Community associations are handy targets for fraud, theft and embezzlement.
Some associations have multimillion-dollar annual budgets. Others are sitting on huge piles of money, amassed in anticipation of major replacement projects like windows and roofs. Still others are neighborly operations with casual attention paid to finances.
If your association is victimized, it’s most likely an inside job. The new Illinois manager licensing law, which goes into effect this year, hopefully will weed out managers with criminal intent and offer more protection to associations. But managers aren’t the only ones who can be tempted to steal.
“Outside of the organized crime rings, the majority of fraud is committed by someone in a desperate situation who finds an easy access point,” said Kristen Saranteas, senior manager of Treasury sales for Wintrust Financial Corp. in Chicago. “It could be someone in your office, in your condo association, in your management company or anyone in between.”
“In today’s economy, things are a little more desperate for some people,” said association attorney Kerry Bartell, of Kovitz Shifrin Nesbit in Buffalo Grove. “That forces associations to be on top of their finances, both more frequently and more carefully.”
You can protect your association’s money by using a combination of high technology and common sense. Consider the following advice from security pros:
Understand the fraud triangle.
Fraud occurs when three elements exist: opportunity, motivation and rationalization, said Arlen Lasinsky, director of litigation and forensic services and a certified public accountant for Frost Ruttenberg & Rothblatt in Deerfield and Chicago.
“If the association has no segregation of duties, and when one person signs the checks, deposits the checks and reconciles the bank account, the opportunity is there,” he said. “Motivation could be drugs, alcohol, medical issues, mortgage payments; everyone has issues. Rationalization is where someone says, ‘I deserve the money’ or ‘I’ll pay it back.'”
Assemble a team.
Don’t allow only one person to handle all the association’s financial matters, regardless of its size. “You need checks and balances inside the board and inside the management company, and oversight on both,” said Saranteas.
Board members should get a monthly financial package from the manager or president that includes the financial statements, cash receipts, disbursements, copies of checks and supporting documentation, said Lasinsky.
“It’s no different than your personal finances,” he said. “If someone else was paying your bills, you’d want to know, ‘Where did the money go?'”
Bartell cautioned that a huge mistake is when associations are not signatories on their own bank accounts. If theft occurs, the association can’t make changes or remove the rest of its money.
“Make sure you have a treasurer who is willing to put the time in and keep a close eye on what is going on,” she said.
It’s also a good idea for board members to rotate duties, said Lasinsky.
Use positive pay.
Send your bank a list of checks you’ve written. If there is a difference or a check is not on the list, it is held until the discrepancy is cleared up.
Set up alerts.
Many banks will text, e-mail and leave voice messages at predetermined times, such as when a balance drops below a certain threshold.
Act quickly.
Consumers have 60 days to review their transactions and report any discrepancies. Corporations, which include associations, have 48 hours.
“When you’re reviewing your account online, those transactions hit as of the close of business the day before,” said Saranteas. “That’s 24 hours, and you have only one more day to react if funds have left your account. The association needs to have multiple people who review an account on a daily basis.”
Safeguard your checks.
The association checkbook probably is locked up, but what about the deposit slips and canceled checks? Don’t pile them into storage boxes or scan them into unprotected data files.
“The account number and routing number is all someone needs to perpetuate fraud against the association,” said Saranteas. “That check might be canceled, but the information at the bottom is live.”
