automated searching is like letting a robot build a car and then having another robot inspect the thing. The robots are certainly useful and lower the cost of the vehicle, but would you drive that car before a person had looked it over? 

The world is getting smaller in many ways, including for fact finders looking to get information about companies.

Sometimes, the company across the street will file more information about itself halfway around the world than it will in its own jurisdiction. With a computer or a good person on the ground far away, the information can be yours in a matter of minutes or hours.

Most people know the way this usually works: a company from a country with rotten disclosure wants to raise money in the U.S., and so is subject to the rigorous reporting requirements by the Securities and Exchange Commission. Foreign companies can be forced to disclose executive pay packages, and that can sometimes give you the name of a private company the executive gets his pay sent to. Great stuff, and only available because the government forces the information out of the company.

But what about the other direction? Companies from the U.S. or other jurisdictions that have great disclosure, which nonetheless turn over more information overseas than they might at home?

Two cases in point:

Last month the EU unveiled legislation to require “transparency” from “extractive companies,” which means companies that dig or pump stuff out of the ground or chop down trees. Even private companies that ordinarily would have no major reporting requirements to non-shareholders would have to disclose payments they made country-by-country.

A time-honored gift to U.S. investigators is Companies House in the United Kingdom. Private companies from anywhere in the world that want a presence in the U.K. have to register. You get names of directors, addresses, shareholder information and financials.

So the next time you have to look up information on a company, ask not only where the company is incorporated. Ask also: “where does it do business?”

We’ve written before here and here about the limitations of Google. So much of what we think we can find on Google is not there because it was never on the internet, or can disappear from Google’s results from one hour to the next.

Now comes a study conducted at Columbia University and reported in The Washington Post that says people are less likely to remember things they think they can recover via Google or other search engines.

Given the disconnect between what we think we can get off Google and what we often fail to find, that’s a disconcerting finding.

Broadly speaking, Google is fine for recalling things you used to look up in the World Almanac: What is Poland’s GDP? When did Groucho Marx die? Who is the junior senator from Wyoming?*

But unless you are extremely famous, Google is rotten at getting you information about yourself or most people you know. Court records, professional licenses, deeds and mortgages – all the pieces of our lives that help to write our life stories – these are rarely on Google. Google yourself and see if more than five percent of your whole life appears.

Our feedback indicates that our most useful tip about how to get the most out of Google is when we talk about “meta searching.” In brief, this is looking on Google for a way to find something that will lead you to the answer you want. If you’re searching for a particular ship, you may not find it on Google. But you probably will find indexes of ships (that may not be on line), or else names of agents you could call to track a ship down.

In this way, Google makes finding things faster, but you still have to use your head. You may also need a telephone and some energy to go somewhere to look things up in books or in databases not connected to the internet.

One last tip: before you head out to the library, write down the address. It may not be on Google either and even if it turns out to be, scientists say you may forget it before you arrive.

*$430 billion (2009); 1977; John Barrasso.

One thing we always tell new clients: there is no such thing as a “local” investigation. A Russian guy in L.A. means you could be dealing with a Nevada corporation in addition to Russia and California. An apartment in Miami may be owned by a British Virgin Islands company.

That’s a good thing to remember when dealing with Greece, and especially if you’re counting on the solvency or liquid assets of a business partner. Your business could be in Greece, but your partner’s collateral could be sitting in HSBC in Switzerland, or in Cyprus. While cracking a Swiss bank account isn’t as hard as it once was, it’s no piece of cake even with a subpoena. Cyprus may be part of the European Union, but it’s not a member of the Financial Action Task Force, the OECD’s umbrella group that fights money laundering. We’ve had experience trying to find assets in Cyprus, and our clients don’t find it fun.

As Greece’s new restructuring plan (which The Economist says is doomed to fail) includes plans to sell state-owned assets, it’s easy to envision foreign investors going into partnership with locals to buy up cheap assets. The local participation may be to get around Greece’s legendary bureaucracy, and local partners sometimes put up cash or guarantees. Given what’s been going on in Greece of late, bank balances in euros held in Greek banks don’t seem to be the most secure kind of backing an investor could be looking at.

The Bank of Greece’s own statistics make for sobering reading. In April, Greece’s net capital flows veered into negative territory. The numbers would have been much worse this year but for large injections of money from the EU.

As long as a year ago The Financial Times was reporting that Greeks were shoveling their bank deposits out of the country to Switzerland, Cyprus and other international points. With the teargas and the fragile plans being discussed this week, no asset search of a Greek person of any means should be complete without looking beyond the country’s borders.

Some other tips before concluding a deal with anyone in Greece or any other jurisdiction with risk of capital flight:

• As part of your standard due diligence, find out whether this person has ever been sued in the places he or she does business, such as the U.S. or the U.K. Previous business partners will have come to know this person and will probably have included associated companies along with the person in their lawsuit. Those companies could contain assets worth going after either as part of a guarantee or to attempt to attach later on.
• Do a basic verification of the person’s alleged contacts in the home country. We have seen many people boast that they are “very close” to a key minister or other connected official, when in fact no particular bond exists. In countries where relationships matter most, it’s the quality of those relationships that is critical. Such things are seldom written down, but are rather determined by quietly interviewing knowledgeable people in the country in question.
• Insist on adjudication of disputes outside the country in question, whether you are looking for arbitration or traditional legal remedies. According to Transparency International Greece’s public corruption problem is worse than Romania’s and almost as bad as the rating achieved by India.