Do you know how your HOA operates and understand its rules? Do you know how state and local laws regulate HOAs, and which apply to your community? If not, you may be unable to recognize fraudulent activity and illegal schemes. Deceptive activity and outright fraud are far more common in HOAs than you might think. Your home probably is your biggest investment, and to protect it, you need to know how to spot some of these potential nightmares so you don’t have to wake up and realize they’re actually happening.
Before you assume that your HOA never would fall victim to internal fraud, consider the case of the Gallego Mafia, a Florida HOA run amok. Like you, the residents of 40 communities overseen by this HOA, formally known as The Hammocks, loved their neighborhoods—but when these fraudsters took over, 18,400 homeowners were left with a mess on their hands.
How the Gallego Mafia took over The Hammocks
Down in Miami, Florida—where state laws regulate HOAs more than in many other parts of the U.S.—a group of HOA leaders faces charges that sound like something out of a mob drama, as recent news coverage points out. The Florida State Attorney, Katherine Fernandez Rundle, has charged this bunch as racketeers and money launderers who fabricated evidence and used shell companies to commit their crimes.
Led by its president, Marglli Gallego, The Hammocks’ board allegedly wrote checks to nonexistent companies for fake services, and stole at least $1 million in maintenance fees, which it used to enrich itself and its friends. For almost five years, the Gallego Mafia met in secret, refused to hold elections, and operated like a shadow government. Now a court-appointed receiver and a provisional board are in charge until new elections can bring in legitimate leadership—and residents are reeling at the substantial loss of association funds, among other consequences.
How to watch out for HOA fraud
HOAs, especially large ones, handle substantial sums of money, which creates a “honeypot” that attracts the greedy and the fraud minded. The Hammocks case may sound extreme, but these incidents are all too prevalent. Vigilance—and knowledge of what to look for—are your best protection and defense. Stay on the alert for these types of problems.
Embezzlement: Misappropriation of funds
Embezzlement simply involves redirecting money reserved for a legitimate purpose and putting it in your pocket instead. Marglli Gallego and her crew diverted maintenance fees through shell companies and fake invoices. That’s a common embezzlement tactic.
How transparent are your HOA’s dealings? Can you see and identify where the funds you pay in are going and how they’re used? If not, you could have a tough time identifying embezzlement. Laws require that most HOA boards share financial records with their members. Never be afraid to ask for these records—and if something doesn’t seem to make sense, get clarification.
Bad records: Cooked books and kickbacks
You’ve heard the stories about fraudsters keeping two sets of financial records to hide evidence of fraud. In The Hammocks case, that’s part of how the Gallego Mafia covered its tracks. They listed fake vendors, invoices, and services—when in reality, the money went into their pockets instead.
Kickbacks occur when a real vendor actually performs work, but they secretly pay back part of their fee to conspirators who either offered them preferential treatment among other service providers or otherwise gave them an unfair advantage against competitors.
As with all forms of fraud that afflict HOAs, sunshine is a great disinfectant. Your board should operate in public, always share its paperwork, and answer any questions that arise.
Breaking corporation law
Corporation law governs how most HOAs operate because most of them operate as corporations. These laws cover financial dealings, resolution of conflicts of interest, and much more. Some instances of fraud constitute insider trading, along with other illegal activities related to goods and services.
But unless you’re a corporate attorney or someone well versed in corporate law, it’s tough to wend your way through the regulations and understand when or how they apply. When you evaluate slates of board candidates, look for people who possess this type of knowledge—and if necessary, hire a corporate attorney to check things out.
Excessive fees and fines
By law, HOA boards aren’t allowed to impose arbitrary fees that don’t match up with the purpose they’re intended to cover. Excessive fees and violation fines can be illegal—and these are common tactics among bad HOA boards.
Likewise, complex rules that no one can follow successfully, or that result in big fines for little violations, aren’t allowed. If you add shrubs or security equipment where your CCRs don’t allow them, or choose a paint color that’s slightly different from the community standard, and you’re immediately subjected to a huge fine instead of a warning followed by a minor charge, that’s a sign that something’s out of whack.
Rigged elections and fraudulent votes
Beyond the financial crimes that immediately spring to mind as forms of HOA misdeeds, a board also can commit or condone voter fraud to elect a specific slate of candidates. Whether this involves fake voter registrations or manipulated ballots, it’s evidence of bad-faith activity—and it’s all too common.
Just ask the residents affected by The Hammocks board. When they attempted to remove the Gallego Mafia, the board went to extremes to avoid ouster. At one point, when residents tried to band together for change, someone called in a bomb threat that forced cancellation of their meeting. When they actually managed to hold elections, more than half the ballots had to be discarded as fraudulent.
Keep your HOA on the up and up
Odds are that you’ll never face an incident of HOA fraud, but these incidents occur frequently enough that you need be proactive to protect yourself. The internet makes large amounts of financial information available online, so fraud-minded individual have an easy time looking for HOA targets. Be alert and take the right steps to keep your HOA operating in line with legal and ethical expectations.
Know how your HOA works
Have you read your HOA’s CCRs and other rules—recently and thoroughly? This is your first guiding step in preventing HOA fraud. Learn and understand the procedures, policies, and regulations that govern your community, possibly through HOA software.
Show up at board meetings, raise your hand—and follow the money
Make a point to attend all HOA board meetings—and bring your neighbors, too. If something doesn’t seem to make sense, or you’re unsure of the why and how of specific decisions, speak up and ask. Keep an eye on where your HOA spends money, and question any expenditure that looks out of kilter.
Plan ahead for crime management
This is prime turf for proactivity because after the fact, it’s too late to figure out what to do about HOA fraud. You need a cohesive plan that outlines how to monitor activity and impose internal controls—and when to contact law enforcement.
Call in the pros
Consult a professional the moment you suspect that fraud has popped up in your HOA—and long before you need to make that call to an attorney or accountant, identify appropriately credentialed people to contact. Better to call a pro and investigate a potential problem than to assume everything’s fine, only to find out it’s not. The same pros can give you sage advice on preventive approaches.
Take steps to protect yourself and your HOA
As the case of The Hammocks shows, fraud can crop up where you least expect it, and the damage it causes can set an HOA back years, not to mention the loss of trust that’s almost inevitable in these cases, along with the impact on a community’s reputation.
Stay alert, understand your HOA’s rules, plan for prevention first and disaster second, and keep an eye out for any dealings that don’t make sense. Remember that sadly enough, in these cases of HOA fraud, the perpetrators may be people you know and trust.
If you see activity that looks suspicious, be prepared to act fast for the good of your HOA and your entire neighborhood. Work with your neighbors to create a well-managed HOA that safeguards the value of your community.