Protect Yourself Against Homeowners' Association Fraud

Scam guide for homeowners' association members and other nonprofits: Internet Scambusters #498

Because it's largely controlled by volunteers and non-experts, a homeowners' association (HOA) or community association can be an easy target for fraud.

But, in fact, any voluntary or nonprofit organization faces the risk of one of its employees or board members "cooking the books."

In this week's issue we present an anti-scam guide for all members of voluntary organizations, with a list of 10 actions you can take if you belong.

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Protect Yourself Against Homeowners' Association Fraud


Groups run by volunteers that hold money on behalf of all their members are increasingly vulnerable to insider scams, such as homeowners' association fraud.

Unscrupulous employees or board members exploit the fact that most volunteers likely know little or nothing about financial management to "cook the books" or channel money to contractors who pay them a kickback.

They know too that volunteers are often pressured for time and may not scrutinize activities in the way that paid officials would do.

In one recent example in Nevada, Federal investigators claim to have uncovered a single scam involving several homeowners' associations whose alleged crooked board members placed lucrative lawsuits and other work with attorneys and contractors involved in the scheme.

Even worse, the Feds contend the perpetrators used dishonest and threatening tactics to get their stooges elected to the boards, sometimes buying condos they never even lived in but which entitled them to stand for election.

This may be an extreme example, but the fact is that any volunteer-led organization -- charitable organizations, trade associations and even religious groups -- runs the risk of an insider scam, although community association or homeowners' association fraud is the most widespread.

And it's not unusual for losses and liabilities to run into millions of dollars.

Donna Berger, executive director of the Community Advocacy Network, which represents homeowner associations said in a recent article in Florida's Sun-Sentinel newspaper: "Fraud is an ongoing threat to associations. And the likelihood of being a victim escalates during bad times.

"Association boards are run by volunteers who take time away from families, jobs and hobbies to serve. Con artists know these time constraints and divided attention might leave an opening."

Usually, the scam is not part of an organized plot but simply the action of an opportunist who is either greedy or in debt and often feels entitled in some way to help themselves (for instance, if they have a grievance, such as feeling they've been treated unfairly).

These three characteristics -- opportunity, motivation and rationalization -- are what crime experts call the "fraud triangle."

As CPA Arlen Lasinsky told the Chicago Tribune: "The standard reasons someone commits fraud are drugs, alcohol, gambling, boyfriend, girlfriend and medical bills. Lately, with the recession, it's also to buy groceries and make the mortgage payment."

The crime comes in numerous forms, from dipping a hand into the petty cash or using an association credit card for personal purchases, to altered bank statements and checks or bogus invoices for work that has never been done.

The loss of money by this means it is not only a hit for the organization affected; it is also a potential threat to board members -- in the shape of lawsuits filed by aggrieved association members alleging breach of fiduciary duty.

Whether you are on the board or just a concerned member of such an organization, it's in your interests to ensure that all possible safeguards are in place.

Here are 10 things you can do, or encourage the board to do, to reduce the risk of fraud and/or protect the organization.

  1. Ensure all board members and employees are thoroughly vetted and that the election or hiring process is "transparent" -- that is, not secretive.

  2. Keep a wary eye out for a board member or employee who seems to be living beyond their means or who never takes vacations (because their crime might then be uncovered).

  3. Question any delays in circulating financial statements and other organizational documents.

  4. Segregate responsibilities -- that is, have different people responsible for signing and banking checks and a third person for reconciling the two. Require two signatures on all checks.

  5. Require at least two original copies of bank statements (that is, direct from the bank, not photocopies provided by someone inside the organization).

    Scrutinize statements, looking for individuals or companies with similar names (one may be a legitimate recipient, the other not).

  6. Set up a "positive pay" arrangement with the homeowners' association bank. Under this system, you send your bank a list of checks that have been authorized and they then compare it with the actual checks they have.

  7. Set a limit on invoice amounts that can be paid without full board authorization. Perform regular spot checks on invoices (from just one company but choosing a different company each time).

  8. Download Preventing Fraud: How to Safeguard Your Organization, a free useful PDF guide aimed specifically at nonprofit organizations produced by the former National Center for Nonprofit Boards (now known as BoardSource).

  9. Have your accounts independently and professionally audited, preferably every month but at least once a year.

  10. Finally, just in case the worst happens, ensure you have full compensation protection through employee fidelity bonds, and directors and officers insurance (known as "D&O").

None of these measures individually will likely be strong enough to spot or stop homeowners' association or other nonprofit fraud, but when combined you'll find they create a formidable defense.

Time to conclude for today -- have a great week!

 

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