+26. Few pastimes consistently. Shopping for the best jurisdiction for a divorce is gaining popularity in the downturn, writes Liana Cafolla

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1 +26 Forensic accounting LOVE vs. MONEY Shopping for the best jurisdiction for a divorce is gaining popularity in the downturn, writes Liana Cafolla Illustrations by Emilio Rivera III Few pastimes consistently attract Hong Kongers more than shopping, but a new and potentially lucrative form of shopping is drawing the attention of wealthy individuals in the city: divorce jurisdiction shopping. A ruling by the Court of Appeal in June has highlighted the importance of carefully selecting the jurisdiction for a divorce settlement as feuding spouses may keep or lose millions of dollars because of it. [ 26 ] A Plus + August 2009

2 In the case, the wife was initially awarded a HK$378 million settlement following the breakdown of her 17-year marriage. The couple, who had married in Shenzhen, both filed for divorce but in different jurisdictions she in Hong Kong and he on the mainland. Filing in Hong Kong was potentially to the wife s advantage after a landmark court ruling in March 2008, which set the basis for asset splitting at and places the lesser-earning partner in a stronger position than before the ruling, when settlements were based on reasonable requirements. Unfortunately, the mainland court completed its proceedings on the husband s suit before the wife s case was finalized; the Hong Kong court, which recognizes overseas divorces but has no power to rule on how assets should be divvied up, was therefore unable to enforce its award to the wife. An expert in international family law, Marcus Dearle with law firm Withers, says the incident is a classic case of divorce forum shopping where the husband saved a huge sum of money by filing in the mainland. Speed is vital and often you need to take out what are called anti-suit injunctions to try and stop people from proceeding in other jurisdictions as a restriction on forum shopping, he says. Separation on the rise In a city where top earners have been hard hit by the recession, divorce lawyers say the number of financially-fuelled separations has been on the rise since late last year, coinciding with the demise of Lehman Brothers. We are frenetically busy, says Sharon Ser, a family law partner at local firm Hampton, Winter & Glynne. We and most other matrimonial specialists are all saying the same, that the workload has really increased. As the Shenzhen case highlights, matrimonial lawsuits now offer much higher financial stakes to play for or protect, and more forensic accountants are being hired to ascertain assets in divorce cases some are reporting a doubling or even tripling in business. There has been an increase in terms of the number of enquiries in this area since the financial tsunami and I believe there will be more and more to come, says Annie Chan, managing director of Mazars in charge of corporate recovery and forensic services. Colum Bancroft, principal at John Lees & Associates, which specializes in forensic accounting, insolvency and restructuring, also reports at least a threefold jump in matrimonial cases handled by the firm since September. Our forensic accounting team is handling more than 10 cases. Perhaps a year ago, we d have had two or three cases ongoing at any one time. Dearle says people have been paying more attention to protecting their assets in divorce filings since the landmark ruling in March Hong Kong courts are generally more generous than the mainland courts. The starting point now in Hong Kong is equality in division, rather than reasonable requirements, unless there is a good reason to depart from it, he says. The court has effectively massively increased the potential claims of the financially weaker party, which is usually but not always the wife. Dearle says he expects more wealthy Hong Kong people to consider a mainland divorce filing following the latest Shenzhen case. Jurisdiction hopping Such jurisdiction hopping is nothing new. International marriages that fail often have lawyers filing divorce papers in more than one jurisdiction when at least one of the parties is aware of the financial pros and cons of filing in a different jurisdiction. Usha Casewell, partner at law firm Boase Cohen & Collins, says she has handled divorce cases involving Hong Kong and the U.S., Hong Kong and Australia, and Hong Kong and England. The Shenzhen case, however, spotlights Hong Kong as a place where divorce settlements are now likely to cost high earners more than most other places. Ser, however, warns that hopping over the border in the hope of a cheaper divorce could end up costing wealthy litigants more than they bargain for; the still evolving legal system on the mainland makes any case outcome uncertain. Litigants also may accidentally open a Pandora s box by revealing their asset holdings to mainland authorities. I m not convinced that there is a big movement to have litigation in the PRC, Ser says. There would be few very wealthy people who would necessarily want to subject themselves to the PRC system and thus disclose all they have to the government or a government agency. Many also have overseas assets and there would be quite a lot of investigation as to how they got the means to obtain those overseas assets. So it s not as if the PRC is a hugely attractive option for the super-rich. In any case, the option is only accessible to mainland citizens, she adds. August A Plus [ 27 ]

3 +28 Forensic accounting We recently assisted a wife in reaching a settlement with the husband after identifying that the value of a company had been understated by some HK$16 million, with various suspicious transactions. A probing mind Fighting for a favourable divorce settlement is often a drawn-out battle and Ser says it s important for the women to go into it with a high level of awareness about the family money. Unfortunately, many wives are completely in the dark when it comes to their husband s finances, she says. I think they just think it s impolite to ask. It s very sad, even in this day and age, and it s something that still irritates me. Women as young as 40 or in their early 40s, a generation that should know better, who have chosen not to find out about the family finances and you would find they sign whatever has been put in front of them, she says. Such ignorance can be costly while it may not necessarily mean a lower settlement, it does usually result in higher legal fees, Ser says. Chan of Mazars says while females in Hong Kong tend to be financially well educated, many wealthy women lose touch with the world after marriage. She cites one case where a woman completed a degree but immediately married a high-profile businessman and never worked. She keeps herself at home to care for the kids and doesn t know what is happening in the world. So in the case of a divorce or matrimonial dispute, she would be a little disadvantaged both in terms of financial knowledge and how to protect the financial interests of herself and her kids, Chan says. Bancroft of John Lees & Associates has had similar experiences. We ve had certain cases where the wife is very knowledgeable, she may even have been involved in running the business. In other cases, probably three or four that I can think of now, the wife has not been involved in the business at all. The wife may have a credit card or the husband may have transferred money, but she really doesn t know where it comes from. Forensic accountants are typically called in by divorce lawyers in cases where the wife cannot supply enough financial information and where the lawyers have reason to believe that the husband s suspected net worth justifies the cost, especially if most of his assets and money are tied up in a company. Usually we re brought in when there are substantial matrimonial assets, says Bancroft. We carry out an initial review to ascertain whether information may be missing and then ask questions in order to elicit more information. Often our skill is not analyzing what s there, it s based on information known about the party in question and asking what you would expect to be there. Usually, you get the answer that your question deserves and so the manner in which a question is drafted is very important. Beyond a probing mind, Bancroft says gathering personal information about the marriage can be the key to unlocking more essential financial information that affects the outcome of a divorce settlement. Often of course the marriage may have been on the rocks for some time, in which case a key question is to see how far back do you go. Preparations may have been made for some time was it building up over a long period, was it just one trigger? That s not [ 28 ] A Plus + August 2009

4 all financial information, but it s an important consideration. Fishy transactions Astute forensic accountants can spot suspicious actions that the husband or wife might have taken for years to meddle with his or her assets before officially filing for a divorce. We had a case where the husband started using a post box address to receive some correspondence, especially bank statements, instead of his usual residential address, says Wilfred Wu, principal of specialist advisory services with BDO Financial Services Ltd. The wife noticed that the statements were missing from the postal deliveries and warning bells went off. It was a good indication to us also that something was suspicious, says Wu. The team eventually uncovered that the husband had changed the delivery address for his bank statements to hide the fact that he had begun selling off assets in preparation for a divorce. The impact of such careful digging by a forensic accountant can make a huge difference to the final settlement. Bancroft says a settlement doubling or tripling (and sometimes even more) the original estimate is not unusual. In a case involving a middle-aged Hong Kong couple, Chan of Mazars spotted signs of missing funds on the husband s bank statements and eventually traced them. He had been transferring money out in order to avoid the matrimonial dispute settlement. Eventually the wife was awarded 50 percent of the joint assets. I would say the settlement was triple what she could have gotten initially because originally the husband said, If you can dig out what you say, go ahead and find them. So she engaged us to investigate and locate the hidden assets and funds of her husband. Ser agrees it s wise to seek the help of forensic accountants. From the questions that the forensic accountants were able to ask, it was clear that the answers given by the husband just didn t make sense, she says. Although we are not always able to find all the money and all the assets, we are able to produce enough inconsistent answers given by the husband to demonstrate to a judge that there must be more assets than are disclosed. And we can then ask the judge to draw what s known as an adverse inference against the husband, which allows the judge to make an award higher than what would seem warranted by the assets that have been disclosed. In some cases, presenting the husband with clear evidence of his deception does the trick, says Wu. We recently assisted a wife in reaching a settlement with the husband after identifying that the value of a company had been understated by some HK$16 million, with various suspicious transactions, he says. Wu conducted his own investigation into the company s worth and presented his findings to the husband who then backed down. The husband decided not to pursue his valuation and accepted ours, says Wu. As a result, the wife won an additional HK$8 million. August A Plus [ 29 ]

5 +30 Forensic accounting Pre-nups are key Forensic accountants and lawyers point out that pre-nuptial agreements are one way of reaching an amicable outcome on settlement, or at least of reducing the financial disputes that often hamper a smooth divorce. While pre-nups are not legally binding in Hong Kong, they are increasingly likely to be taken into account by courts here when deciding on settlements, say divorce lawyers. In a divorce case in England last month where pre-nups are also nonlegally binding the Court of Appeal defeated the husband s plan to wrangle more money out of his multimillionaire German wife by honouring a pre-nup signed in Germany between the two parties, which barred the poorer husband from making financial claims against his wife. In February, a court in Singapore which has followed English courts in not recognizing pre-nups upheld one made between a Dutchman and his Swedish wife. Given the likelihood that the Hong Kong courts will at least take into account the contents of a pre-nup, it makes sense for wealthy individuals here to enter into one, Dearle of Withers advises. The recent cases are really good news for the high net worth individual because they are slowly tightening the court s recognition of pre-nup agreements. So pre-nups are the key, he says. A pre-nup is also a signal for spouses to take an interest in their financial situation. Pre-nuptials are becoming very popular and I hugely endorse them, says Ser. Even though people think they are unromantic, it s the best method of couples communicating on their joint aspirations prior to the marriage. While pre-nups can play a starring role in reducing subsequent fights over asset splitting, spouses are advised to explore the legal status of all the assets in a marriage. One financial instrument that is often overlooked when compiling an individual s worth is trusts, according to Dearle. Trusts and other assets are now more likely to come under attack in divorce cases because of the rule. People have often assumed that trusts are untouchable in divorce cases, but that can be a very expensive mistake, he warns. It s important for Hong Kong spouses to appreciate that the Hong Kong courts, like in England, not only can take trust assets into account as a resource, but in certain circumstances if the other spouse is not a beneficiary of a trust, the court has the power to vary the trust to make the other spouse a beneficiary, he says. Ultimately, the final decision on a settlement lies outside the hands of forensic accountants and lawyers, and rests with the discretion of the court. There, a judge can make or break a fortune quicker than any high earner. Casewell of Boase Cohen & Collins recalls reading about a recent Hong Kong divorce case where a fund manager was appealing against the large order made to his ex-wife, which had been calculated based on his massive earnings in the good times. Now, because of the recession, he claimed he didn t have as much money and didn t want to pay her. Those who live by the market, die by the market, pronounced the judge, and shot down his request. [ 30 ] A Plus + August 2009