Digital Payment Platforms May Be Secretly Routing Your Building's Money

Think your digital payment system is safely depositing maintenance fees directly into your building's account? Think again. This eye-opening episode reveals how a Queens co-op discovered their payments were making mysterious detours through unauthorized intermediary accounts before reaching their bank.

Carl Cesarano, managing shareholder at the auditing and accounting firm Cesarano & Khan, exposes the hidden risks lurking in popular payment platforms. You'll learn why that convenient digital system might actually be creating dangerous blind spots in your financial oversight, how these payment delays can wreck your building's cash flow planning, and what red flags to watch for when reviewing your bank statements.

Whether you're a treasurer trying to track down missing payments or a board member wondering why your budget projections keep falling short, this episode delivers the insider knowledge you need to protect your building's finances. Habitat's Emily Myers conducts the interview.

Thanks for listening. Subscribe to this podcast for more stories on how New York co-ops and condos have solved a myriad of problems. Brought to you by Habitat Magazine, the "bible" that hundreds of board directors turn to every day!

Transcript

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Emily Myers: Welcome to Problem Solved, a conversation about challenges facing New York co-op and condo board directors. I'm Emily Myers with Habitat Magazine, and I'm joined by Carl Cesarano, managing shareholder at the auditing and accounting firm, Cesarano & Khan, thanks so much for being here. 

Carl Cesarano: Thank you very much. 

Emily Myers: So most boards assume digital payment platforms are a safe and efficient way to manage payroll and expenses, but what if they're actually creating blind spot?

In this episode, we're gonna look at how a lack of transparency in these systems can open the door to financial mismanagement, delayed transfers, and even the diversion of funds. More importantly, we'll explore what boards can do to stay ahead of potential risks. Carl, this issue came to your attention when a co-op in Queens discovered payments weren't going directly into their official bank account.

Is that right? 

Carl Cesarano: That is correct, Emily. The typical flow for the revenue side is there's an originator, which is the co-op or condo owner, or perhaps even an homeowner's association, the the owner of their unit. Then there is a third party, whether you wanna call it a sender, an intermediary, a clearing house.

Who actually facilitates the movement of the money. Now, the next phase of this is after that part. It typically should go to the receiving financial institution of the co-op condo or homeowners association. And then from that point to the individual co-op condo or HOA bank account, what we have noted in several instances.

Is between the point of the third party sender or clearinghouse, um, payments. Were making a stop into another account before going to the receiving depository bank, and then ultimately to the account of the co-op condo or homeowners association. We've noted situations where, um. It was actually not the name of the co-op condo or HOA.

And we've also noted situations where it goes into what was framed as a kind of clearing or sweep account in the name of that particular co-op condo or homeowners association. So there was a bit of a lag, and in many of the cases I. The board was not aware of that account, and they did not have control of that account.

And the argument always seemed to be while we were doing our audits is, well, your money ultimately got there, didn't it? And we said, well, yeah. And in the cases we saw, the money ultimately got there. But now this creates a whole different level. Of doing a risk-based audit. We have a new level of risk. We have to design procedures to look for this.

You have issues of unauthorized accounts opened on behalf of these boards. Nobody at the board level is aware of it. So you do have a lot of room, um, for other types of potential fraud, whatever that may be. 

Emily Myers: So what possible reasons might an agent or platform have for diverting these funds? I mean, are there legitimate explanations?

Carl Cesarano: Well, especially in, in the rental industry, have this concept of a sweep account where they say, look, we kind of sweep everything into one account and then we redistribute it, uh, where it belongs. Another explanation that I heard was. It goes into this account and if the transaction clears, then it will move through the system.

Emily Myers: So even if no money is technically lost, what are the financial risks for these delays for co-op and condo boards? What should they be aware of? 

Carl Cesarano: So the, the defense always seems to be, well, please quantify your loss. What did you lose? So you said there was an intermediary account. You said you ultimately got your money and, and the vast majority of cases, that is true.

However, we don't know if that will always be the case. Once there's a loss of control and a lack of transparency, anything can happen. That's number one. Number two, it's the lag and the time value of money. So hypothetically. If that adds another day, two days, three days, week for us to get our cash flow, then it really hurts the budget because we have planned for every dollar coming in by a certain date so that we can then pay our operating expenses.

But one of the important things in risk-based auditing, which is what you're required to do, is to go in and evaluate risk. Based on that risk, you design procedures to look at the transaction flow, the workflow, and to opine as to whether you know, this flow is working and this will determine the amount of testing you have to do.

Emily Myers: How did this discovery come about? Because of course it's gonna be useful for boards to hear how you uncovered this intermediary. Bank so that they can see if the same situation is happening in their financial transactions. 

Carl Cesarano: Well, the one that really sticks out in my mind was when you look at the same platform using, say, managing agent A, and you could see the flow, the coding, how the money comes in, and it should go from in theory.

From, say, your account to your bank, to the intermediary and from the intermediary to my bank and then into my account. But then we've seen where it was actually coming from another account. 

Emily Myers: So as an auditor, you were able to see it perhaps more clearly. 

Carl Cesarano: If you're not looking for something and you, you do your planning and you your order procedures and.

You know, there's a certain sample selection. You know, there's an inherent risk that you may not see because you're not reperforming every single transaction. You're looking at selective transactions, and of course, it's all about transparency and informing these boards as to what's going on, right? You have to look at this stuff in real time because everything is outsourced on a third party company.

Emily Myers: So let's, uh, look at then what carbon condo boards can do to improve their oversight of digital payments. But first, can I just ask you what steps the board took once they discovered this issue? 

Carl Cesarano: Well, of course, you know, they had a meeting with us. We explained, um, the flow of the transactions. They got their legal counsel involved, got their managing agent involved as well.

In many cases, there was a change of. Keen, if you will, because there was no transparency. They weren't informed that they didn't, they felt that, you know, their planning was totally off because of it. They thought it was inappropriate. I mean, all these things are, are valid points and in some cases, uh, it was cease and desist or, or else, let's put it that way.

Emily Myers: So then how do carbon condos get digital transparency and more oversight of their platforms they're using? 

Carl Cesarano: The role of the treasurer is very important in this matter. You're, you're kind of the custodian of a lot of things. Financial is to really look at the reports, look at the flow, look at the bank statements.

You know, this issue is not only on the revenue side, it, it also happens with respect to the payment side, so that, that's become an issue as well. And I, I would say. That's the more common issue on the electronic platform world. 

Emily Myers: So what's the solution here? As you pointed out, digital payments are here to stay.

What can boards do then to protect themselves? 

Carl Cesarano: Well, I would say that you must have approval of everything over, let's say $500 can even make the benchmark lower, um, when these charges are made management. Or the board should get these receipts immediately. There should be a reconciliation of the receipts to the bill, and then a reconciliation of that to the underlying books and records, uh, of the co-op or condo or homeowners association.

Emily Myers: Carl, thanks so much. So many good reminders there for boards on financial management and adapting to the use of digital claimants. Thank you. 

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The result, clear financial reporting, confident decision making, and greater transparency for your organization. Trust the firm that understands the unique challenges of co-op and condo financial management. Visit ck-cpas.com to schedule your free consultation. Cesarano & Khan and the specialized co-op and condo financial services done right.