CO-OP / CONDO FRAUD IS BACK

Mindy Eisenberg-Stark, an accountant and certified fraud examiner, says such crimes run in cycles. After a major wave of fraud in 1994, when 82 managing agents and four firms were indicted in a kickback investigation, by a period of heightened diligence by boards gave way, in time, to backsliding. 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. The arrests of Stoll and Modano, coupled with the sudden collapse of Charter Management (see "Corruption Concerns," Habitat, October 2009, and "A Charter Management Agent on the Company Corruption Scandal"), indicate we might be entering a third wave.

"I do agree that it's cyclical," says Patrick Dugan, chief of the investigative division in the Manhattan district attorney's office, and an active participant in 1990s prosecutions. "But I would not conclude that there has been a 10-year hiatus in corruption. The corruption's still there. The industry needs to be constantly on guard."

Dugan cites Modano's arrest. Not only is the manager charged with commingling funds from the six properties, he also allegedly failed to make tax payments. He then arranged with the city's Department of Finance to pay the back taxes on an installment plan — and failed to pay up.

"The people in those buildings didn't even know this [arrangement had been made] and the Department of Finance didn't tell them," Dugan says. "Now they have to pay fines and penalties."

Detecting — And Preventing

Ken Citarella is an attorney and certified fraud examiner who has spent 28 years investigating white-collar crime in Westchester County. He's now in private practice with Meiselman, Denlea, Packman, Carton & Eberz. "The basic problem," he says, "is that most people on boards are volunteering their time. So a lot of the management chores get contracted out to the managing agent. Unless the board knows what specifically to look for, it's easy for the manager to deceive them."

But there are ways for co-op and condo boards to increase your chances of preventing fraud.

"You want to try to create an atmosphere where fraud will not be tolerated," Citarella says. "A board should set a policy of zero tolerance — and then be actively involved in what the managing agent and contractors are doing. It's not a guarantee, but it has a deterrent effect. The thief is going to go where the pickings are easier."

As well, "[T]he more people that [need to be] involved in committing the fraud, the less likely the fraud is to occur," Citarella says. In other words, spread out the responsibility for your finances. And finally, he advises, "Just because someone has been reliable in the past, doesn't mean they'll continue to be reliable. Love your employees; send birthday presents to their kids. But on the job, don't trust them. It's not personal; it's a business."

Be on the lookout, he says, 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. He also advises boards to be wary of a manager who never takes a vacation.

Beyond these general precautions, Citarella ticks off a half-dozen of the most common types of fraud as well as ways to deal with them. They include:

• 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 vendors to the managing agent. With the help of your engineer, compare bids to invoices as they come in. Get documentation for cost overruns.

• Phantom employees. Keep an up-to-date list of employees and call periodic employee meetings.

• Bid-rigging. Make sure all bids are opened by a board representative, not the managing agent. Rotate bids to different vendors. Check references. Make sure bidders exist.

What to Do when Fraud Happens

First, protect the evidence by collecting all bank records, computer files, checkbooks and other relevant records. Second, have a forensic accounting conducted by a CPA who is a certified fraud examiner. You might try to recoup the loss directly from the thief, but Citarella cautions that this is usually futile and even risky. "It rarely works out well," he says. "And if you decide to sue later, that can compromise your legal position."

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