Members of home owners' associations (OAs) in Dubai may still be able to embezzle funds under their control despite the introduction of safeguards, strata management experts have warned. Under new legislation, the associations will be in charge of hundreds of thousands of dirhams, which will be pooled to fund the maintenance of residential communities' common areas including lifts, sporting facilities and gardens.
In countries where OAs are established, there have been reports of general managers or members of an elected board stealing from their funds. Last month, the head of a US homeowners' association management company in Colorado was reportedly accused of embezzling US$42,819 (Dh157,000). And in St Petersburg, Florida, the former property manager of a condominium complex turned himself in to police to face charges that included transferring $250,000 to his account and using it as a down payment for a $2.6 million home, newspapers have reported.
But while embezzlement can financially cripple an OA and leave it without the resources needed for basic building maintenance, owner apathy is a much more immediate threat to their viability. Unless owners took an active interest in their association - attending meetings, examining budgets and voting on issues such as community rules and maintenance contracts - the system would suffer, said Peter Crogan, the chief executive of BCS Strata Management Services. BCS manages 130,000 properties under strata title in Australia and is helping to prepare communities in Dubai for the introduction of the new legislation.
An added danger can arise even if only a small group of owners regularly attend meetings, thereby setting the agenda for an entire community. It is a realistic threat, considering the number of overseas investors who buy to rent. "The biggest problem that we're going to have in the Strata Law is complacency, in that owners will not bother to vote," said Mr Crogan. Responsibility for the management of common areas will pass from project developers to property owners within 12 months of the Strata Law coming into effect.
The law was passed in April, but its impact will not be felt until supporting regulations set out how they will operate on a day-to-day basis. These regulations are likely to be passed before the Cityscape Dubai property exhibition in October. On Australia's Gold Coast, where strata title and OAs have been in operation since 1965, it can cost about 700,000 Australian dollars (Dh2.2m) per year for the maintenance of a development containing about 200 apartments.
The reserve fund, which covers a building's maintenance needs for 10 years, would require another 300,000 to 400,000 Australian dollars per year. While the Strata Law is expected to include safeguards to prevent the misappropriation of these funds, no system is infallible, specialists say. Richard Thompson, the owner of Regenesis.net, a US company specialising in OA management, said embezzlement from such associations had historically been a minor concern because in the early days of a building, the funds were small and sometimes dedicated only for maintenance.
But would-be embezzlers could be enticed as they watched funds accumulate over the years and turn into large reserves, he said. Also, some of the developments to come to Dubai are so enormous and complex, they will require a significant fund at the outset just for basic maintenance. "Wherever you've got a large amount of financial transactions, [embezzlement] happens," said Mr Thompson. "There's no doubt under the sun."
Strict rules placed on any financial transactions by an OA, with the associations operating under the watch of Dubai's property regulator, should minimise the risk, said Mr Crogan. A professional company appointed as the OA's general manager would supervise financial dealings, and allow its records to be externally audited, Mr Crogan said. A management board - three to seven people elected from a building's owners - will also have full access to the financial records.
If a member of the board stands to receive a financial benefit from an OA decision, for example heading a company that has been awarded a substantial maintenance contract, that person must declare the interest and abstain from voting. According to experts, the real danger arises when a single property owner within a building is elected as the OA's manager. "The embezzler is one that usually is entrusted with substantial funds with no one else overseeing them," said Mr Thompson. "After a period of time, the temptation just gets too great.
"The key to avoiding embezzlement is setting up a system with unrelated parties watching the cookie jar." Jane Dalton, a solicitor at the international law firm Trowers and Hamlins, said certain safeguards have been included in the Strata Law, but there were still gaps to be filled and they have not been made public. "There are specific requirements in the law for funds to be placed in separate bank accounts, but it comes down to whether the new regulations will have provisions for accounts to be audited," she said.
Studies published by Regenesis.net advise OAs to implement several key safeguards. Cheques should require two signatures, bank statements should be duplicated and sent to two different parties and the same person should never write, sign and issue cheques, the company advises. In addition, the reserve fund should be kept in a separate bank account to the regular operating funds. Another important measure is for the OA to take out a form of employee dishonesty insurance that reimburses the association up to a certain amount in cases of theft, legal experts say.
"The underlying protection for any such organisation is to oblige the managers to contribute each year to some sort of central fidelity fund," said Walter Robinson, an associate at the law firm Al Tamimi and Company. "This gives the public comfort that if anyone swipes the money, there are resources to repay members of the association whose funds have been misappropriated." @Email:rditcham@thenational.ae