How to Push Back Against a Board Member Taking Kickbacks

“The first thing a board member should do is look at the process for selecting the particular vendor,” says Stuart Halper, a lawyer with the firm Stuart Halper Associates. “You want to see what the competitive bids were and where this particular bid matched up in comparison to the other bids. If, for some reason, it’s one of the middle or higher bids, an eyebrow should be raised right off the bat.”

But a suspicion of wrongdoing is not nearly enough to move forward. A little digging is in order.

“You want to do some research on the web, see if there’s anything going on with this particular individual,” Halper says. “You want to see if this vendor is under any sort of investigation by the authorities.”

If the bid was on the high side and the vendor looks questionable, your next step is to start sifting through the paper trail.

“As a director, you have the right to look at any of the (co-op’s or condo’s) books and records,” says Ken Jacobs, a partner in the law firm Smith Buss & Jacobs. “That includes all drafts of the contracts, including correspondence. That makes your job a little easier as far as getting materials to review.”

Your investigative work might get an unexpected boost if the suspected board member is lazy or sloppy. Let’s say the contractor who just replaced the roof is suddenly redoing the suspected board member’s kitchen and bathroom. It’s been known to happen.

“It now becomes a political situation, rather than one of restitution or criminal action,” says Halper. “The bottom line is you need to have the person eliminated from the board. The only way to do that is by a vote of the shareholders or unit-owners. I have yet to see bylaws that allow a board to remove board members, absent judicial action.” (It is possible for the board to revoke the presidency, thus diminishing the suspect’s power.)

Before the next election, though, you should begin eliciting the support of your fellow board members.

“If the kickback is obvious,” says Jacobs, “you’re less constrained about going to the rest of the board and saying, ‘I found out that this contractor is repairing the board president’s bathroom, and I’d like to investigate further as to how and why this happened.’ Most sane boards will respond to that. You will get support.”

If the board is convinced there was fraud, they can take their case to the District Attorney. Any or all board members can file a lawsuit against the suspected taker of kickbacks – a risky and usually costly alternative that frequently has the added undesirable side effect of dividing the building into warring factions.

A far more surgical solution is to appeal to the offender’s sense of shame. Many boards require members to sign a Code of Ethics, which draws lines between ethical and unethical forms of conduct but rarely carries any enforcement mechanism. That doesn’t mean such codes are toothless.

“Board members can pull the offender aside and say, ‘Look, we may not be able to prove this in a court of law, but we’re going to publicize it. And you should resign because what you did was shameful,’” says Jacobs. “And it does help. You hope that will be the mechanism that tips the scales over and forces a resignation.”

Then again, you might avoid all these headaches by taking a simple precautionary measure. “In your vendor contracts,” advises Jacobs, “always have them sign some kind of representation that they have not made any payment or any sort of inducement to anybody in order to get the contract.”