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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Let’s get started…


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!