Advocating the use of a Lock Box for Community Associations

Advocating the use of a Lock Box for Community Associations

Tue, 24 Aug, 2010 at 21:10
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By: Frank Coleman, Assistant Vice President


There have been many incidents across the country where Community Associations have been subject to fraud.  In these instances, funds were not deposited into the Associations operating accounts either by the Board Treasurer or Property Management Company.   In some cases the checks were in a desk drawer for weeks, lost or not deposited at all into the checking account. In other cases, someone at the Association was waiving the assessment fee of a community member, however the payments were being recorded as paid in the accounting software.  In other documented cases, the checks were deposited into someone’s personal account or directed to a phony account and were not discovered for months.  No one likes to talk about fraud, but it does happen and it causes unit owner’s trust of the Association Board to be betrayed.  In many cases the fraud is usually committed by a friend, board member, neighbor or property manager.

How can Community Associations protect themselves from possible fraud or just unintentional deposit errors and not portray the association with a negative public image?

One feasible option is for Community Associations to use a lock box service from a Financial Institution to prevent fraud and safeguard assessment checks to assure they are properly deposited into the correct operating accounts.  How does the lock box work?   Either the Association or the Property Management company contracts with a Financial Institution for the lock box service.   The assessment checks and coupons are mailed to the main Post Office where they are held in a specific mail box for the Association/Property Management Company.  The Financial Institution picks up daily at the Post Office and captures the checks/coupons information (Association name, unit number ID and dollar amount) and deposits the dollars into the correct operating account of the Association at the Bank’s lock box operations center.

How can fraud be prevented by having checks deposited into the Association’s operating account when using a lock box service from a financial institution?

Services provided by a Lock Box can help prevent fraud

  • A Bonded Third party (Financial Institution) is depositing the checks directly into the operating account.
  • The Financial Institution will make image copies of the checks and coupons being deposited and will provide on line access for the Association/Property Management Company to review.
  • The Financial Institution provides a data file (Association name, unit number ID and dollar amount) that can be uploaded to the Association/Property Management Company accounting software package, such as QuickBooks or other property management software.
  • Provides an audit trail of checks being deposited for the Association Treasurer or the independent Auditor to review. (Treasurer or Association Board should be reviewing the banking statements monthly.)
  • If a unit owner does not pay their assessments in time, there is documented evidence that can be used for issuing late fees or legal action for collecting past assessments.
  • Faster availability of the Associations funds.
  • If there is adverse legal action against a unit owner, the lock box has the ability to flag the unit owner account and not deposit the check.  It can then be sent to the Association Board, management company or attorney.
  • Reduces labor and processing cost at the Association or Property Management Company.
  • Minimizes the errors that can result from manual data entry.

If fraud is committed and not detected for a long period of time, the Association may be limited in some of the legal and insurance options available to pursue the embezzler or recover the missing monies.  In some cases, if the Community Association Board fails to take action against the embezzler, they may be open to law suits for not performing their fiduciary responsibilities.

It is human nature to assume that our association is immune from the risk of fraud, until it happens. Then we ask how we could have prevented the fraud in the first place.  The Association Board has been given the responsibility of protecting the finances and property of the association/unit owners.  The Board should implement systems and procedures to be proactive in preventing fraud.  In today’s world of ID theft and numerous Bernard Madoff-Ponzi type schemes on Wall Street, using a lock box service is an efficient, economically sound decision to deter and discourage fraud from occurring.