Suspected HOA Fraud and Mismanagement

The two most important things to do when you suspect that your Home Owner Association (“HOA”) and Condominium Owner Association (“COA”) are being mismanaged is to keep and gather as much proof as possible to support your suspicion and follow the process outlined in your association’s bylaws to prevent from being barred from recovery.  

What are HOAs and COAs?  

In order to understand how to prevent and address HOA and COA mismanagement fraud, it is vital to understand how HOAs and COAs are structured.  Illinois homeowners associations and condo owners' associations are legal entities that operate as non-for-profit organizations.  

Generally, HOAs and COAs are managed by a group of home or condo owners who get elected to the board of directors. The board of directors usually consists of at least a president, vice president, treasurer, and secretary. These elected board members owe a fiduciary duty to the homeowner's association not to mismanage and not to commit fraud against the HOA or COA.  

The board of directors sometimes hires a management company to manage some of its functions.  

Every HOA and COA should have a book of association rules and regulations called the Declaration of Covenants, Conditions, and Restrictions (“CC&Rs”)  

The CC&Rs provide rules and guidelines for setting fees to be paid by the association members and enforcing the collection of those fees. These fees may include special assessments for an unforeseen or additional project not originally budgeted.  

Is There a Specific Law In Illinois That Governs How HOAS And COAS Are Managed?  

Yes. In addition to the CC&Rs, HOAs, and COAs may be subject to the following Illinois-specific law:  

• The Illinois Community Association Manager Administrative Rules;  
• The Illinois Community Association Manager Licensing and Disciplinary Act;  
• The Illinois Community Property Act;  
• The Illinois Common Interest Community Association Act;  
• The Illinois Condominium and Common Interest Community Ombudsperson Act;  

• The Illinois Assistance Animal Integrity Act;    
• The Illinois Human Rights Act;  
• The Illinois General Not-For-Profit Corporation Act; and  
• The Illinois Fair Housing Act.  

These documents can be accessed by visiting the Illinois Law section of https://idfpr.illinois.gov/ccico/ .  

Also, HOAs and COAs may be subject to the following federal law:  

• Federal Fair Debt Collection Practice Act; and  
• HUD Final Rule: Project Approval for Single-Family Condominiums (August 15, 2019).  

Municipalities often have their own local rules, for example, The City of Chicago Condominium Ordinance.  

Why Are HOAS And COAS Vulnerable to Mismanagement and Fraud?

The board of directors are generally unpaid volunteers elected to manage the HOA or COA’s finances, among other duties. This means that most directors have other responsibilities, such as jobs and family obligations, and don’t have the time to review every detail of every single transaction that the HOA or COA engages in.  

The lack of supervision, in combination with relatively easy access to large amounts of money, opens a gateway for specific board members or managers to be tempted to mismanage and/or embezzle funds from the association.  

How To Prevent HOA And COA Mismanagement and Fraud?

The most cost-effective way to mitigate HOA and COA mismanagement and fraud is to prevent it before it happens. Not all mismanagement and fraud occur by direct stealing of cash; often, fraud occurs through embezzlement, manipulated elections; bribery; kickbacks from a third party that the HOA hires for contract work such as landscaping or tuckpointing; or falsified financial statements and budget plans.  

Most board members do not have financial management training or backgrounds. Hiring third uninterested parties such as a CPA to handle financial record keeping, budgeting, and to do yearly taxes for the HOA or COA is an excellent way to prevent fraud, promote transparency and standardized transactions with no room for kickbacks, mismanagement, or fraud.  

Implementing a sort of checks and balances system for approving any and all financial decisions and transactions requires two or more board members to approve each transaction or a majority vote to approve transactions over a set threshold amount.  

How Do I Know If I Have HOA Or COA Embezzlement?

It is not always possible to catch fraud early in its tracks. More often than not, embezzlement or fraud is caught after months or even years of such mismanagement. Some signs that this may be occurring are:  

1. Be wary. Often hikes in assessment fees or many special assessments that seem excessive. Although sometimes we do not want to pay extra special assessments, they may be legitimate and based on the community’s actual needs for things like emergency repairs.  

2. Watch for excessive contract fees for work such as landscaping or laundry services.  

3. Note when there is heavy pushback from a board member or a manager when a vendor change for a service is suggested.  

Keep in mind that these are some signs that may indicate fraudulent activity, but they do not necessarily prove that there is actual fraud occurring.  

What To Do When You Suspect Your HOA Or COA Is Mismanaged or Defrauded?

Collecting as much information as possible when HOA or COA fraud is suspected is essential to prove fraudulent activity or mismanagement. Critical proof can be found in balance sheets, tax returns, financial statements, meeting minutes, and conversations with board members or managers.  

The Illinois statutory law provides that the HOA must maintain the following documents:  

Mandatory HOA Documents

1. The association's declaration, bylaws, and plats of survey and all amendments of these
2. the rules and regulations of the association, if any
3. If the association is incorporated as a corporation, the articles of incorporation of the association and all amendments to the articles of incorporation
4. minutes of all meetings of the association and its board of managers for the immediately preceding 7 years
5. all current policies of insurance of the association
6. all contracts, leases, and other agreements then in effect to which the association is a party or under which the association or the unit owners have obligations or liabilities.
7. a current listing of the names, addresses. email addresses.telephone numbers, and weighted vote of all members entitled
8. ballots and proxies related to ballots for all matters voted on by the members of the association during the immediately preceding 12 months, including but not limited to the election of members of the board of managers
9. the books and records for the association's current and 10 immediately preceding fiscal years, including, but not limited to, itemized and detailed records of all receipts, expenditures, and accounts

The above HOA or COA documents must be available for any member of the association “to inspect, examine, and make copies” upon a written request. The next step is to review the CC&Rs for specified procedures for addressing suspected fraud.  

You must generally bring a request for an external audit to the board. If the board refuses to hold a special meeting to approve such an audit, you may bring your concerns to law enforcement by making a police report requesting an investigation.  

Checklist for Building Your Case for Investigation

• Define the issue(s) clearly.
• Collect and organize governing documents and financial records.
• Maintain a log of all communications.
• Interview residents and gather statements.
• Take photos/videos of any violations.
• Familiarize yourself with state and local HOA laws.
• Send a formal demand letter to the HOA.
• Consult with an attorney if necessary.
• Prepare for mediation or arbitration.
• File a complaint with state authorities if applicable.
• Build a legal case if litigation is needed.

Following these steps will help you build a strong, well-documented case for your HOA investigation. Whether the goal is to achieve transparency, enforce your rights, or pursue legal action, thorough preparation is key to a successful outcome.

If you have any questions or concerns about HOA or COA fraud or suspect such activity, please contact O’Flaherty Law, P.C. for further information.