Preventing, Recognizing and Dealing with Condo Fraud

March 2018

Condo corporation fraud is intended to separate condo owners from their money.

It can destroy trust between condo directors, management and residents.  Where it exists, money stolen from the pockets of condo owners often cannot be recovered except through increased condo fees or special assessments.

Knowing how to recognize and prevent fraud is an important task for any corporation.  Condo corporations, which rely on trust, are particularly susceptible.  Yet these organizations often avoid implementing the most basic of protections to deter and detect fraud.

Condo fraud is not new.  It has happened before and continues to occur wherever condo corporations are lax about their internal financial management systems.

The 1990s were a time of major financial scandals among condos and co-ops in major cities throughout North America.  There were kickback schemes and other fraudulent actions.  Some involved property managers.  Tactics included creating bank accounts in a manager’s name rather than the corporation which allowed deposits to be transferred to specific individuals.

Condo fraud occurs wherever condo corporations exist.  Condo corporations accumulate large cash balances enticing to those with criminal intentions.  Large cash balances attract people intent on committing fraud.

In 2015, one condo management company managing condo properties in three US states was indicted for larceny.  Two of its executives were charged with larceny, conspiracy and false entry in corporate books.  A year-long police investigation found that company owners “systematically falsified invoices sent to dozens of the company’s clients without the knowledge of the condominium association boards or the laborers whose work was falsely inflated.”

More recently, one 15-unit condo corporation was defrauded of $400,000 by a property management company provided with signing authority on corporation accounts.

Types of Fraud

Forms of fraud that condo corporations are susceptible to are diverse and can include:

  • Kickback schemes – money given to an employee in return for directing the condo corporation to a specific vendor
  • Comingling of bank accounts
  • Creation of fictitious vendors
  • Creation of fictitious employees
  • Borrowing of funds
  • Poorly written contracts with terms intended to avoid detection of improper transfers of funds

Preventing and Identifying Fraud

Once money has been lost it may be too late for action by the condo corporation.

It is smarter to work towards preventing fraud before it starts.  This is done by establishing processes and procedures that become natural checks and balances for the condo corporation.  This approach prevents people from attempting a fraud that will be difficult to execute or relatively easy to detect.

Fraud is often identified by a condo director and an accountant who have maintained oversight over financial records of the corporation.

One of the most important steps in preventing fraud is to ensure one individual does not have control over all financial matters.  Where millions of dollars are being managed, the risk is too high for control to reside in the hands of a single individual.  Should a single individual become too powerful or retain too much control over finances, opportunities for fraud increase.  Another necessary control is to separate custody of assets from record keeping.   Receipt of condo fees should be handled by someone different than whoever handles accounting and recordkeeping.

When you suspect fraud, bring in professionals to evaluate the situation.  Your accountant or a condo fraud specialist can assist.  Depending on the situation, they may recommend use of a forensic accountant trained to follow money trails to detect fraud.

The key to preventing fraud is to know where the risk exists and implementing procedures that limit this risk.

General Policy Controls

  • Ask common sense questions.
  • Where a condo board lacks an individual with strong financial skills to serve as treasurer, consider options for obtaining this expertise rather than defaulting to a less qualified director for this role.

Financial Controls

  • Do not accept cash. Require condo fees and other monies to be paid by cheque, credit card or debit payable only to the condo corporation.
  • Have cheques signed by two individuals and matched against invoices.
  • Never co-mingle corporation funds with other accounts.
  • Utilize purchase orders.
  • Document petty cash disbursements.

Good Practices

  • Review available reports monthly.
  • Directors should review all financial data provided to them to ensure it appears as expected. Do not accept as correct financial documents based on assurances of management or other directors.
  • View actual invoices and bank statements. Do not rely on summary reports.
  • Review details of major expenditures and large contracts on a regular basis.
  • When hiring a vendor do not just rely on recommendations. Obtain cost estimates from multiple sources.
  • Adopt a zero tolerance policy against fraudulent activities to encourage employees, directors and residents to report suspicions of fraud.
  • Control account access. Not all directors or employees require this access.
  • Require documentation – invoice, contract or receipts – before disbursing funds.

For more information see Financial Management/Condo Fraud in the Condo Archives.