While 2017 has brought great fortune and growth in the real estate market, the year has unfortunately also seen several management companies’ theft/embezzlement from their association clients. To be clear, these incidents were isolated. By far, most management companies take the manager’s fiduciary role very seriously, and have multiple checks and balances in place to prevent such theft.
For those affected by the thefts, the initial shock is wearing off, and associations are now trying to deal with the aftermath. The experience of some of those associations can provide lessons for all associations.
How to avoid becoming a victim of theft/embezzlement
In most of the cases this year, the management company likely carried insurance coverage for theft or employee dishonesty, which is sometimes called “crime coverage”. However, in some cases, the losses suffered by the associations will likely exceed coverage limits on the management company’s policy. That means that all the company’s clients suffering losses will share in the insurance recovery, but it’s unlikely everyone will be fully reimbursed for their losses.
LESSON #1: Each association should maintain its own theft/employee dishonesty coverage, separate from the management company’s coverage. Having your own policy ensures that your own money is protected, regardless of the level of loss suffered by the company’s entire clientele and the coverage limits on the company’s policy. Most management companies ensure that their clients maintain this coverage and some management contracts even mandate it, but, unfortunately, an association may not know it doesn’t have the coverage until it’s too late. Check with your manager now.
Some associations’ replacement reserve funds are among the funds stolen. The loss of any funds is a significant setback, to be sure. But loss of replacement reserve funds can pose even greater problems. Unless the association takes quick action to address the loss of those funds in particular, lenders may be unwilling to finance purchases of homes in the community.
While even the most vigilant association could still be the victim of sophisticated scams, some of the losses might have been preventable if there were better checks and balances in place between the association and its management agent. Associations with a high number of vendors and a high cash flow are prime targets for theft.
LESSON #2: Ensure that there are proper checks and balances in place:
- Require receipts for all expenses for which reimbursement is requested.
- Review the receipts to make sure they are for proper expenses related to association business.
- Review and reconcile bank account statements.
- Do not have an ATM card associated with the association’s checking account.
- Require dual signatures on all checks written on any association account.
- Review the payee on all checks to make sure that they are association vendors.
- Require more than one signature to open/close an account in the association’s name.
- Ensure that signatory information on file with bank is up to date. (This should be part of the process carried out after every annual meeting at which directors are elected.)
- Ask questions. If the answer isn’t satisfactory, ask more questions.
What to do when an association is a victim of theft/embezzlement
If an association discovers there has been a theft of association funds, the Board must take some immediate action:
- Get control of the passwords to all of your email accounts, bank accounts, credit cards, and other financial records. Even though you may have escorted the wrongdoer out the door – or he/she just didn’t show up one day – the association may still be at risk for losing money. The thief could still be controlling accounts electronically and having funds sent to a new account opened in the association’s name.
- Contact the association’s bank immediately to change signatories and obtain records regarding transactions. If there is forgery, the association should determine if a director’s signature has been forged on checks, since this could create claims of liability for that director if he or she does not act promptly. The association’s contract with its bank likely imposes a relatively short time period in which to notify the bank – often just 30 days. Delayed notification to the bank will limit the bank’s liability, which is already low.
- Have a copy made of the association’s computers or a backup of some sort so that the association has some record of when the theft was discovered. The association will be changing and modifying its records going forward to try and straighten things out, but law enforcement will want to see how things looked at the time of the theft so criminal prosecution can proceed with any possible civil suit against the thief. The association’s computers are evidence, as is the data on them.
- Contact law enforcement, which in most cases is the local police. Before you contact law enforcement, try to get a handle on the extent of the loss and some documentation of how it occurred. Frequently, this may be nothing more than finding a number of checks that have been forged or a number of improper transactions.
- If the association has taken the precaution of obtaining employee dishonesty or theft insurance, then the association needs to notify its insurance carrier of the claim. It will be helpful to have a police report and other documentation when that claim is filed.
Just as a home robbery sends the homeowner reeling, theft of association funds sends the members of the association’s board reeling as well. Indeed, the entire association is affected by the illegal activity. Taking steps to avoid a loss can save not only the headache of dealing with the loss, but, more important, the loss itself. If, despite best efforts, an association is the victim of theft, it is important to act promptly to protect other assets and to recover any stolen assets possible. The association’s legal counsel can provide guidance and assistance in navigating the sometimes complicated paths toward recovery of funds.