Misuse of Funds, Kickbacks and Fraud

In this section, we look at two situations that frequently occur in condos and that are hushed: no one wants to talk about them!

These are misuse of money and kickbacks and, somewhat less common, but nonetheless occurring far more often than is openly discussed: fraud and outright theft.

All three of these situations probably cost tens of millions of dollars each year to Ontario condo owners.

Misuse of Funds

Misuse of funds or waste of condo moneys by management companies and boards of directors is a frequent occurrence and too often goes unnoticed even by well-informed owners.

Condo monies are wasted when:

  • repairs are done by an expensive contractor when an equally competent one would carry them out for less; this generally occurs when jobs are not tendered or when managers and/or boards have a personal preference for a particular contractor (Click here for letters about Condo Fraud, Kickbacks, and Conflicts of Interest);
  • alterations are made (such as clean outs in units for the kitchen stacks) to solve a problem (such as back ups in sinks), before other inexpensive solutions have been tried, such as educating residents and asking their cooperation; or even before testing on a small number of units to see if these alterations will bring relief to the problem in question;
  • expensive equipment is installed but is not used; one can think here of camera systems as well as building automation system (BAS);
  • constant upgrading of common areas are carried out just to please contractors, managers, or boards;
  • contractors are hired to do work that an employee, such as a superintendent, should be doing as part of his or her daily or weekly routine;
  • employees or managers do not put the time they are paid for;
  • the corporation law firm is used to write routine correspondence because neither the president nor the manager write well or can be bothered to do so;
  • repairs are carried out in an improper sequence so that the first set of repairs have to be done again after the second set is completed;
  • regular contractors fail to use certain procedures to diagnose a fairly routine mechanical problem and, instead, suggest that the board hire an expensive consultant;
  • regular contractors are asked to diagnose a technical problem and do the repairs themselves; often, it is preferable to hire an independent contractor or engineer to diagnose serious problems to avoid potential conflict of interest;
  • boards and managers treat themselves to expensive meals during board meetings;
  • utilities, such as electricity or water, are allowed to be on when unnecessary or to be overused;
  • expensive parties are given which are not paid for by the individuals who attend them;
  • managers or boards mail letters to residents that could easily be posted on the available bulletin boards in a building.

What can an owner do?

As evidences in the letters received, there is unfortunately not much that owners can do because, under the current Condo Act, they are not adequately protected. Many owners have tried to object but have subsequently been threatened by the manager, board, and even the condo lawyer.

Owners can:

  • keep a diary of occurrences they detect;
  • see if they can find a contractor who might give them a quote for a job that was done and seems unduly expensive. (Again, this presumes that owners have had access to documents...);
  • requisition a meeting to discuss the issues, keeping in mind that discussions are not binding;
  • requisition a meeting to remove the wasteful board. This may be the only solution if the misuse of funds is serious. But this also presumes that other more honest board members can be found.  And this also presumes that requisitioning a meeting will be successful and will not, instead, result in owners who participate being harassed and threatened... and even receive unwarranted legal letters. (Click here for Requisitioned Meetings)

Kickbacks and Fraud

Since the inception of this website July 2009 and up to the end of August 2012, 128 letters (or 8% of all letters) have been received containing credible evidence that kickbacks and/or fraud are occurring in particular condos. Only six of these cases were under investigation by the police or a court ("forensic audits") and, as such, the writers could not divulge the evidence.

In condos, kickbacks occur when a manager, a management company, or a board member (generally the president) receive monies, special services for free, or large gifts from various contractors in return for contracts, for allowing higher invoices, or even work that is unnecessary. Eventually, these kickbacks are paid by owners via their fees as these contractors recoup their kickbacks by overcharging on their invoices to the condo.

Fraud takes the form of managers, board members, or contractors using corporation money for themselves. Fraud can be small or large.

In Canada, both kickbacks and fraud are illegal.

Examples of fraud:

  • A manager has work done on her house or a president has his or her suite improved while the contractor is doing other work in the building: The contractor charges the corporation instead of the president. This can be difficult to detect.
  • Cheques are forged by a board member or manager for their own benefit.
  • Cheques are paid to a fictive contractor for services that have never been rendered..
  • Repairs to a condo are not carried out: The monies disappear from the books and go to a manager or a board member.
  • Monies are transferred little by little to someone else’s account or pocket book. This is easily done with petty cash or funds intended for gifts to staff or parties.
  • A manager or a treasurer volunteers to buy furniture for the lobby and party room; while so doing, he buys items for himself.
  • Invoices are padded and include services not rendered or, yet, "repairs" are carried out that were not needed.
  • Board members pay themselves a salary, even though condo owners have not voted a by-law that would allow such payments--and even sign their own cheques!

In Canada, none of these actions are legal but they are very difficult to prove, especially when no tendering process occurs or when it is flawed. For instance, quotes can be solicited from other contractors who are known to be very expensive. This way, the elected contractor’s quote appears reasonable. Please consult Condo Fraud, Kickbacks, and Conflicts of Interest in Readers Respond for various sad examples.

What can owners do?

Easier said than done because, in such situations, board and managers refuse owners’ requests to examine relevant records. Or, yet, records do not exist.

And the Condo Act in Ontario, as it has been interpreted in at least one Court case, has not helped matters at all. Indeed, it has been concluded that owners who even go so far as to successfully obtain condo documents (as the Act allows them to do), cannot use these documents to question board members or even to conduct their own “investigation.” This in effect deprives owners of many of their rights.

Owners who suspect that kickbacks or fraud are occurring should first of all try to obtain documents and keep quiet about it—then approach their local police station... and hope that they will be heard. One owner reported that he was told at his police station, “The police don’t do condos.” Of course, this is not true. Four other owners, including a president, were simply rebuffed and shrugged off at their own police station. If contacting the local police station fails, perhaps contacting the Office of the Independent Police Review Director might be helpful. In all circumstances, owners should keep a record of their contacts and activities and always retain a copy of whatever records they pass along to investigators.

So what about the corporation’s auditor? It could be advanced that, in some cases, he or she may be able to detect fraud. Even though elected by owners at the AGM, auditors are often loath to get involved in such matters for which they may themselves only have suspicions. This is particularly so when the culprit might be a management company: Management companies and auditors have many faceted relationships. One auditor told an owner that it was not their mandate to do “forensic” audits.

And what about the corporation’s lawyer? In theory, such a lawyer should listen and many do. However, it is also an unwritten “rule” that solicitors do not talk with owners but only with the board and manager—and generally only with the president who represents the board. In many cases where owners tried to approach the corporation’s solicitor, they were threatened with legal action. (Click here for Issues with Lawyers)

Kickbacks and fraud are tricky issues because an owner could be sued or threatened to be sued for defamation by the board or a manager were he or she to make such allegations. Whistle blowers are not protected under the Condominium Act of Ontario. As well, kickbacks and fraud are difficult to substantiate, which is no excuse to do nothing about it. Unfortunately, the onus resides on owners who are already very powerless and helpless--even boards can be helpless. This is one more reason why condos need more protection and a stronger Condo Act.

If owners have substantial evidence, particularly through the financial statements, that theft or fraud or kickbacks are occurring, they should, with the help of a lawyer, get a court order under Section 134 of the Condo Act. Litigations, if necessary, could begin after--but this is costly and successful owners may not recoup their monies, under current legislation.

In addition to these problems, one has to consider theft of food, tools, paint, and other items on the part of various condo staff and contractors. It is impossible to tell how often any of this occurs.