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Feb 15, 2013 | Article  Jonathan H. Fine

Fraud Prevention Procedures Lacking

Most of us have seen legal agreements that have many clauses that seem unnecessary. Every one of these agreements evolved as new clauses were added, either as a result of a mistake a lawyer made in his/her last agreement or, out of fear for making one in this agreement. As a result of several very high profile fraud cases involving condominium corporations, it is time for the condominium industry's fraud prevention procedures to evolve.

The frauds involved the head of a property management firm, Manzoor Khan.

Fraud #1 - Khan rigged the bids for lucrative construction work so that a company he controlled won the bid. The contract price was about twice the actual price and he got the work done at the actual and pocketed the difference. The case also involved forged architect's payment certificates.

Fraud #2 - Khan arranged loans in the names of various condominium corporations but totally outside of knowledge of the boards of directors. He tricked lawyers and lending institutions with lies and forged documents, using the proceeds from the next loan to service the previous loan. The only face that anyone involved in these loans ever saw, was Khan.

There is in excess of $25,000,000 missing and Khan is thought to have fled to Bangladesh.

How could this happen?

This was truly the perfect storm of events which Khan recognized and took advantage of. So what were the elements of this perfect storm:

• we have become too lackadaisical. The line between business friendships (promotion) and professionalism has become blurry

• from a management perspective, too often the tail wags the dog which has lead to a perception among some, that managers are in charge of the business of the condominium corporation

• fraud prevention safety checks have become watered down and bastardized to a point where they are ineffective. Formality has given way to casualness

• we trust too much at times where trust must be documented and proven, rather than assumed

• technology can be easily manipulated by a fraudster to create forgeries and other false documents

What can we do to prevent fraud in the future? Here are some ideas:

1. Trust less. Require personal attendances for the signing of significant documents, with photo ID. Insist that a director be present to sign a significant document. We should re-instate the procedure of having a subscribing witness who swears an affidavit that he/she saw the documents duly executed.

2. Don't accept documents at face value. Assume that signatures on a significant document that were not signed in front of you, are forged, and obtain proof that they are genuine.

3. Be wary of email. Email accounts and false aliases are easy to obtain. Make a point of seeing people face to face for important transactions.

4. Make presenting photo ID a condition of being elected as a director of a condominium corporation. Condominium corporation's should keep an historical registry of directors with proof of ID. People dealing with the condominium corporation can use this directory to make sure that they are dealing with a director and not an imposter.

5. Suggestions for changes to the Condominium Act, 1998:

a. a lawyer/law firm cannot register a borrowing bylaw if that lawyer (or a member of the law firm) was not present at the meeting where the borrowing by-law was confirmed by the unit owners;

b. upon registration of the by-law, the lawyer must certify that he or she, or that a member of the law firm was present at the meeting and that the by-law was in fact passed by the requisite majority;

c. the condominium corporation's legal counsel should be required to attend each annual general meeting;

d. the condominium corporation's historical lawyers and accountants should be shown on every status certificate, with length and dates of service indicated thereon;

e. there should be a central registry of condominium directors similar to the system required with respect to business corporations.

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Jonathan H. Fine

Jonathan H. Fine Partner

B.Sc., J.D., F.C.C.I.

jfine@finedeo.com
905.760.1800 x226
905.760.0050

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