There is always that person or neighbour who seemingly earns a modest paycheck though spends extravagantly. Whether they are driving a luxury vehicle, wearing a fancy watch, or frequently travelling to lavish destinations, these scenarios blur reality and make one wonder whether there is a secret behind achieving excessive success with minimal effort. However, there’s often more going on than meets the eye.
While an acquaintance may justify the gap between lifestyle and earnings with an alternative source of income such as family contributions, a forensic investigator obtains more concrete clarity through the application of the Net Worth Method.
The Net Worth Method is like a boat floating on water. On one hand, the boat will float effortlessly if assets are higher than liabilities and income is higher than expenses. On the other hand, the boat may sink if assets are lower than liabilities and income is lower than expenses. Under the second scenario, the boat will remain afloat if there is an alternative source of income or funds from unknown sources, which allows the boat to remain buoyant.
Through the application of the Net Worth Method, the investigator’s first step is to determine whether funds from unknown sources exist and the magnitude of the same. Once the unknown amount is determined, the second step is for the investigator to determine the source of the unknown funds.
To understand how to apply the Net Worth Method, we consider the following elements:
Net Worth: We determine net worth by subtracting an individual’s total liabilities from total assets at a specific point in time. To accurately calculate this amount, both assets and liabilities must be known, which can be determined through public and private source searches.
Net Worth Increase (or decrease): An individual’s net worth will likely fluctuate from one period to the next. Therefore, we calculate any increase in net worth by determining an individual’s net worth at a specific point in time in the past and the individual’s net worth at the current date.
Income: An individual’s income is determined by adding any increase in net worth to living expenses.
Funds from Known Sources: Funds from known sources includes inheritance, salaries, gifts, lottery proceeds, and all other known income, which can be obtained through public and private records, including tax returns and other financial personal data.
Funds from Unknown Sources: Finally, funds from unknown sources are determined by subtracting the amount of funds from known sources from the income amount. We consider this unknown amount as the “missing puzzle piece” and the focal point for the forensic investigation.
We’ve determined that an individual receives funds from unknown sources. Now what?
Whether the identification of funds from unknown sources is determined as part of a company’s internal investigation or tax audit, this amount is the focus. Part of the forensic investigator’s procedures is utilizing the Net Worth Method for establishing a baseline using numerical values to question an individual. Once the value is determined, the investigator can ask questions to obtain a justification for the funds from unknown sources and validate the same.
In some cases, the funds from unknown sources may be legally obtained and unreported to avoid paying taxes. On the other hand, funds from unknown sources may be obtained through illicit means. In either case, further investigation is warranted.
GG Observations
At Grewal Guyatt our professionals have extensive experience in the application of the Net Worth Method and can assist in an investigation which may require this technique.
