Oh, for the heady days of the 1990s when the "offshore boom" was at its height. I remember going to the Shorex Conference (a contraction of "Offshore Exhibition") and having a nice man from a Caribbean bank explain to me his bank's super-secret software to keep depositor's information absolutely confidential.
In essence, the depositor was given an unmarked key-fob that had some randomly-generated numbers, and a duplicate key-fob was held by the bank. If the depositor wanted to know her account information, she could call the bank, give them the number then showing on her key-fob, and only then would the bank give her (or whoever held the key fob and knew that it connected to that bank) access to account information.
The idea was that the account information would be secret, and the bank itself would not even have any information that linked the account to the particular depositor. Unfortunately for its depositors, the bank (First International Bank of Grenada) turned out to be a massive pyramid scheme were depositor's moneys were embezzled about as quickly as they came in, and upwards of $170 million of depositors' moneys were lost.
Secret, yes. Safe, no.
The point is that notions of secrecy have long been a part of asset protection planning. Indeed, a lot of folks care more about secrecy than they do about being protected from creditors. Some folks don't want their competitors to know how well or how poorly they are doing, or that they have made key investments or divested assets. Some folks think that the less potential claimants can find in potential assets, the less of a target they are to lawsuits (there is some truth to this, but not as much as they would like to think). Others, perhaps the majority, are just flat paranoid.
Secrecy can play a significant role in asset protection planning, mostly in the area of attorney-client privilege. To understand why, one must consider that the arch-nemesis of asset protection planning is the fraudulent transfer laws.
In part, the fraudulent transfer laws test "intent"-- whether the debtor had an intent to defeat or delay the collection rights of his creditors. If a creditor can show, whether by the statements of the debtor, or through an examination of the surrounding circumstances, that the debtor intended to defeat or delay the collection rights of his creditors, then a fraudulent transfer can be established.
Thus, in a debtor's examination or deposition, the question becomes, "Why did you make this particular transfer of a valuable asset?" This question can not only be asked of the debtor, but also of the debtor's professionals and anybody who knows about the transaction. Only the attorney might be able to block the question on the ground of attorney-client privilege (but be careful of the crime-fraud exception to attorney-client privilege which has been held in some cases to apply to fraudulent transfers).
By contrast, the debtor's communications with non-attorneys have no chance of being protected, i.e., if the debtor discusses asset protection planning with his CPA or financial planner, that is fair game, and in now numerous cases, a discussion of asset protection planning has been held to evidence the requisite anti-creditor intent. Nor is it sufficient to have an attorney come on the scene later, since attorney-client privilege is relatively narrow and does not operate retrospectively to immunize prior non-protected communications. In other words, the client who talks with non-attorneys about asset protection first has quite possibly already blown her planning.
This is why asset protection planning is strictly the purview of licensed attorneys (persons with law degrees who are not licensed to practice law for whatever reason do not get the benefit of attorney-client privilege) -- other professionals and non-professionals need to stay out of the business altogether. This is not a protectionistic statement, but one well-grounded in the fact of the importance of attorney-client privilege.
Achieving true secrecy in one's planning is almost impossible, and the odds of a debtor being able to hide assets are so low that it should not be relied upon to even the slightest degree. While representing creditors, I have occasionally run across debtors who were obsessed with secrecy and took elaborate steps to try to conceal their affairs, and those efforts mostly came to naught.
The first problem is that unless somebody is completely isolated from society -- think of the crazy guy living in a shack buried deep in the woods -- they will have relationships that are subject to discovery.
I can't even count the number of cases that I have settled because I merely notice the debtor's spouse for examination -- often, the debtor is hiding his financial troubles from his wife, who at any rate doesn't want to be involved in any court proceeding in even the slightest way. I'm sure that it creates some interesting bedtime talk too: "YOU may be willing to risk prison to save a few bucks, but I'm not."
Ex-spouses, particularly those who carry emotional baggage past the divorce decree (which is 99%+ of them), are the next-best targets, closely followed by former business partners and employees. "You're saying that your former boss, the debtor, has a lakeside cabin that he keeps for fishing trips, is that correct?" The debtor's kids often make good witnesses and are fair game: "You say you went with daddy to which bank?"
In other words, it is very difficult for a debtor to keep their affairs secret from those around them, and those folks might not be willing to lie, or nearly as motivated to do it well.
Debtors also will put together plans to keep their affairs secret, and then do careless or stupid things that reveal assets. A good example is that of a debtor that I had a couple of years ago, who claimed under oath to the judge to be penniless and without work. However, just a couple of weeks previously, the same debtor had gone to the local car dealership to lease a new car, and had filled out a financing statement (also under penalty of perjury) wherein he had stated his income to be "in excess of $500,000 per year" from an hitherto unknown company that the debtor owned. That was the end of the debtor's credibility with the Court, and thereafter things got very ugly very quickly for the debtor, who soon thereafter settled on terms quite unfavorable to him.
How does a creditor find such a financing statement? Suffice it to say that there are various services out there that for as little as $30 will compile a detailed financial compendium of the debtor, including UCC liens (showing assets being financed), credit checks, bank accounts, etc. Well before the first debtor's examination, a creditors' rights attorney will usually have a thick dossier on the debtor, and then its just a matter of hauling the debtor into court and hoping that she lies (yes, lies are better than truths as far as creditors are often concerned) about as many things as possible.
Then there are tax returns, which may or may not be discovery before a judgment is entered, but are almost always discoverable in post-judgment enforcement proceedings. Got a K-1 from an investment partnership? Start counting down the minutes until it gets hit with a charging order. Say that you have no income? Your tax return says quite differently. And what exactly did you take that depreciation allowance on?
Creditors for a few hundred bucks can also hire private investors, who will do everything from a "trash pull" (grab the debtor's trash and look for correspondence and receipts) to interview neighbors and even follow the debtor around for a while to see what their lifestyle is like and any banks that they may go to. These days, tiny GPS trackers placed under the bumper of the debtor's car are popular tools to see where the debtor is going -- If they are going to Bank X a couple of times a month, maybe Bank X needs to get hit with a levy for any accounts on which the debtor has signatory capacity.
Bank statements, even from accounts that are long-since closed, are usually gold mines for creditors. These can be subpoenaed directly from the bank or other financial institution, without waiting for the debtor to voluntarily turn them over. If the creditor finds a wire-transfer to Escrow Company, you can be sure that Escrow Company will get getting its own subpoena next.
A lot of times, distressed debtors want asset protection because they have given a personal guarantee that has been called. Their problem is that to get the loan, they had to give a financing statement that amounts to a roadmap of their wealth -- with usually nothing of value excluded because the debtor was trying to show as many assets as possible so as to get the biggest possible loan on the best possible terms. But how hard do you think it is for a creditors' right attorney to simply go down the list of those assets in a debtor's exam and trace where each asset went? That is but one of the reasons why persons who have taken given a personal guarantee are almost always said to be D.O.A. when it comes to asset protection planning.
The point is that while secrecy is not necessarily a bad thing, it should not be relied upon for anything like quality asset protection planning. To the contrary, a good asset protection plan will presume that eventually a creditor will know everything, but will stand up anyway based upon its technical legal merits. This is not to say that a debtor should make things easy for a creditor to discover, but that secrecy should not be relied upon at all -- because usually secrecy fails.
In court, a debtor has to be able to ultimately explain exactly what she did with her assets and why, and do so in a way that has absolutely nothing to do with creditors, past, present or future. This is why the best asset protection has usually been to do straightforward and plain-vanilla business and estate planning, albeit with some subtle tweaks built in that have creditor-deterrent effects. Or, else, maximize exemptions and the use of ERISA plans that that anti-creditor effects that are completely appropriate and proper as given by the state legislature (and sometimes state constitution) and Congress.
One can still pursue secrecy in their assets and affairs, just don't count on it.
And that is no secret.
This article at http://onforb.es/1BZh3FR and http://goo.gl/uD7NPk
