Habitat 101: Five Common Forms of Co-op and Condo Fraud
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Aug. 15, 2013 — Co-op and condo fraud tends to run in cycles. There was a major wave of fraud in 1994, when 82 managing agents and four firms were indicted in a kickback investigation. In 1999, 59 more individuals and 21 companies were indicted in various kickback and payoff schemes. Among the indicted were managing agents, management companies, supers, architects, engineers, waterproofing contractors, and even co-op board members.
There are ways for boards to increase their chances of preventing fraud. The first step is to create an atmosphere where fraud will not be tolerated — thieves tend to where the pickings are easiest. As well, the more people that need to be involved in committing the fraud, the less likely the fraud is to occur, so spread out the responsibility for your finances.
Be on the lookout for changes in a manager's personal life — a death in the family, a spouse's job loss, a sudden taste for drugs or gambling, anything that can change a person's motivation and, eventually, his behavior. Be wary of a manager who never takes a vacation.
Beyond these general precautions, keep an eye out for these five common red flags of fraud:
• Checks payable to cash. Make sure you get copies of all checks along with your monthly bank statement.
• Invoices from nonexistent companies. Inspect a copy of every paid invoice; if you have doubts, do a Google search and call the company to make sure it exists.
• Kickbacks from legitimate vendors to the managing agent. With the help of your engineer, compare bids to invoices as they come in. Get documentation for all cost overruns.
• Phantom employees. Keep an up-to-date list of employees and call periodic employee meetings. Count noses.
• Bid-rigging. Make sure all bids are opened by a board representative, not by the managing agent, and rotate bids to different vendors. Check references. Make sure bidders exist.
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