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Minding Your Money Boards Must Be Alert for Financial Shenanigans

In the increasingly-paperless world of modern banking, there are fewer hands writing checks and processing transactions. With no need to physically deal with cash and checks, this should mean fewer mistakes — and better security. Does this also mean fewer opportunities for fraud and embezzlement? Not necessarily, since determined thieves will always try to find a way into a system, whether it’s the cash in Grampa’s mattress or accounts in CitiBank’s computers. Plus, not everyone trusts wire transfers and direct deposits, and not every association or unit owner is banking-by-computer quite yet.

Regardless of trends in electronic banking, the occurrence of fraud and embezzlement within community associations, experts report, is thankfully rare. And while financial transactions have gone high-tech and electronic, the situations where managers, trustees or contractors have scammed or stolen from association accounts seem decidedly low-tech and old-fashioned. Most embezzlers are hiding in plain sight.

“I have been on ethics panels and been privy to situations where someone caught in the act, was being disciplined and have had cases where associations were ripped off,” notes Attorney Henry Goodman, a principal at the Dedham, Massachusetts and Lincoln, Rhode Island law firm of Goodman, Shapiro & Lombardi, LLC. “People who commit fraud often do so in a way that’s both open and yet disguised. Further, it is not confined to any one group. It could be a contractor, a manager or a board member. You can have a trustee or manager who’s well-liked and respected… presenting paperwork at board meetings that appears valid, but when the board eventually checks the bank accounts, they find that they’re empty.”

In one case, Goodman states, “An association’s treasurer in a self-managed community had fired the accountant, but took the accountant’s letterhead from an old report, and created phony financial documents on altered photocopies. He also took old insurance policies and changed the dates and policy numbers to make it look like new policies, while diverting funds in the budget intended for insurance payments. The result was… the association had no insurance for several years. Fortunately there were no insurance claims. This individual was finally caught when a contractor contacted the board president because he was waiting for his bills that had not been paid. This case, because the fraud went on so long, it cost the board a lot of money — into six figures.”

Spreading the Scam

Often, however, the perpetrators find ways to skim that don’t involve huge sums for any one association, essentially spreading the theft around. Goodman describes a management company in which a manager bought a large order of (several cases) of supplies, enough for one association, installed some in each of several associations and then charged every association that the company managed for the same full order of supplies. “And the other associations got charged for the installation as well, he says.” In a similar example, he adds, “What happens when you have a contractor doing all your fencing or siding, or whatever… and the board opens a charge account at the local Home Depot? The guy may be buying tools and supplies the condo doesn’t use. All of a sudden, someone on the board notices a charge for red paint, and there is nothing painted red on the property. Board members have to be diligent [in checking charges].

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