Managing agency malfeasance - The theft of funds from sectional title schemes

Managing agency malfeasance: The theft of funds from sectional title schemes by Professor Graham Paddock

According to a recent Personal Finance report, the Estate Agency Affairs Board is dealing with another theft by a managing agent, this being the most recent in an ongoing series of similar thefts of substantial sums of money. The legal officer for the EAAB confirmed that the Cape Town-based managing agent involved has agreed to repay R400 000,00 to one body corporate and that another theft is being investigated.

The prospect of the managing agent repaying the stolen money sounds very positive, but it does not address the scheme’s current cash flow needs. However, any owner who sells his or her unit before the full amount is repaid will not recoup the loss.

The fact that the EAAB operates a Fidelity Fund against which schemes can claim when managing agents steal their savings is also some comfort. However, such a claim can only be progressed once the persons who stole the savings have been sequestrated, so it can take 4 to 7 years to finalise the claim and receive the compensation. This is cold comfort to owners facing the choice of paying special levies or borrowing funds at very high interest rates.

On the one hand, there have been regular reports of managing agents stealing scheme funds ever since the late 1970s. So it is reasonable to expect that owners and trustees should be aware of this risk and should take steps to protect their property, for example by ensuring that any person who has access to scheme funds is covered by a fidelity insurance policy.  On the other hand, owners in sectional title schemes are constantly looking at ways of reducing their expenditure to keep their levies as low as possible. This means that most schemes do not arrange for fidelity insurance; in practice most schemes have no cover against theft by trustees and only the EAAB’s “last resort” cover for theft by the managing agent or his or her employees.

Schemes that employ managing agents can reduce the risk of theft of their funds very considerably by insisting that their money be kept in a separate account and regularly checking the balance in that bank account. With Internet banking and modern software systems, there is no reason that trustees should not be able to check the status of the body corporate account at any time. 

When a managing agent uses a “bucket account” system (in which each scheme’s funds are mixed with those of other schemes) it is impossible for trustees to exercise direct control. They are always dependent on the managing agent’s reports and information as to the state of their finances. Many managing agency thefts have gone undetected for long periods, often starting with small “borrowings” that increase over time and are covered by the application of one scheme’s reserve funds to other’s immediate expenses.

Trustees need to understand the inherent risks involved in allowing their scheme’s money to be mixed with other money and if they choose not to insist that the money be kept in a separate account they should, to avoid charges of negligence, take active steps to reduce that risk. They must watch the funds very carefully on a continuing basis and should also insure against the risk of theft. 

Courtesy: Paddocks

Adjunct Professor Graham Paddock is the Senior Partner at Paddocks and the Director of Mystrata South Africa.