Manager
- Embezzled as much as $4 million
- Elaborate scheme involving multiple associations
- Ran the entire day-to-day operation, writing and depositing checks, balancing the books, and getting bank statements
Bookkeeper
- Embezzled $398,000
- Forged board member signatures to obtain bank loans
- Convicted, but skipped bail and is at large
- Previous conviction for tax fraud; served 14 months
Manager
- Embezzled $167,000
- Wrote checks to herself from the association account for personal items over seven years
- Plea: to serve ten days jail time on weekends
- Total control over books; HOA account had $83 despite $250,000 in assessments
Treasurer
- $666,000 missing
- Loans or advances made to related entity
- Plead guilty
- “Trusted:” Due to high regard in the community, HOA never audited the books until discrepancies appeared on the balance sheet
Manager/President
- Embezzled $166,000
- Purchased trips to Disney World, artwork, jewelry, and cash advances
- Obtained unauthorized credit cards tied to condo association accounts, issued in both his and association’s name
Lawyers
- Accused of stealing $300,000
- Money possibly used for personal business ventures
- Association audit showed funds shuffled around and missing
- Prior lawsuit detailed failed development/investment project with alleged misuse of funds
Fraud Triangle
Side One: Opportunity
- Complete control for a long duration of time
- Inadequate prevention
- Seemingly trustworthy and professional
Side Two: Rationalization
- Work hard for the association without reward
- Association has a large amount of money
Side Three: Pressure/Incentive
- Prior crimes
- Gambling addiction
- Unemployed
- Failed business ventures
- Extravagant lifestyle
- Illness in the family
Prevention: Banking
- No commingling; separate reserve/operating accounts
- Require dual signatures
- No debit or credit cards
- If you use online viewing of accounts, have multiple people with access, but no linked accounts for online transfers; disable online bill pay; change passwords
- Always reconcile bank statements; don’t leave it to the person handling most of the transactions
- Never ignore odd transactions
- Require the bank to send canceled checks back so you can verify the signatures are real and see to whom checks are endorsed when deposited
Prevention: Internal Controls
- Segregate duties so person that is receiving funds isn’t the same person that is issuing payments
- Rotate responsibilities, such as reconciling bank statement or signing checks
- Independently verify that vendors are real
- Check the background of all money handlers
- Keep association accounting records up-to-date, especially cash receipts and disbursement journals
- Get an annual review or audit, and—every few years—get a full audit
Prevention: Insurance Considerations
- Buy fidelity coverage along with your general liability policy; if you don’t, your loss is likely excluded
- Set an adequate “sub-limit” in an amount proportional to the annual assessments
- Watch for endorsements that limit whose acts are covered; ask if your money handlers are all included, whether it be officers, directors, employees, managers, or other agents
- Don’t buy a policy that requires completion of fraud prosecution as a prerequisite to coverage
Signs of Trouble
- A large number of owners show as being past due on assessments, and either there is no active collection effort or owners claim to have paid
- Services are paid for, but don’t seem to have been performed; a lot of deferred maintenance is present; there are vendors no one recognizes
- Association always seems to be out of money, bounces checks, has unusually large transactions, or has an unusually high number of small transactions
- Person handling funds has a sudden change in lifestyle, is always on vacation, or has new cars and nice belongings, all without an exceptionally high-paying job
Recovery
- Pursue criminal investigations
- Hire a “forensic” accountant and lawyer
- Civil suits: Attach property and garnish funds that may not have been spent
- Insurance: Notify carrier immediately
- Always openly communicate with owners about what may have happened
For the information on a current case of fraud affecting local HOAs quoting VF Law’s Rich Vial, see the Oregonian article at: http://www.oregonlive.com/business/index.ssf/2012/06/northwest_empire_community_man.html