HOA’s Harm
HOA Criminal Fraud
A Nationwide Problem NO ONE IS TRACKING !
The FBI doesn’t. The insurance-industry doesn’t. State governments don’t. The HOA-Industry doesn’t. There are even few sources, critical of HOA’s, that give much attention to actual criminal fraud in HOA. But here are two notable ones: https://independentamericancommunities.com/ category/hoa-corruption-abuse-power/corruption- fraud-theft/ Kansas City Star Most HOA critics agree - Criminal fraud is widespread, but the frequency…??? THE MOST COMMON FORMS Embezzlement: Ususally defined as the act of someone fraudulently taking property that has been entrusted to him or her by someone else. Violating Corporation Law - Lying about HOA's finances Exaggerating information about the HOA's operations or finances Taking possession of any property of the corporation and not making an entry of this in the HOA's records Destroying or fabricating HOA records with the intention to defraud Kickbacks: A board member or group within the board conspires to steer contracts to vendors who have promised kickbacks in return for the business they’ll receive. Election Rigging: Individuals band together to get their friends and associates elected to the board. Those board members use their power to steer contracts to companies they own, contractors who promise kickbacks, to skim funds from the HOA, or to make changes to HOA by-laws, policies or procedures that favor their group interests. People who participate in election rigging can be prosecuted for mail/wire fraud and forgery crimes depending on the circumstances. Other Types of HOA FRAUD - Theft of cash receipts Pay & Return Employee purposely overpays a vendor; vendor returns the overpayment; employee embezzles the refund. Tampering with checks issued (forged signatures, altered dates, adjusted amounts) Stealing blank checks or counterfeiting duplicate checks with altered payees Creating and paying fictitious vendors Shell Company An employee sets up a shell company (often with a fictitious name) and bills the employer for goods or services it does not receive. The employee converts the payment to his/her benefit. Pass-Through Scheme Shell company (owned by the employee) purchases goods, resells them to the employer at a marked-up price. Creating inflated or phony expense vouchers Theft of inventory Altering purchasing, receiving or shipment records Paying non-existent employees Lapping Manipulation of accounts receivable to steal cash. One payment is taken and then other receivables are applied to the account – the process continues so all accounts would appear current. Voiding checks Employee writes a check to a vendor for a certain amount, but records the payment as higher in the books. Then the next check is written for the difference and entered as a void. When the bank statement arrives the checks are destroyed and the account is reconciled as if one payment was made for the higher amount. Credit card usage/refunds Using HOA credit cards for personal expenditures or purchasing and returning items,then using the credit for personal expenditures. SIGNS of HOA FRAUD - Falsified bank statements Falsified balance sheets Payments made to vendors that didn’t exist Exorbitant “consulting” fees paid to people who either did not exist or had no credentials to consult Payments for highly excessive or unnecessary repairs, amenities, etc. Balances exceeding budgeted amounts
HOA’s Harm
HOA Criminal Fraud
A Nationwide Problem NO ONE IS TRACKING !
The FBI doesn’t. The insurance-industry doesn’t. State governments don’t. The HOA-Industry doesn’t. There are even few sources, critical of HOA’s, that give much attention to actual criminal fraud in HOA. But here are two notable ones: https://independentamericancommunities.com/ category/hoa-corruption-abuse-power/corruption- fraud-theft/ Kansas City Star Most HOA critics agree - Criminal fraud is widespread, but the frequency…??? THE MOST COMMON FORMS Embezzlement: Ususally defined as the act of someone fraudulently taking property that has been entrusted to him or her by someone else. Violating Corporation Law - Lying about HOA's finances Exaggerating information about the HOA's operations or finances Taking possession of any property of the corporation and not making an entry of this in the HOA's records Destroying or fabricating HOA records with the intention to defraud Kickbacks: A board member or group within the board conspires to steer contracts to vendors who have promised kickbacks in return for the business they’ll receive. Election Rigging: Individuals band together to get their friends and associates elected to the board. Those board members use their power to steer contracts to companies they own, contractors who promise kickbacks, to skim funds from the HOA, or to make changes to HOA by-laws, policies or procedures that favor their group interests. People who participate in election rigging can be prosecuted for mail/wire fraud and forgery crimes depending on the circumstances. Other Types of HOA FRAUD - Theft of cash receipts Pay & Return Employee purposely overpays a vendor; vendor returns the overpayment; employee embezzles the refund. Tampering with checks issued (forged signatures, altered dates, adjusted amounts) Stealing blank checks or counterfeiting duplicate checks with altered payees Creating and paying fictitious vendors Shell Company An employee sets up a shell company (often with a fictitious name) and bills the employer for goods or services it does not receive. The employee converts the payment to his/her benefit. Pass-Through Scheme Shell company (owned by the employee) purchases goods, resells them to the employer at a marked-up price. Creating inflated or phony expense vouchers Theft of inventory Altering purchasing, receiving or shipment records Paying non-existent employees Lapping Manipulation of accounts receivable to steal cash. One payment is taken and then other receivables are applied to the account – the process continues so all accounts would appear current. Voiding checks Employee writes a check to a vendor for a certain amount, but records the payment as higher in the books. Then the next check is written for the difference and entered as a void. When the bank statement arrives the checks are destroyed and the account is reconciled as if one payment was made for the higher amount. Credit card usage/refunds Using HOA credit cards for personal expenditures or purchasing and returning items,then using the credit for personal expenditures. SIGNS of HOA FRAUD - Falsified bank statements Falsified balance sheets Payments made to vendors that didn’t exist Exorbitant “consulting” fees paid to people who either did not exist or had no credentials to consult Payments for highly excessive or unnecessary repairs, amenities, etc. Balances exceeding budgeted amounts Multiple payments to a vendor that was only supposed to be a one-time transaction Single-source contracts Vendors' addresses on invoices have P.O. Boxes instead of hard street addresses Vendors' addresses have the same address as an employee or board member Property management employees refusing promotions or vacation time Missing or misplaced documents, letters, bills, etc. Copies of documents on file where one should find originals Delays in bank deposits Fees paid for 'consulting' without a full vetting by the board of directors Duplicate payments A petty cash fund that keeps disappearing Accounts payable and accounts receivable are out of balance An employee or board member always wants to work at home instead of the property management office, or is there working alone a lot Someone gets defensive when asked for a report from the accounting/bookkeeping software your association uses Drinking/drug/gambling problems Services paid for but not performed Overbuying - For example, your accountant receives an invoice for 100 pool recliners, and your pool area only has 20. Someone somewhere is pocketing a lot of extra money. See who signed for what. Returning Large Purchases - A manager, employee, or board member may go to Lowes or Walmart and buy hundreds of dollars' worth of supplies. They then go back and return them, pocketing the money. The association's bookkeeper has a copy of the receipt, but the fraudster used the original to get a refund and pocketed the cash. Now your property is out the money  and the supplies. Don't rely on background checks ALONE. The vast majority of embezzlers are first-time offenders; only about 7 percent of those who have been caught had been convicted previously for fraud. Pre-employment tests designed to measure a predilection for theft, fraud, or other forms of dishonesty are fairly accurate. Once hired, consider testing finalists, or testing employees before granting them additional responsibilities.