On October 22, 2015, Judy Sue and William Stratas addressed the Ontario Legislative Assembly committee that is reviewing Bill 106, the Protecting Condominium Owners Act.
Below is the official transcript of their comments to members of the committee:
The Chair (Ms. Soo Wong): I believe that the next group coming forward is Eagle Audit Advantage Inc. I believe we have William Stratas … Okay. As you heard, you have 10 minutes for your presentation, followed by five minutes of questioning. In this turn, questioning will be coming from the official opposition party. You may begin at any time. Please identify yourself for the purpose of Hansard.
Mr. William Stratas: Yes, thank you. William Stratas, managing director at Eagle Audit Advantage Inc.; and Judy Sue, certified fraud examiner, Eagle Audit Advantage Inc.
At the outset, I’d like to acknowledge the presence of our own personal MPP, the great member from Trinity– Spadina, Han Dong. Thank you for joining. I think you’re a guest to the committee.
Mr. Han Dong: Thank you.
Mr. William Stratas: Thank you, sir. We have a question for the committee. It’s a very important question. Which is easier: to steal candy from a baby in a crib or to steal $150,000 in one year from a condominium corporation? This is not a trick question. I’ll answer it for you … The answer is the condo, because a baby has a built-in alarm system. A baby will immediately scream and cry. In condominiums, by contrast, financial crimes are typically silent crimes with vast potential for victimization of the owners. Contractors and property managers can take advantage of the lack of sophistication of typical volunteer directors who sit on condo boards. These persons are easy to dupe and manipulate.
Matters become even more dire if one or more directors is tempted to disregard their fiduciary duties and participate in frauds themselves. The lack of sophistication of volunteer directors and failures of governance oversight are the core vulnerabilities of condominiums to fraud.
Obviously, you cannot legislate higher diligence of volunteer directors. So at the root of the consumer protection theme of the new act, our ministry officials have proposed a very strong licensing and enforcement regime on the management industry. Judy and I are among the strongest supporters of these measures proposed by the ministry, in their entirety and without dilution. We cannot emphasize that enough: without dilution. I will speak and expand a little more on those matters in a moment.
But first, a little bit of history: Judy and I have perhaps the most unique background story of any persons appearing before you. Seven years ago, we were ordinary condo owners in a downtown building, she with her suite and mine with mine, both of us being original buyers in what is now a 25-year-old building.
Suddenly, by unique circumstance in the spring of 2008, we came together as a team to run for election to our condo’s board of directors. Judy will pick up the story from there.
Ms. Judy Sue: Yes. We learned that the board had lost $142,000 by signing a cheque for a 100% upfront payment to a contractor for delivery of water-efficient toilets. It turned out that the contractor certified the cheque, took the money, delivered nothing and could never be found again.
Our condo board directors were completely in the dark about what happened and seemed incapable of any remedial action. We believed that something deeper was improper, so we decided to take action. We ran as candidates for the board of directors. We were elected by an enormous margin: eight to one, far bigger than Justin Trudeau’s victory.
With that mandate, as two new directors on a five-person board, William and I undertook an extremely detailed examination of every single expense transaction from the previous three years. We discovered tens of thousands of dollars of improper expenses beyond the missing $142,000. Shortly thereafter, we terminated the management company and the following day we launched a lawsuit for $306,000 in damages for negligence, theft and fraud, as alleged.
The litigation ended in a settlement with full recovery and much more. We served on our board for a total of four years. During that time, we networked our success to other condo buildings. We learned that all condominium corporations are equally vulnerable to financial exploitation and victimization by trusted persons of authority, including managers and sometimes the directors themselves.
In 2013, we applied the success of our own condo’s recovery and the skills we had developed during our past services as directors and founded Eagle Audit Advantage. We are Canada’s first and only professional consultancy focused on prevention, detection and investigation of frauds in condominiums.
Let me summarize for you the typical kinds of frauds we find in our engagements: phony invoices, phony payroll, duplicate billings, false tendering, cash skimming, embezzlement for personal-use purchases of wide scope, forged documents and kickback payments from contractors.
How is it possible that such a wide scope of financial misconduct could occur in condominiums? Well, number one, complete absence of internal controls in some management companies and two, lack of supervision of managers at the buildings.
In their marketing materials, all management companies claim to have best practices in place. We have found that in some companies, there appear to be absolutely none. This problem appears in all sizes of management companies, including some of the largest ones. When there is an absence of internal controls at a management company, it can permit an astonishing scale of losses by fraud. As you know, the ultimate losers are condominium owners, ultimately putting up to one million condo owners in Ontario at risk.
Mr. William Stratas: Judging by Judy’s comments, I am sure you can understand why some persons in this industry despise us and wish that Eagle Audit would simply disappear. Judy and I have the audacity to seek the truth, to ask the hard questions, to look behind doors that no one wants to open and to confront the underbelly of fraud and corruption that permeates some segments of this industry—not all, but some.
We believe that a large swath of the condominium industry, including some boards and even professionals, appears to suffer from a culture of complacency and possibly a willingness to be blind regarding the frauds that occur in condominiums.
Now briefly, if I may, I wanted to add some words of praise regarding the ministry officials. By contrast to that attack we sometimes sustain in the industry, one group that has very much appreciated our efforts with wide- open eyes is the ministry officials who have been managing this condo act reform process since 2012. We have worked closely with them through this time and they have welcomed our contributions with high enthusiasm. Judy and I have nothing but great praise for these ministry officials, some of whom are here today, too numerous to mention by name, of course. We believe they have executed to the highest ideals of the professional public service of our fine province.
Mr. Clerk, if I may ask that you could circulate this to some of the members; thank you, sir, for the interruption.
Now I would like to briefly address some of the points raised in ACMO’s legislative brief. I’m going to go through this very quickly. Obviously, we’ll give you some backup in writing, okay? But I want to touch on some of the issue sheets they’ve raised. If you want to skip to your booklet, you may.
Issue 21, page 26: As I said, we advocate that this committee not dilute the provisions for enforcement and inspection proposed in the Condominium Management Services Act. We strenuously urge you to avoid dilution and we respectfully say that some of the proposed ACMO amendments are a strong dilution, for whatever motives; for example, issue 21. There is a need for that background information to come forward from ACMO files, and we would certainly expect that it do so.
Again, I’ll skip through quickly.
Issue 22—turn the page: “Notice to the registrar.” The notice period of five days is just fine. You know why? A lot of damage can be done in 30 days. Timeliness is important; it’s simple; it can be done electronically. No one should complain. Reasons for termination of managers absolutely must be disclosed. The industry recycles its duds. This is a huge problem. The licensing regime needs to know the real story about what’s happening in terminations or, shall we say, voluntary departures. Whatever the case, put it on paper, put it in writing, disclose fully and transparently. Transparency was supposed to be one of ACMO’s themes.
Issue 23, page 29: Proactive disclosure of these ownership changes at the corporate level are very important to prevent shell games. This was part of the discussions we had with the ministry officials. Shell games in ownership and, most of all, directors, who have fiduciary responsibilities higher than just management—these games cannot be allowed to avoid and evade the accountability that happens when management companies know they’re doing the wrong thing.
Issue sheet 24: again, ownership shell games. That’s the reason the ministry needs that provision. It would put the ministry in control immediately if a bad situation developed. Otherwise, with some of these dilutions, the ministry will be in catch-up mode. That’s not the place you need to be when you need to act quickly to defend owners’ interests.
Turn the page, 25, as we close: vital disclosures. These are very vital. And I want to say, trust funds: They mention trust funds twice. A quick example in closing, Madam Chair: They claim, “The real estate industry handles trusts funds, but we don’t.” You know what they handle? They handle millions and millions of dollars of operating funds on a day-to-day and hour-to-hour basis. They need a high level of oversight because it’s even greater exposure. They’re handling millions of dollars of operating money. Thank you.
The Chair (Ms. Soo Wong): I’m going to turn to Mr. Barrett: Do you want to begin the questions?
Mr. Toby Barrett: Thank you to Eagle Audit Advantage. There has been certainly much discussion over the last several years on the impact of fraud on people’s insurance premiums. For example, car insurance and auto fraud. Certain measures have been taken to combat that. Part of that did involve this particular ministry, for a while anyway, on tow truck fraud and what was going on here. This is a ministry that does deal with scams and other fraudulent activity like that.
Do you feel the expertise of this ministry is represented in the legislation itself? Are there amendments that should be made to crack down on this somehow? Because we are creating a law here.
Mr. William Stratas: Absolutely, but I do not believe, personally nor professionally, that you need some higher level than what’s represented in this act. Ultimately, sir, as you know, many parts of our economy are in a sense self-regulating, self-reporting. You can only have so many condo cops running around.
However, our point is, Member Barrett, that where there are anomalies occurring, where there are questions and suspicions, we would strongly say that the ministry needs to act swiftly, and I mean very quickly. So these proactive disclosures—none of which are onerous to the industry, contrary to their brief—are necessary to keep the eye of the ministry able to open that file instantly, and not to be in reactionary but proactive mode, if there is a problem detected in any way, from either a whistle-blower or a question regarding a complaint or anything that’s raised in the industry.
We think the mechanisms are absolutely fine as outlined in this act. It is heavy enforcement, it is potential and it’s also, by the way, deterrence, as you can well understand. This is a strong message to these providers that they need to clean up their act now.
Mr. Toby Barrett: When I think of the insurance industry, many of the companies are very large and they have the resources to deal with fraud. They don’t seem to do a particularly good job of it in many cases. I just wonder, how can a condo board—where are they going to have the expertise to prevent these kinds of scams and things going on?
Mr. William Stratas: Having sat on our own board, and assisting many corporations right now, let me explain it. Most corporations have blanket directors and officers liability coverage. Many also have fidelity coverage regarding their employees or their contractors. Fidelity insurance is a known product out there.
Most importantly, management companies themselves have fidelity coverage, but you would be shocked at how completely unwilling management companies are to invoke their insurance. Even though it’s in their contracts that they provide that fidelity coverage for any loss, they are so reluctant to pull it and to simply indemnify their victimized clients. It’s quite an interesting dynamic. They all are fully insured; they just don’t want to invoke it for some unimaginable reason. That’s their business, but you cannot, in my opinion, put a super level on top of that of some kind of insurance on top of insurance.
Everybody here is fully insured. The question is invoking it; they have to be willing and able to. Do they even get the right advice from their professional advisers? As I mentioned in my comments, the apparent willful blindness of even some professional advisers in this industry: “Oh, you know, don’t make that claim. You’ll never get your”—what do you mean? You make the claim. It’s in your policy; you’ve paid for it. It is really astonishing how reluctant some of these players are even to invoke that insurance. They’re all fully covered, sir. There is no deficiency in the insurance model in this industry from that perspective, as you mentioned.
Mr. Toby Barrett: And beyond insurance or mitigating risk, are these people being caught? Do our enforcement or police have the expertise to deal with this kind of white-collar crime or whatever you want to call it?
Mr. William Stratas: Member Barrett, you have civil recovery and you have criminal. We’ve been involved in and we are presently involved in cases involving both. However, I underline to the member and to his colleagues: You don’t get recovery through the criminal process.
However, this is an interesting question. The criminal process has an importance for public deterrence and public denunciation. It is really interesting when you compare the record of prosecution and pursuit of management company and manager misconduct in the United States, in major jurisdictions like Florida and other places—I follow all this on the blogs, on the Web. They are always prosecuting and charging major crimes. In Canada, nothing. It’s very silent about that. People seem somehow not wanting to make the call.
The Chair (Ms. Soo Wong): Mr. Stratas and Ms. Sue, thank you so much for your presentation and for your written submission.