Is your Association Protected Against Theft, Embezzlement and Fraud?
Condominium associations and homeowners associations collect assessments from homeowners earmarked for the benefit of the community. However, there are times when board members, property managers or, more generally, thieves misappropriate or embezzle monies intended to benefit the community.
In 2017, the treasurer of the Black Forest Estates Association in Traverse City, Michigan was initially charged with multiple felonies each involving a maximum penalty of 14 years in prison for forging the president’s name on hundreds of dollars in checks and cashing the checks for “personal expenses.” While the total amount allegedly stolen in this circumstance was only $1,200, other associations have faced far more significant money missing totaling $77,000, $200,000 and even $1,300,000. Ultimately, the treasurer at Black Forest pled guilty to lesser charges and was sentenced to 30 days in jail for attempted embezzlement between $1,000 and $20,000.
There are various means for condominium associations and homeowners associations to protect against theft, embezzlement and fraud.
- Fidelity Bond. Most insurance companies offer fidelity bonds as part of the package of insurance options. A fidelity bond is a form of insurance protection that covers policyholders for losses that they incur as a result of fraudulent or dishonest acts by specific individuals (i.e. the Board of Directors and property manager). Some governing documents requires that associations obtain a fidelity bond, but even without such a mandatory requirement, associations may want to consider this coverage.
- Restrict Access. Rather than have the entire Board with access to the association’s bank account, restrict the number of people with access to bank account(s) to specific individuals such as the president and treasurer.
- Two-Signature Checks. Boards may want to require that any checks above a certain threshold require two signatures.
- Procedure for Change in Leadership. Boards should have a procedure in place when there is a change in the leadership of the association. Old board members should not have access to the association’s bank accounts.
- Restrict On-Line Access. While on-line banking can make things easier for associations, it also opens the association to potential fraudulent wire transfers and other nefarious acts. Boards should review who has access to on-line banking and how often the password is changed.
- Audit. In Michigan, condominium associations with greater than $20,000 in annual revenues are required to have its books, records and financial statements independently audited or reviewed by a CPA, unless the majority of co-owners vote to opt out on an annual basis. Homeowners associations currently have no such requirement. Thus, making sure a proper audit is conducted regularly could catch potential issues sooner than later.
Having procedures in place to consistently and routinely monitor your association’s bank account(s) and expenses may help protect against theft, embezzlement and fraud. Even though Black Forest Estates Association only faced a loss of $1,200 in monetary value, there is also the cost associated with investigating the matter in the first place, speaking with investigators and preparing to be a witness at criminal trial, if necessary. Thus, catching irregularities earlier may prevent against catastrophic losses down the line and avoid additional time, energy and efforts pursuing the transgressor.
Joe Wloszek is a Member of Hirzel Law, PLC where he focuses his practice on condominium and homeowner’s association law, commercial litigation, commercial real estate, large contractual disputes, and related real estate matters. Mr. Wloszek has been a Super Lawyers Rising Star in Real Estate Law from 2013-2018, an award given to only 2.5% of the attorneys in Michigan each year. He was also named a Top Lawyer in commercial law by DBusiness Magazine in 2014, a Michigan Top Lawyer in real estate law by Michigan Top Lawyers in 2016 and the Pro Bono Volunteer Attorney of the Year in 2014 by Michigan Community Resources. He is a Certified Real Estate Continuing Education Instructor through the State of Michigan and the past Chair of the Oakland County Bar Association Real Estate Committee. He can be reached at (248) 478-1800 or [email protected].