Condo Fraud Schemes

July 2018

As interest in condo living continues to grow, a large and growing amount of money passes through condo corporation bank accounts.  This is what happens when condo owners pool funds to manage their respective condo corporations.

There are advantages to pooling of funds to allow a condo corporation to do what is expected of it, and to operate more efficiently than if each condo owner operated independently.

There is also a disadvantage.  Large and growing bank balances create an incentive for those in a position to access this money to siphon off some for their personal use.  Lack of supervision or oversight can make this task easier.

Lack of supervision and oversight apparently allowed one enterprising Halton-area condominium manager to steal $3 million from 13 area condo corporations between 2009 and 2014.  He was arrested in 2016 and sentenced to four years in prison.  The condominium manager received payments from condo corporations for work done at other buildings and misdirected money meant to be invested in GICs.   Other strategies used to steal funds intended to cover expenses included receiving multiple payments for the same work invoice, false information on others and unauthorized payments.  The condominium manager controlled two construction firms involved in the fraud.

Financial mismanagement and fraud can be devastating for a condo corporation.  In addition to the loss of money, dishonesty and loss of trust can be difficult to recover from.

Condo fraud tends to occur when one individual in a condo corporation gains too much power combined with a lack of oversight.

Fraud is not a mistake.  It is an intentional act that is often preventable.

Fraud typically occurs in one of three forms.

Kickbacks are when a vendor pays someone a fee to obtain business.  In a condo corporation that person may be a board president or condominium manager.  This money typically comes from the condo corporation which pays an amount to the vendor that includes any kickback paid by them.

A condominium manager or director may invoice a vendor for $12,000 and report it to the condo corporation for $9,000.  They may work with the vendor to overcharge and split profits.  Or a condo board may be invoiced for work that was not done.

Kickbacks are less likely to occur when the condo board, rather than a single individual, engages directly in negotiating contracts and monitoring transactions.

Kiting deals with bank account transfers.  Perhaps money is transferred from an operations account to multiple reserve fund accounts.  The amount of money coming out of one account should equal the amount of money deposited into the multiple accounts.  Unless someone is checking to ensure these amounts balance, some funds can be redirected to an account not controlled by the condo corporation.  Kiting is most likely to occur at the end of a month or fiscal year when financial statements do not yet fully document in-process fund transfers.

Payroll fraud involves paying people who don’t exist – ghost employees placed on the payroll – or paying people for time not worked.  These individuals may be a spouse, child or other family member of the fraudster.  Although easily detected, payroll fraud goes undetected if nobody is looking for it.

Other forms of fraud include over-ordering supplies and stealing them or taking money from the petty cash box.

Simple practices can help prevent condo fraud:

  • Review Invoices! Unless someone is reviewing physical invoices, there is no way to ensure they are valid and being properly paid.  Only once an invoice is reviewed should a cheque for payment be signed.
  • A monthly financial package likely includes numerous journals and statements. Review these documents.  If there are amounts or vendors that are not familiar, or amounts are inconsistent with what has been budgeted, ask questions.
  • Segregate financial duties. Invoices should not recorded by the same individual making payments.
  • Require two signatures on cheques.
  • Require sealed bids from multiple vendors for large projects.