Condo fraud revealed

Condo homeowners' environments can be incubators of fraud because volunteers comprise the boards that oversee the collection of large sums of money, and they might not properly manage these funds for the benefit of clueless residents.

Leon Benzer, owner of the Silver Line Construction Company, apparently liked the influence he wielded. He liked the cash even more. Between 2003 and 2009, Benzer fraudulently gained control of 11 condominium homeowners' associations (HOAs) in the Las Vegas area so that the HOAs would direct work to his business and a conspiring law firm.

According to a federal indictment, Benzer and several cronies identified HOA boards that could potentially bring construction defect cases. They then allegedly enlisted real estate agents to find condos within several HOA communities for purchase. Benzer and many others recruited "straw purchasers" to use their names and credit to purchase condos in the complexes, according to court documents.

"On at least 37 occasions," according to a U.S. Department of Justice statement, "Benzer and certain co-conspirators allegedly provided the down payments and monthly payments on behalf of the straw purchasers, including HOA dues and mortgage payments, and various false and misleading statements were made to secure financing for the properties.

"The co-conspirators also made various false and misleading statements to secure financing for the properties. Further, to manage the properties, Benzer and others allegedly conspired to open at least five bank accounts through which they moved more than $8 million. Eventually, 33 of the 37 units went into foreclosure," according to the statement.

Benzer's co-conspirators, at his direction, would transfer partial interests in the condos to other co-conspirators to make them appear to be homeowners who could stand for election to HOA boards of directors. The co-conspirators won some elections by submitting faked and forged ballots.

Benzer and his cronies then directed the conspiring HOA board members to manipulate votes to select property managers, contractors, general counsel and attorneys to represent the HOAs — including Benzer's construction company and the conspiring law firm.

On Jan. 15, 2013, 11 individuals — including the ringleader, Benzer — were charged in a 17-count indictment.

Benzer and his company made millions off the illegal deals. He and others, according to the indictment, gave cash and items of value to the other defendants for their alleged roles in the conspiracy.

On Feb. 24 of this year, in a plea agreement Benzer pleaded guilty to conspiracy to commit mail and wire fraud plus tax evasion. As of press time, his sentencing was scheduled for Aug. 3, and trials continued for the remaining defendants. In all, 36 defendants have pleaded guilty since August 2011, and most are cooperating and waiting to be sentenced, according to Benzer pleads guilty in massive Las Vegas Valley HOA scheme, by Jeff German, Las Vegas Review-Journal, Jan. 23. Prosecutors are seeking nearly $25 million in restitution for the HOAs and lending institutions defrauded in the takeover scheme.

Now, that's extreme HOA fraud. But all the same risks exist in any homeowners' association. Here we'll discuss how HOAs can deter and prevent crimes in this fraud-rich environment.

Appeal of condominium living

Many who are nearing retirement age are considering selling their houses and moving into the "carefree" lifestyle of condominium or co-op apartments. However, they might not realize that owning a condo is quite different than a single family home.

A condominium association actually owns the buildings and the land. It directs the maintenance and repairs of the property. For example, an HOA is usually responsible for painting the buildings and much of the yard work.

The condo owner owns a fractional share of the corporation and has one vote on matters put before the HOA. A condo homeowner also owns the right to use the inside space of his or her unit and is responsible for any internal repairs or upgrades. The homeowner often is responsible for maintaining a fenced backyard space or patio.

A condominium homeowner's association collects monthly dues from the owners to maintain the property. The dues amounts and provided services can vary widely. Condos with a clubhouse, swimming pool, tennis courts and/or other amenities typically charge much higher dues than condo associations that don't. Hopefully, a board hires competent maintenance workers and does a good job of keeping up the grounds and the buildings. But the individual owner of a unit likely will have little — if any — control over the quality of the maintenance or who performs it or when.

An HOA might make major repairs — such as repainting or installing new roofs, replacing fences and resurfacing roadways — with funds from collected monthly dues. Or an HOA might assess each owner a portion of the total cost, which can run into thousands of dollars per unit, depending upon the work. Therefore, an HOA could collect and spend hundreds of thousands of dollars in a year. Hopefully, the HOA board members properly manage the funds to maintain the property, but they might have few controls in place to assure they do that.

Risks can vary depending on whether an HOA manages the condo complex by itself or hires a property management company.

Self-managed HOAs

Sometimes smaller condo associations elect to be self-managed because monthly HOA dues typically will be lower. However, owners are expected to share in running the association. For example, an HOA board president might run the daily operations, and the treasurer or bookkeeper will pay the bills. But unless these persons are knowledgeable managers who work well together, major control issues could put the condo association at risk financially.

Sometimes, volunteer HOA officers don't realize that a condo association needs to be run like a business. They might have personal agendas, such as keeping dues low. Or they might vote to defer maintenance or want to do everything on the cheap, which isn't in the best future interests of the HOA and condo owners.

Of course, if the volunteer treasurer isn't honest, an HOA might be staring at an embezzlement case. Self-managed HOAs must hire qualified, honest bookkeepers to keep the accounting records and then retain CPAs to complete the taxes and an annual audit.

Professionally managed HOAs

A professionally managed HOA will hire a property management organization or property manager to run the HOA for a fee. Although the HOA has a volunteer board, the paid property manager manages the daily operations.

A very large HOA complex often hires a small staff, which could include a grounds person, a maintenance worker and an office manager/bookkeeper to assist the property manager. Though many of these professionally managed HOAs are well run, they're also vulnerable to fraud and embezzlement by their property managers.

A number of cases have hit the news over the last few years in which property managers were using HOA funds for his or her own purposes. In one case, the manager pocketed a large percentage of the funds designated for grounds maintenance. A volunteer HOA board has to keep close tabs on its paid manager.

Unfortunately, many condo residents don't want to be bothered with the daily operations of their HOAs. Ready cash can tempt even the most honest treasurer or property manager. Then, after the funds are gone, the HOA might have to assess homeowners more money for necessary repairs. 

Accountability, red flags and fraud prevention issues

HOAs should strengthen their accounting systems with controls to prevent errors and fraud. If you're ever called in as a fraud examiner to investigate an HOA, here are some key matters you should look at.

Property appearance

Walk the property and note unkempt common areas and apparent deferred building maintenance and then determine the causes. The HOA might simply need to hire a better yard service. Perhaps the collected monthly dues simply aren't sufficient to cover the costs, or some homeowners are delinquent in their dues paying. It also might indicate lack of proper budgeting for expenses or dues being too low. Eliminate all logical, above-board reasons before investigating for possible diversion of HOA funds for personal uses.

Property management issues

Determine who's actually running the HOA. Meet with the property manager, the bookkeeper, other employees and board officers. Ask for a copy of the Covenants, Conditions, Restrictions and Reservations — a legal document that specifies how the HOA is to be run. Homeowners and especially potential buyers should read these rules very carefully, but many don't.

Is a reputable property manager/management firm running the HOA? If the HOA is self-managed, how is it being managed? Specifically, determine who's responsible for deciding about property maintenance. Smaller HOAs, for example, typically contract with yard service providers to maintain grounds. They also might have contracts with businesses that provide other ongoing services, such as cleaning gutters and washing windows, and perennial services such as repainting, roof replacement, driveway repaving, etc.

The HOA should put all of its jobs out for bid to reputable contractors. Hopefully, one person isn't making all of the decisions. An HOA should be holding board meetings at least every quarter to discuss these issues. If not, beware. Also, a board that prides itself with doing everything on the cheap might be deferring maintenance that could decrease the condos' property values and be an inroad for fraud.

Find out how many units are for sale or if any are in foreclosure. Is there an outstanding lawsuit against the developer or other party related to the HOA? Banks might refuse to lend to potential buyers if the HOA looks risky to them.

Record keeping

Ask for a copy of the accounting records, the annual budget, recent tax returns, the most recent audits and any reserve studies. Also, carefully read the minutes of recent board meetings. The HOA's set of accounting records could be a manual system or in software packages such as QuickBooks. Or, horrors, you might have to actually reconstruct the books.

Property management firms usually know they should be keeping books and most do. Self-managed HOAs should hire an outside bookkeeper unless their treasurer is an experienced accountant. The HOA's treasurer, and/or another knowledgeable HOA member, should be reviewing the bookkeeper's monthly reports.

The HOA should be sending homeowners regular financial reports (profit and loss statement and balance sheet) and paying for an annual audit. The HOA must be vigilant because — more than many other environments — it's relatively easy for someone to divert, misappropriate or mismanage HOA funds.

Internal controls and segregation of duties

Conduct an internal controls review. Of course, one person shouldn't be doing everything involved in managing the HOA: selecting vendors, supervising work, making all decisions about repairs, etc. However, smaller, self-managed HOAs often operate with just single individuals running the show because no one else wants to do it, or larger HOAs will hire a supposedly competent manager and then leave all details to him or her. Recipe for disaster.

Because the dollar amounts received and spent for upkeep of the condo buildings can be sizable, the target of most embezzlers is cash. Therefore, proper segregation of duties over cash is essential.

A separate board member should be approving all invoices. Although the bookkeeper likely will be preparing the checks, an HOA officer should be signing them, and someone else should be reconciling the bank account. The HOA can arrange online banking so the bookkeeper can view the account's activity but not be able to transfer funds. Also, large checks should require the signature of two officers. To reiterate, the HOA should never relegate all cash duties to one individual.

If the HOA hasn't had a recent external audit of the accounting records, you'll probably need to thoroughly examine the accounting system. Compare the actual amounts spent to the budgeted amounts. If something appears to be amiss, analyze trends in expenditures. Look for increasing expenses for no apparent reason. (See "Typical HOA controls issues/problems" and "Crucial segregation of duties/internal controls needed" on the left.)

Reserves

Many HOAs use certificates of deposit and/or reserves savings accounts to save for major repairs such as new roofs and repainting buildings. Look into the accounting and banking records for these accounts. If no records exist, beware. If the HOA issues assessments to cover major repairs, check to see who hasn't paid theirs.

Federal and state requirements

Even if the HOA has little taxable income, determine that it's properly filing annual tax returns on time. It should at least be filing informational returns.

The HOA also should be preparing Form 1099s for vendors and properly processing withholdings for employees. Determine if the HOA has conducted a recent reserves study to estimate the timing and cost of upcoming major projects, including roof replacements, repainting, etc. Some states in the U.S. require reserves studies and/or annual audits. Because HOAs are corporations, they typically must provide annual reports, officers' names and other information to the state.

Helping hands for HOAs

Of course, if an HOA calls in a fraud examiner to examine its financial situation, someone on the board or within the association is concerned. Possible concerns can be high dues or why it costs so much to run the operation. But the board might not be communicating to homeowners the detailed reasons for maintenance costs.

Alternatively, a property manager or bookkeeper actually could be mismanaging or diverting HOA funds. If you're called in, your job will be to get acquainted with the operation of the HOA and to evaluate the situation. Whether you find fraud or not, you can help improve conditions by recommending better internal controls and the counsel of a credentialed accountant to establish a proper accounting system if necessary.

Linda Lee Larson, D.B.A., CFE, CPA, is a retired associate professor of accounting. 

The Association of Certified Fraud Examiners assumes sole copyright of any article published on www.Fraud-Magazine.com or ACFE.com. Permission of the publisher is required before an article can be copied or reproduced.