Public housing authorities (PHAs), like any business, face risks from employee theft, fraud, and forgery that could compromise operations and finances. To mitigate these risks, the U.S. Department of Housing and Urban Development (HUD) mandates crime insurance coverage under the Annual Contributions Contract (ACC).
At HAI Group®, we offer essential crime insurance coverage to help PHAs meet HUD's requirements and safeguard their funds and assets.
Understanding these requirements is key to ensuring your agency remains compliant and protected. Keep reading to learn how HUD-mandated crime insurance coverage works, why it’s essential for your PHA, and how to implement fraud prevention strategies that help protect your assets.
Understanding HUD's crime insurance requirements
HUD's ACC requires the following crime insurance protections for PHAs:
- Fidelity bond/employee dishonesty/theft, disappearance, and destruction: This coverage protects against direct losses of or damage to money, securities, or property due to employee theft, fraud, or forgery.
- Theft, disappearance, and destruction coverage is mandatory only if the amount of cash and checks on hand at any one time exceeds the amount prescribed by HUD, which is currently $5,000.
While HUD requires crime coverage, it does not specify a universal dollar threshold. PHAs must determine the appropriate limits based on their unique financial operations. To determine the proper coverage limits, PHAs should assess factors such as:
- Annual operating budgets and the volume of funds managed.
- Number of employees with access to cash or the authority to sign checks.
- The agency's financial exposure in the event of theft or fraud.
HUD field offices can serve as a resource for further guidance.
Why crime insurance is vital
The financial and operational risks PHAs face are significant. Without adequate coverage, your agency could suffer devastating losses from theft or fraud. Crime insurance acts as a crucial safeguard against these risks, helping to maintain financial security and operational continuity.
Examples of internal fraud and employee theft in public housing further illustrate the critical need for such coverage:
- The former director of a housing authority and his chief assistant were sentenced for bribery and fraud schemes.
- Former managers of a major metropolitan housing authority were found guilty of misappropriating funds meant for repairs and maintenance.
- A former housing authority executive was sentenced to prison for embezzling nearly $7 million over several years.
These cases serve as a stark reminder that the risk of employee theft and fraud is not theoretical—it is a real and present danger. Crime insurance can help PHAs recover from the financial loss associated with such misconduct, providing crucial support when an agency's reputation and finances are at stake.
Insights on preventing internal fraud
The risk of internal fraud is a significant concern for PHAs. Rich Larsen, CPA, a partner with Novogradac, has extensive experience working with housing organizations to identify fraud and implement internal controls.
"In my experience, the most common fraud is with rent collections at remote sites where employees receive payments (cash or checks) and pocket it," Larsen said. "The employees can then adjust the accounts receivable report to reflect payment or write off the amount owed."
PHAs may be able to prevent it this type of fraud through simple controls, according to Larsen:
- Employees taking rent payments should not be able to adjust tenant accounts.
- The accounting system should provide a computer-generated receipt for the tenant.
- Copies of deposit slips and checks should be provided daily to the finance team for recording.
- Tenant statements should be sent out at least monthly by the finance team.
While it's often assumed that employees in finance and accounting are more likely to commit fraud due to their access to financial data, Larsen notes this is a misconception.
"With internal finance and accounting fraud, generally, there needs to be a collusion between at least two individuals," he explained. "Accounting functions typically have more oversight and segregation of duties than other functions, so fraud is not as pervasive as people might think."
Larsen highlighted an increasing trend in internal fraud involving employees who have custody over physical assets such as electronics and building materials.
"How hard is it for an IT supervisor to order a couple of extra phones or laptops and sell them personally? Or what about a maintenance supervisor who over-orders lumber, fixtures, or equipment when a housing authority is rehabbing a property?" he said.
To prevent such fraud, Larsen recommends that housing organizations track capital assets over a specified value, tagging and monitoring them by someone independent of the purchasing process.
Sharing passwords is another potential risk factor for internal fraud.
"In no circumstance should an employee provide their password to another employee or have that password easily accessible to other employees," Larsen advised. "If an employee needs your password to perform their job, then there is a problem with that employee's job responsibilities."
The role of leadership in fraud prevention
Larsen stresses that organization size does not dictate fraud risk. Instead, housing organization leaders that prioritize fraud prevention and provide employees with a mechanism to report fraud anonymously, generally experience lower fraud rates.
"Most employees have an incredible amount of pride in their work and believe in the housing organization's mission, so if they see fraud, they will report it," Larsen said. "But only if reporting is encouraged by management and employees can file reports anonymously and without any repercussions."
For smaller housing organizations with limited employees, fraud prevention can be particularly challenging.
"It is very hard for small housing organizations with a limited number of employees to segregate bookkeeping duties properly," Larsen said.
He suggests involving someone outside the accounting function—such as a board member or the executive director—in the review process.
"The process may only take 25 to 30 minutes a month, but it lets people know someone is checking, and someone is performing that control function," he said.
Responding to reports of internal fraud
How should a housing organization respond to a report of internal fraud? Larsen says the answer depends on the situation.
"A housing organization that receives an internal fraud report should examine financial records and, if necessary, work with an outside auditor or attorney," he said. "An assessment needs to be done to determine who is potentially involved and the level of loss."
HAI Group Claims Manager Mike Pepe explained that internal fraud must be proven before a fraud claim is accepted.
"All investigative documentation must be shared with the claims team," he said.
Pepe said that the recovery process may take longer than other types of claims due to the additional time required for fraud investigations. If criminal charges are filed, the claims process can be further delayed as well.
Partner with HAI Group for comprehensive protection
At HAI Group, crime insurance coverages must be specifically requested and are not automatically included in policies. Our account executives are available to guide you through the process and provide tools to help your agency understand coverage limits. By securing the right coverage, your PHA may be able to mitigate potential financial losses and maintain compliance with HUD requirements.
Contact your HAI Group account executive today to learn more about adding crime coverage to your policy and protecting your agency.
This article is for general information only. HAI Group® makes no representation or warranty about the accuracy or applicability of this information for any particular use or circumstance. Your use of this information is at your own discretion and risk. HAI Group® and any author or contributor identified herein assume no responsibility for your use of this information. You should consult with your attorney or subject matter advisor before adopting any risk management strategy or policy.
HAI Group® is the registered trademark for a family of companies which includes Housing Authority Risk Retention Group, Inc., Housing Authority Property Insurance, Housing Enterprise Insurance Company, Inc., Housing Insurance Services, Inc. (DBA Housing Insurance Agency Services in NY and MI), Housing Authority Insurance, Inc., Housing Telecommunications, Inc., Housing In-vestment Group, Inc., and Public and Affordable Housing Research Corporation. For more information, visit www.haigroup.com. Products or services may not be available in all jurisdictions. Certain property and casualty coverage may be provided by a risk retention group or a surplus lines insurer or by a third party. Risk retention groups and surplus lines insurers do not participate in state guaranty funds and their insureds are not protected by such funds.
