How HOA Fraud Puts Homeowners and Communities At Risk

How HOA Fraud Puts Homeowners and Communities At Risk

There’s no one-size-fits-all approach to homeowners associations (HOAs). Different regulations apply in different states, and individual communities apply their own rules, which makes the HOA landscape look a little like the Wild West. As a resident, you need to know how your HOA works and understand some essential ways to protect yourself from fraud and scheming.

Unfortunately, fraud and deception are common occurrences in HOAs — and it’s something that homeowners need to be aware of so they can protect their investments. After all, if you want to ensure that you continue to enjoy your dream home, you’ll want to take steps to avoid falling victim to nightmare scenarios.


The Gallego Mafia


The Gallego Mafia: A Miami HOA Gone Rogue

A recent story emerging from Miami highlights the serious consequences of alleged fraud and corruption in HOAs. The Hammocks HOA—a Miami homeowner’s association—is facing charges of racketeering, money laundering, fabricating evidence, and using shell companies.

According to State Attorney Katherine Fernandez Rundle, the HOA leadership, headed by Marglli Gallego, is accused of stealing at least $2 million from the maintenance fees of their neighbors. At the heart of the scheme, the HOA wrote checks to sham companies that did not provide services. Over time, the organization allegedly diverted the money to their own and associates’ pockets.

Shockingly, the board stopped holding public meetings, leaving homeowners in a state of limbo and confusion. Meeting in secret for nearly five years, the board appears to have hidden its activities from neighbors and refused to hold new elections.

In response to the charges, a judge has appointed a receiver to take control of the HOA and work with a provisional board until new elections can be held. Residents are asking the state to look at Florida Statute 720—which regulates HOAs—to prevent future cases of abuse.

HOA Fraud To Watch For

Unfortunately, cases like the Gallego mafia’s racketeering are all too common in HOAs. The rise of “suburban greed” has created a fertile ground for fraud and money laundering schemes. The key is to recognize these schemes and know how to protect yourself from them.

1. Embezzlement

In the Hammocks HOA fraud seen above, Margli Gallego and her associates are accused of embezzling funds. Embezzlement occurs when members of the HOA board—or their associates—use money earmarked for maintenance fees to pay themselves. In many cases, this involves using shell companies or fake invoices to conceal their activities.

A lack of transparency in the financial records of an HOA can make embezzlement challenging to spot. Thankfully, most homeowners associations are required by law to provide their members with the most recent financials. Use these protections to ensure that no one uses HOA funds for their own purposes.

2. Falsified Records and Kickbacks

In some cases, a board may falsify records or manipulate the books to hide their activities. This can be as simple as creating fake invoices for services that were never rendered or creating fictitious vendors and paying them for nonexistent work. In many cases, these payments take the form of kickbacks, where a portion of the money is sent back in secret to those involved.

When HOA boards aren’t willing to operate in public, shady activities and falsified records become easy to hide. The best way to protect yourself is to look closely at the paperwork and ask questions when something isn’t clear.

3. Corporation Law Violations

Most HOAs operate as corporations and are subject to corporate law. This includes regulations related to financial transactions, conflicts of interest, and other matters. In some cases, fraudulent activities can involve violations of these laws, such as insider trading or excessive payments for goods and services.

But corporate law can be complicated to understand. One way to protect yourself is to ensure that your HOA board includes competent individuals who understand how to follow these laws. It also helps to hire a professional corporate lawyer on occasion to make sure everything is in order.

4. Unreasonable Fines and Fees

Another common way HOAs take advantage of homeowners is by tacking on excessive fines and fees. In some cases, these can be justified when they’re related to violations of contracts or HOA rules. But in other cases, they can be arbitrary, unnecessary, and even illegal.

Some HOAs impose rules that are impossible to follow or that trigger expensive fines for minor offenses. For instance, placing an external security camera on your property could be deemed a violation of the HOA rules and require an exorbitant fine. A new paint job that doesn’t meet the HOA’s exact specifications is another common target for fines.

5. Election Fraud and Rigging

Although most think of financial crimes in conjunction with HOA misbehavior, associations also can influence elections and change their board composition. This can involve suspicious voter registrations or ballot manipulation to get specific candidates elected.

In the Hammocks HOA incident, residents reported that previous attempts to remove the board were met with resistance. In one instance, residents attempted to gather so they could demand change, but their meeting had to be canceled because of a bomb threat, and another election saw more than half of the ballots thrown out because of alleged “fraud.” Unfortunately, these types of activities are all too common in HOAs, and it’s crucial for homeowners to be aware of them.

Steps You Can Take to Hold Your HOA Accountable

Even though the chances of your HOA falling victim to fraud are small, these incidents are on the rise. The ease of access to financial information on the internet has made it easier for fraudsters to target HOAs, so it’s important that homeowners remain vigilant. Fortunately, you can take steps to protect yourself, and make sure your HOA operates legally and ethically.

1. Understand How Your HOA Operates

The first step is to understand your HOA’s rules and how it HOA operates. Read the HOA documents carefully, and ensure that you’re familiar with all of its regulations, policies, and procedures. This will help you spot any irregularities or fraudulent activity.

2. Attend Board Meetings and Ask Questions

Become a regular attendee at HOA board meetings and ask questions about any questionable decisions. Pay attention to how your HOA spends money and look for any signs of financial mismanagement. If you are concerned about something, don’t be afraid to speak up, and enlist other homeowners to magnify your concerns.

3. Develop an HOA Crime Management Plan

It’s also essential to develop an HOA crime management plan. This should include measures such as monitoring activity, creating internal controls, and involving the police when necessary. Taking these steps can help protect your HOA from fraudsters—both inside and out.

4. Utilize Professional Resources

If you suspect that your HOA is engaging in any type of fraudulent activity, it’s important to consult a professional. This can include an attorney or accountant who specializes in HOA financial matters, as well as implementing professional HOA software. They can help you investigate the issue and ensure that everything is done lawfully. Additionally, they may be able to provide advice on how to handle the situation and prevent future fraud.



Protect Yourself and Your Community from HOA Fraud

The Hammocks HOA story is a reminder of just how easy it is for HOAs to become victims of fraud, and the damage that even a single incident can cause. But it’s not just the financial loss that can hurt. Fraud also can damage the community itself and affect its reputation.

To help keep HOA fraud from happening in your area, remain on alert, understand your HOA’s operations, and take steps to protect yourself and your community. Stay vigilant against potential fraud to safeguard your community from fraudsters—even those who may live next door.

If you ever suspect any type of fraudulent activity, it’s essential to act quickly. Stay aware and take the right steps to protect your HOA and ensure it runs properly.

Above all else, keep in mind that by working together with other homeowners, you can create a strong, secure HOA that will benefit everyone for years to come.

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