A Las Vegas construction firm owner faces sentencing after pleading guilty for his part in a scheme to defraud area home owner associations (HOAs), the Las Vegas Review-Journal reports. U.S. Justice Department prosecutors say Leon Benzer and attorney Nancy Quon conspired to rig elections in order to take over HOA boards of directors, obtain construction defect contracts for Quon, and secure repair work for Benzer's company. At one HOA, Quon's firm obtained more than US$5.2 million in fees from a construction defect settlement, while Benzer's company was awarded US$7 million to perform repairs. After an FBI raid in 2008, Benzer was charged; Quon, who was never charged, killed herself in 2012. Prosecutors are seeking nearly 20 years in prison for Benzer and US$13.4 million in restitution.
Unfortunately, the HOA fraud seen in this story is substantial, but not unique. HOAs are common in the U.S. and typically are formed as corporations by a real estate developer to market, manage, and sell homes and lots in a residential subdivision. Later, they transition to homeowner control after a predetermined number of lots have been sold. In 2010, the Community Associations Institute trade association estimated that HOAs governed 24.8 million U.S. homes and 62 million residents. In Nevada, there are more than 3,000 HOAs. Most HOAs are incorporated and are subject to state statutes that govern nonprofit corporations and homeowner associations. However, state oversight of HOAs is minimal and varies from state to state.
Here are some strategies that HOAs and their regulators should consider to help reduce the risk of the kind of fraud committed by the Las Vegas fraudsters.
- State and Local governments. Governments benefit from the existence of HOAs because they handle some traditional functions such as road maintenance, streetlights, and parks, helping to contain rising government costs as growth continues. They should support strong HOA organizations and exercise greater scrutiny to ensure that HOA boards adhere to minimum standards. Board directors have a legal, fiduciary duty to HOA members and violation of that duty may result in liability for individual directors.
- Regulation. One matter local and state regulators should oversee is whether directors actually own and reside in a unit within the specific HOA, which has been required in Nevada since 2009. The lack of such a law before that time enabled the perpetrators of the Las Vegas fraud to secure a seat on HOA boards and direct money and work to their own companies. In most cases, day to day operations of HOAs are in the hands of management companies hired by their boards. Education requirements for these managers varies from state to state, with some requiring certification under all circumstances and others less. Greater consistency in these requirements would increase the probability of competent, fraud-free management. Many states, including Nevada, have established processes to handle HOA complaints such as violations of law, or set up an alternative dispute resolution process to deal with administrative violations. But given the apparent volume and impact of HOA fraud, a whistleblower system would be a useful anti-fraud addition.
- HOAs, directors, and managers. Robust governance by board directors is fundamental in preventing fraud. The association should adopt an ethics code for board members to ensure they act ethically and in accordance with their responsibilities. All board members and employees should be thoroughly vetted and any election or hiring process should be transparent, not secretive. The board should exercise vigilance to ensure its directors are not being paid and do not have any kind of employment contract with the HOA. Even if part time and volunteer, directors need to be engaged in monitoring HOA activities, including questioning any delays in circulating financial statements and other organizational documents.
- Internal control. Putting an effective system of controls in place is critical, even in a volunteer-based, not-for-profit organization. That should include appropriate segregation of responsibilities, authority delegation limits, regular spot checks of financial transactions and invoices, and having HOA accounts independently and professionally audited at least once a year, preferably more often. Finally, becoming better educated about the nature, sources, and tactics of fraudulent behavior, in the context of how this impacts not-for-profit organizations, is essential. There is a wealth of resources, often free, available to boards. For example, Preventing Fraud: How to Safeguard Your Organization is a guide aimed specifically at-not-for profits, produced by BoardSource, formerly the National Center for Nonprofit Boards.