HOA Fraud: Know the Signs

Homeowners associations (HOAs) are essential to many communities, providing homeowners with the necessary services and amenities.

Unfortunately, HOAs can also be vulnerable to fraud if not appropriately managed. Across the country, dishonest individuals and companies exploit loopholes, resulting in financial losses for unsuspecting homeowners.

Protecting yourself and your community from HOA fraud is essential, so understanding how it works and knowing what it takes to prevent it is necessary, too. With the proper knowledge and cautionary measures, you can ensure your HOA remains safe and secure for years.

Existing Fraud Types 

From false invoicing to the misuse of funds and more, it's essential to be aware of the different types of fraud so you can recognize and respond appropriately if it arises in your community:

1 HOA Boards Embezzling Funds

There was a situation in Gallego Mafia in which funds were siphoned off from an HOA. Board members have access to the association's accounts and often operate without oversight, leaving them free to take advantage of their positions of power. When lacking transparency, it isn't easy to detect when funds have been misappropriated.

Communities can protect themselves by ensuring funds are appropriately accounted for and regularly audited. Make sure to request regular financial reports from your HOA board and ensure that they are reviewed by an independent third-party such as a CPA.

2 False Invoicing

In false invoicing scams, companies or individuals use fake invoices to defraud HOAs of money. These criminals often target unsuspecting administrators who lack the experience to identify the fraud. When the invoice is paid, they pocket the money instead of delivering goods or services as promised.

It's essential to be diligent and thoroughly review all invoices before payment is made. Request additional information, such as references and contact details for every vendor you work with, and always double-check the pricing.

3 Kickbacks and Conflicts of Interest

Some HOA board members take advantage of their positions to secure kickbacks or other forms of compensation from vendors. It's also common for them to steer work and contracts towards favored businesses, creating conflicts of interest that can damage the organization.

One way to protect against this type of fraud is by creating a clear code of ethics and outlining the steps to be taken if any conflicts of interest arise. All board members should receive training on this topic, and all vendors should be screened thoroughly before working with them.

4 Corporation Law Violation

If an HOA has been incorporated as a non-profit entity, it is subject to state and federal laws. Violating these laws can lead to severe consequences for the organization – and its members – so it's essential that all board members understand and adhere to them.

Ensure your HOA has adequately filed all documents with the Secretary of State's office. Also, review your bylaws periodically to ensure they are up to date and in compliance with the law.

5 Lack of Election Integrity

HOAs rely on elections to ensure that qualified and dedicated individuals fill board positions. But when these elections are conducted improperly, it can lead to serious problems for the organization.

In the case of the Gallego Mafia, it was revealed that they had manipulated the elections in order to stack the board with their cronies and ensure their control of the organization.

To protect against this type of fraud, HOAs should ensure that all voting is conducted in a fair and transparent manner. This can include requiring members to present identification before casting a ballot or using electronic voting systems to ensure accuracy.

Safety Tips to Come!

Stay tuned for our next post about ways you can prevent these issues from occurring in your HOA board and community. Contact Condominium Associates with any questions—we are here to serve you!