Your co-op or condo is your home but it's also a business with vendors, contractors and a board of directors that sets guidelines affecting everyone. As in any business, there exists the potential for theft and fraud. While there are no fool-proof methods to prevent wrongdoing by board members and the professionals and vendors they do business with, there are checks and balances that can be put into place to help keep everyone honest.

Sitting on the Board

The board of directors, especially the president and treasurer, are in positions that are ripe for abuse. According to the president of a 200-unit co-op downtown, the former president who served for ten years had become a dictator. If you crossed her, you jeopardized your place on the parking space list, you might not be permitted to sublet, and she could make selling your apartment a nightmare.

On top of all this, the marble in her apartment was suspiciously installed simultaneously with the lobby's marble. She was suspected of regularly submitting fraudulent invoices for reimbursement and sources claim she demanded kickbacks from building vendors. However, no one could prove any of these allegations against the board president because she held all the reins.

To avoid such nightmarish scenarios, the co-op's new board president swears by term limits for board members, especially for members who have authority to contract the services of vendors and professionals. "If you know that someone will be looking over the books in two years," he reasons, "you can't be quite as blatant. You also must have a strong managing agent who will say, 'Listen, I'm not going along with this.' "

Some years back, an Upper West Side co-op was in receivership due to a mortgage dispute with the building's sponsor. During the same period, the co-op was losing tens of thousands of dollars in revenue from the garage beneath it, which had a 15-year, far-below-market value lease. On a hunch, the board president checked the public estate records of the deceased owner of the building, and found what resembled a kickback. The documents showed the property owner had received $100,000 from the garage owner. It had been recorded as a loan repayment. Coincidently, the garage's first "loan" payment came due the day the lease began.

During mediation of the mortgage dispute the co-op's representatives mentioned their findings to the sponsor—who represented the deceased owner's family. "The point was not pursued," says the board president, "but their lawyers knew we had them. Suddenly $100,000 became the magic number. When the case was settled we got $100,000 off the face value of our mortgage, and $100,000 in cash for building repairs. In sum," she advises, "get hold of every primary document you can. Understand the mortgage and offering plan."

According to Doug Heller, a partner with the Manhattan-based law firm of Friedman, Krauss & Zlotolow, "You should have an adequate fidelity bond on the managing agent, the board and anyone else who can touch money." A fidelity bond—which can be obtained by the co-op or condo as part of its insurance package—ensures that if there are any problems, the losses incurred by the bonded individual(s) are covered by the bonding company. Steven Greenbaum, the director of property management at Mark Greenberg Real Estate Co., Inc. (MGRE), a residential real estate management firm with offices in Manhattan and Port Washington, says that for major expenditures MGRE clients issue a check for the exact amount from the reserve fund and deposit the check in the operating account. Management then cuts the check to the contractor.

"When board members can only issue checks to their own entity," says Greenbaum. "It prevents anything underhanded." Another important preventive measure is, according to Elliott Meisel, a partner with the law firm of Brill & Meisel in Manhattan, "If every board member gets a copy of the monthly financial statements, the possibility that someone else is reviewing it may keep people honest."

The Property Manager Connection

Trust between the board and its property manager is just as important as trust among board members. A good property manager will discreetly alert the board if a board member suggests—or is seen doing—something unethical. "When selecting a management firm, boards should evaluate the needs of the shareholders and fit those to the management company," says Stephen Kessler, director of management at Andrews Building Corp., a residential property management firm in Manhattan. "Is the prospective company's focus only on managing properties, or also on brokerage, renting stores, selling insurance or refinancing underlying mortgages? If so, are they putting personal gain before the interests of the property?"

The board president at a 75-unit co-op on the Upper East Side says she had the co-op's counsel review the management firm's contract before signing, something every board should do. "We have a fine relationship based on trust," she says of her agent. But trust goes only so far, warns Neil Sonenberg, a certified public accountant and partner with the accounting firm Rosen, Seymour, Shapss, Martin & Co. in Manhattan. He advises there be a minimum of two people—at least one from the board—signing off on large purchases. He relates the story of a managing agent who ordered a co-op's lobby furniture and then shipped it to a warehouse to sell it. "The board and the management firm let him authorize everything. This man had been working for the building for years, so the co-op trusted him."

Marc Taub, a certified public accountant and partner with the Manhattan-based accounting firm Ellenbogen Rubenstein Eisdorfer & Co., LLP, recommends that one board member be chosen to pre-approve ordinary expenses, for purposes of control. "That person should inform the treasurer of the approvals," he says. "Major expenditures should be approved by the whole board."

Requiring two signatories on checks above a certain amount—a board member's and the managing agent's—helps prevent fraud. While many attorneys advise this approach, Kessler says none of his properties require dual signatures because "it's insecure and adds red tape. We have a bond which protects against the theft of money," he explains, "and we have employee dishonesty insurance, which insures against an employee's dishonesty." However, some other firms require dual signatures even on checks cut for ordinary expenses.

Working with Vendors

To avoid kickbacks on capital projects, professionals recommend that the board get at least three bids from different sources. Bids should come back sealed, go to the architect or engineer and then be opened in front of the board. "The board needs to shop around, do its homework," says Taub. "They can't just rely on the managing agent for sources."

According to Bob Anesi, a partner with the Manhattan law firm Anesi & Associates, which specializes in detecting institutional fraud, including fraud against and within co-ops, condos and management firms, "For significant jobs, you should use an independent company to give the building a good estimate of what work has to be done. Then have that body monitor the bidding process and the work itself. Today the construction industry is more competitive than ever, so I think there's very little bid-rigging to inflate prices."

The propriety of gifts passed between those working with co-ops and condos as well as to board members is always an issue. "There's the cash gift the board gives a manager for extraordinary service," says Kessler. "We have a policy that all such gifts be disclosed to the owner of the company, and then it's not a problem," says Meisel. "However, during Christmas, all gifts of cash or gift certificates are sent back. Even if they're small, they give the appearance of impropriety," he adds. "Every business curries favor with their clients with very small gifts. You just draw a line between a 'thank you for your business' and an inappropriate inducement."

The Active Board

"Ninety-nine percent of co-op corporate officers are honest," says Anesi. "However, boards need to be more active in their building management." While he admits that it's sometimes hard to get people who care enough about their building to subject themselves to all the aggravations of being on a board, Anesi points out that board members and professionals agree that the best defense against dishonest practices in co-ops and condos is an active board.