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This article was originally published in the December 2015 issue of The Montreal Lawyer.
According to the Association of Certified Fraud Examiner’s 2014 Global Fraud Study “Report to the Nations”, real estate industry fraud cases notably account for large losses, ranking second highest amongst the various industries. Although the frequency of such cases was not at the top of the list, it should be noted that the resulting losses when fraud did occur in the industry, were quite severe.
What is Fraud? It can be defined as an intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.
Unfair means can include:
One type of fraud I have encountered fairly often is Project Development Fraud. This is generally defined as the co-mingling of the funds of an investor or several investors with those of others, or fraudulently directing the funds to other projects.
How does it happen? It usually occurs in ventures where two or more partners are jointly involved in a real estate project and one partner is more active in the business than the other(s). In these situations, the more active partner generally carries the responsibi lity for the back office work, which may include the accounting, procurement, payments and overall expenses pertaining to the development project. It may also include equalization payment allocations calculations.
Without proper controls as well as oversight in place, this individual or persons working for them may be able to inflate expenses, misappropriate funds to other projects or hire a biased management company. I have encountered all of the above in real estate project development frauds over the last few years.
I have also encountered situations where two or more partners have invested in commercial real estate and failed to foresee certain issues which would arise shortly thereafter. In one case, two friends decided to invest in a large commercial property to be developed. The active partner, who had experience in the field, was in charge of both the back office as well as front office, and decided to hire related parties. The silent investor, inexperienced in the field, was not aware of this until he toured the property and noted that numerous employees had begun to leave their jobs and others related to the active partner were being hired. He was told that they left due to arguments with the active partner’s related party. The silent partner then began to question the hirings as well as all related expenses. The investigation discovered that the active partner had “borrowed” funds and directed them to his own personal projects. There was also an issue with sales tax that had been recovered and directed to another project. This led to a deterioration of the working relationship with the other partner as well as to their friendship.
Such a review is beneficial for all investors, no matter what their role in the ventures. It can be performed proactively to recommend appropriate controls at the outset or even during the project as an independent oversight mechanism.
About the Author: Corey Anne Bloom, CPA, CA, CA·IFA, CFF, CFE is a Partner in MNP’s Investigative & Forensic services division. She is a Past-Chair and Regent Emeritus of the Association of Certified Fraud Examiners Board of Regents and has been invited to speak in Canada and internationally multiple times.
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