Post by Poor Richard on Oct 24, 2020 10:24:30 GMT -7
Steps to Take If You Suspect Fraudulent Activity Within the HOA Board
HOA Manager reports:
"Groups that are run by volunteers that handle money are particularly vulnerable to fraud, embezzlement, illegal activities, and scams. HOA boards are no exception. Access to funds is a temptation that some cannot resist.
Dishonest board members can exploit the fact that most volunteers don’t know the details on how to financially manage the HOA’s funds. They also know other board members are busy with family life, jobs and hobbies and may not have the time to scrutinize every transaction. Board members with a bit of financial savvy can “cook the books” to embezzle money or collude with outsiders to collect kickbacks.
Common Types of HOA Fraud
Embezzlement: California embezzlement laws define embezzlement as the act of someone fraudulently taking property that has been entrusted to him or her by someone else. This would mean an HOA board member covertly takes the HOA’s funds for himself or herself.
Violating Corporation Law - Deceit, Exaggeration, “Cooking the Books”: Another type of HOA fraud is related to violating California corporate law. HOAs are typically California nonprofit corporations called mutual benefit corporations. Directors of a mutual benefit corporation can be charged with a crime if they commit certain misconduct offenses within the HOA. This includes:
Lying about the HOA's finances
Exaggerating information about the HOA's operations or finances
Taking possession of any property of the corporation and not making an entry of this in the HOA's records
Destroying or fabricating HOA records with the intention to defraud
Kickbacks: A board member or group within the board conspires to steer contracts to vendors who have promised kickbacks in return for the business they’ll receive. Since the kickback money is a portion of the monies paid to the contractor, it’s a form of HOA fraud.
Election Rigging: A more complex form of HOA fraud is rigging elections to the HOA board. Individuals band together to get their friends and associates elected to the board. Once elected, those board members use their power to steer contracts to companies they own, contractors who promise kickbacks, or to skim funds from the HOA. People who participate in election rigging can be prosecuted for mail/wire fraud and forgery crimes depending on the circumstances.
What Can You do to Investigate Fraud or Illegal Activity?
If you suspect fraudulent activity within your HOA board, it’s important to gather as many documents as you can to support your suspicions. It could be that a board member simply made a mistake, but if you believe there is intent to defraud, that’s another matter. Steps need to be taken where intention to steal or defraud takes place.
Requesting and Reviewing Your Association's Records
If you aren’t a board member and want access to the board’s records, Civil Code sections 5200-5240 allows you access to the association’s records. You can review or request copies of the following:
Financial documents pertaining to reserves, budgets, financial statements, and audits
Executed contracts
Written board approval of vendor or contractor proposals or invoices
Tax returns
Agendas and minutes of member meetings
Membership lists
Check registers, invoices, cancelled checks, purchase orders, credit card purchases and statements, statements for services rendered and reimbursement requests
Governing documents
Board Member or Homeowner? You Can Call a Special Meeting
If you are a member of the board, and you’ve reviewed the association’s records and suspect fraud, you can call a special meeting of members as specified in the bylaws.
If you’re a homeowner, you can gather support of five percent of the membership to hold a special meeting. If the special meeting is not held, it is a violation of California law under Corp. Code, Section 7510(e) and you can file a complaint with the Attorney General.
At the meeting, you can discuss your suspicions and any supporting documentation you may have. Call for an independent CPA to review the HOA’s financials. If no meaningful discussion takes place, or you’re ignored, your next step may be to take your suspicions to law enforcement.
Steps to Getting Law Enforcement Involved
The California Attorney General’s Office recommends that if you believe fraud, theft or embezzlement by your HOA board or any of its individual members is present, report it to the police or sheriff's department. Once law enforcement investigates the crime, the case may be sent to the county district attorney's office for prosecution. The county district attorney will then decide whether it’s appropriate or not to file criminal charges.
Hire a Professional
Many HOA board frauds are perpetrated because there is no third party oversight. You can make a motion at the special meeting to hire an HOA manager so that a neutral third party can assist. A reputable homeowner association management firm can oversee finances, uncover or allay fears about fraudulent activity, as well as provide full professional services including plumbing, electrical, HVAC, flooring, painting, construction, as well as cleaning and maintenance."
"Groups that are run by volunteers that handle money are particularly vulnerable to fraud, embezzlement, illegal activities, and scams. HOA boards are no exception. Access to funds is a temptation that some cannot resist.
Dishonest board members can exploit the fact that most volunteers don’t know the details on how to financially manage the HOA’s funds. They also know other board members are busy with family life, jobs and hobbies and may not have the time to scrutinize every transaction. Board members with a bit of financial savvy can “cook the books” to embezzle money or collude with outsiders to collect kickbacks.
Common Types of HOA Fraud
Embezzlement: California embezzlement laws define embezzlement as the act of someone fraudulently taking property that has been entrusted to him or her by someone else. This would mean an HOA board member covertly takes the HOA’s funds for himself or herself.
Violating Corporation Law - Deceit, Exaggeration, “Cooking the Books”: Another type of HOA fraud is related to violating California corporate law. HOAs are typically California nonprofit corporations called mutual benefit corporations. Directors of a mutual benefit corporation can be charged with a crime if they commit certain misconduct offenses within the HOA. This includes:
Lying about the HOA's finances
Exaggerating information about the HOA's operations or finances
Taking possession of any property of the corporation and not making an entry of this in the HOA's records
Destroying or fabricating HOA records with the intention to defraud
Kickbacks: A board member or group within the board conspires to steer contracts to vendors who have promised kickbacks in return for the business they’ll receive. Since the kickback money is a portion of the monies paid to the contractor, it’s a form of HOA fraud.
Election Rigging: A more complex form of HOA fraud is rigging elections to the HOA board. Individuals band together to get their friends and associates elected to the board. Once elected, those board members use their power to steer contracts to companies they own, contractors who promise kickbacks, or to skim funds from the HOA. People who participate in election rigging can be prosecuted for mail/wire fraud and forgery crimes depending on the circumstances.
What Can You do to Investigate Fraud or Illegal Activity?
If you suspect fraudulent activity within your HOA board, it’s important to gather as many documents as you can to support your suspicions. It could be that a board member simply made a mistake, but if you believe there is intent to defraud, that’s another matter. Steps need to be taken where intention to steal or defraud takes place.
Requesting and Reviewing Your Association's Records
If you aren’t a board member and want access to the board’s records, Civil Code sections 5200-5240 allows you access to the association’s records. You can review or request copies of the following:
Financial documents pertaining to reserves, budgets, financial statements, and audits
Executed contracts
Written board approval of vendor or contractor proposals or invoices
Tax returns
Agendas and minutes of member meetings
Membership lists
Check registers, invoices, cancelled checks, purchase orders, credit card purchases and statements, statements for services rendered and reimbursement requests
Governing documents
Board Member or Homeowner? You Can Call a Special Meeting
If you are a member of the board, and you’ve reviewed the association’s records and suspect fraud, you can call a special meeting of members as specified in the bylaws.
If you’re a homeowner, you can gather support of five percent of the membership to hold a special meeting. If the special meeting is not held, it is a violation of California law under Corp. Code, Section 7510(e) and you can file a complaint with the Attorney General.
At the meeting, you can discuss your suspicions and any supporting documentation you may have. Call for an independent CPA to review the HOA’s financials. If no meaningful discussion takes place, or you’re ignored, your next step may be to take your suspicions to law enforcement.
Steps to Getting Law Enforcement Involved
The California Attorney General’s Office recommends that if you believe fraud, theft or embezzlement by your HOA board or any of its individual members is present, report it to the police or sheriff's department. Once law enforcement investigates the crime, the case may be sent to the county district attorney's office for prosecution. The county district attorney will then decide whether it’s appropriate or not to file criminal charges.
Hire a Professional
Many HOA board frauds are perpetrated because there is no third party oversight. You can make a motion at the special meeting to hire an HOA manager so that a neutral third party can assist. A reputable homeowner association management firm can oversee finances, uncover or allay fears about fraudulent activity, as well as provide full professional services including plumbing, electrical, HVAC, flooring, painting, construction, as well as cleaning and maintenance."