Condominiums and other similar common-interest developments are often a target for fraud because they represent large pools of money that are funded by recurring and mandatory fees that are paid by each condominium unit owner. More often than not, the unit owners become careless by not monitoring how this money is spent.

Condominium funds can be misappropriated through:

  • Embezzlement or theft by a board member, property manager or other decision-maker who has been tasked to manage and allot these funds
  • Kickbacks or bribes paid by contractors to one or more of these decision-makers
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Overview

The potential threat of condominium fraud and the inherent risk that this poses to vulnerable unit owners can be attributed to the changing urban and rural geographical landscape on both a local and national scale. While the benefits of living in condominiums or other common-interest developments are undeniable, condominium owners can fall prey to the maliciousness fraudsters. Condominium corporations and boards, homeowners’ associations and property managers can also become victimized, but in other cases, these parties can be the perpetrator of fraudulent acts when paired with unscrupulous contractors.

Condominium owners are a prime target for fraud due to the fact that their cumulative funds are managed by very few, such as a board of directors or a property management company. When those entrusted with managing these funds act competently, honestly and in good faith, this system can be cost-effective and beneficial to all property owners. However, when there is poor oversight or malicious intent, these funds can easily be misappropriated.

Embezzlement and Theft

Embezzlement and Theft

In the context of condominium fraud, embezzlement and theft typically involves someone responsible for managing the funds of a condominium corporation, such as a board member or property manager. The funds could be redirected for their own benefit, rather than for its intended use – for the good of the unit owners as an entirety. It can also involve the misappropriation of physical assets such as furniture, equipment or materials that were purchased by the condominium corporation.

These types of schemes can involve perpetrators:

  • Issuing payments to themselves or to companies that they set up under the guise of legitimacy. These fictitious companies can appear to be above board based on convincing descriptions that may contain the words ‘loan’, ‘salary’ or ‘reimbursement’
  • Purchasing physical assets on behalf of the condominium corporation and then using those assets for their own personal use
  • Forging signatures in order to approve disbursements directly, or to manipulate board elections which would afford them the opportunity to control future spending decisions
  • Dipping into a ‘petty cash’ fund, or creating a new ‘special’ fund to redirect funds

Red Flags:

  • The unit owners of the condominium encounter resistance if they ask for information and disclosure from the board or property manager
  • The board members or property managers are reluctant to answer questions from the unit owners regarding the disbursement of funds
  • The vendors are numbered companies, have little to no web presence or have an unusual address (such as a PO Box)
  • Purchases of furniture, equipment or materials seem excessive relative to the needs of the condominium or cannot otherwise be accounted for

Kickbacks

Kickbacks

In a ‘kickback’ scheme, the result is often not unlike that of an embezzlement or theft plot. That is, the existence of benefits received by a board member or property manager that come at an expense to the condominium unit owners. A kickback scheme is distinguishable from other fraudulent acts since it includes the involvement of third-party contractors or suppliers.

Kickbacks in a condominium fraud case commonly involve a contract or who provides payments, gifts or services to someone charged with managing and disbursing the funds of the condominium corporation. In return, contracts and business arrangements are awarded to the contractor in question. Kickbacks can take other forms, such as the unlawful approval of forged or inflated invoices, or the approval of goods and services that are excessive or not required by the condominium.

Red Flags:

  • A strong preference for retaining specific contractors on an ongoing basis
  • A lack of consideration for other contractors who are qualified
  • The procurement process is not competitive
  • An exorbitant cost for goods and services
  • The scope of projects awarded seems to be excessive
  • Contracts for work considered to be unnecessary is carried out on the property
  • Board member or property manager seem to have closer relations than usual with particular contractors

Condominium Fraud Case Study?

After years of renting, a new condominium unit owner became enamoured and thrilled with the idea off finally owning her own place. She was able to afford the down payment, closing costs, mortgage payments and condominium fees. She liked the view from the terrace, and the overall layout of the unit. In addition, the location of the building and the available amenities were exceptional. However, after a few years, she noticed that her condominium fees were frequently increasing. She also learned from discussions with other condominium owners in her building that several of them had concerns about how contractors were selected and their excessive rates. In some cases, it was even questionable as to whether they were even doing the work that they were hired to do. Although many of the condominium owners had not taken an interest in becoming involved with board elections and decisions, their newfound and collective suspicions piqued their curiosity to fully understand the extend what was actually occurring. This group of concerned unit owners requested disclosure from the condominium board and property manager. Much to their chagrin, the response of the board and property manager was unsatisfactory. It was determine that retaining counsel would be the best course of action, and through this, they retained a forensic accountant to address and resolve these issues.

After making preliminary inquiries with condominium owners, board members and the property manager, the forensic accountant identified four specific projects that were undertaken by the condominium corporation that warranted further review. These projects were selected for review due to their excessive cost or because there were specific allegations raised about them by the unit owners. The forensic accountant performed an in-depth examination of board meeting records, project budgets, invoices, banking records and accounting records related to these four projects. The forensic accountant’s investigation identified some clear patterns that could simply not be ignored. Three projects employed the same two contractors, and there was little or no evidence that a competitive procurement process had been undertaken. Moreover, the expense for these projects far exceeded the initially estimated budget. For two of the projects in particular, the forensic accountant found that the vendors billed the condominium corporation for goods and services that were not delivered to them. It is, however, conceivable that these goods and services were delivered elsewhere.

Based on a review of the vendor records and the interviews that he had conducted with the likely perpetrators, the investigators discovered that the contractors had been billing the condominium corporation for renovations performed inside the units belonging to board members, and not in the amenity spaces and other common areas of the building as expected. Pointed and direct questions during an interview with a vendor would yield an admission of wrongdoing by paying kickbacks to one of the condominium board members. Based on the forensic accountant’s findings, the condominium unit owners brought a lawsuit against the corrupt board members and vendors, which ultimately resulted in a negotiated financial settlement.

Relevant Evidence:

  • Condominium board meeting minutes
  • Condominium board election documentation
  • Condominium corporation bank statements, including banking records
  • Condominium corporation procurement records
  • Invoices from vendors to the condominium corporation
  • Emails and other communication records between all relevant parties
  • Public records, such as real estate records
  • Interviews conducted with condominium owners, board members, the property manager and vendors

To determine whether your condominium may be susceptible to fraud, take the following brief survey: