oversight

Beverly Place Apartments Subsidized Nonexistent Tenants, Unqualified Tenants, and Tenants With Questionable Qualifications

Published by the Department of Housing and Urban Development, Office of Inspector General on 2017-06-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

              Beverly Place Apartments,
                     Groves, TX
                Multifamily Project-Based Section 8




Office of Audit, Region 6          Audit Report Number: 2017-FW-1009
Fort Worth, TX                                           June 29, 2017
To:            Mary Walsh, Southwest Region Director, Multifamily Housing, 6AHMLA
From:          Kilah S. White, Regional Inspector General for Audit, 6AGA
Subject:       Beverly Place Apartments, Groves, TX Subsidized Nonexistent Tenants,
               Unqualified Tenants, and Tenants With Questionable Qualifications




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of the Beverly Place Apartments in Groves, TX.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG website. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
817-978-9309.
                    Audit Report Number: 2017-FW-1009
                    Date: June 29, 2017

                    Beverly Place Apartments, Groves, TX Subsidized Nonexistent Tenants,
                    Unqualified Tenants, and Tenants With Questionable Qualifications



Highlights

What We Audited and Why
We audited the multifamily project-based Section 8 program at the Beverly Place Apartments.
We selected Beverly Place because we received a complaint of potential fraud, suggesting that
the complex did not have appropriate controls to ensure tenant and unit eligibility. Our objective
was to determine whether the owner administered its project-based Section 8 program in
accordance with U.S. Department of Housing and Urban Development (HUD) regulations and
guidance.

What We Found
The owner did not administer the project-based Section 8 program at Beverly Place in
accordance with HUD regulations. It assisted at least 97 tenants who were either ineligible for
assistance or whose eligibility could not be supported. This condition occurred because the
owner did not establish effective control systems, which allowed the onsite employees to commit
fraud. The employees falsified tenant eligibility and did not properly verify tenant income as
required by HUD. As a result, HUD paid the owner more than $574,000 in subsidies for
ineligible tenants and incurred more than $227,000 in subsidies for which the owner could not
support the tenants’ subsidy amounts.

What We Recommend
We recommend that the Southwest Region Director of Multifamily Housing require the Beverly
Place owner to (1) repay HUD more than $574,000 for housing subsidies received for ineligible
tenants and units and (2) support or repay HUD more than $227,000 for units for which
managers either did not have a tenant file or did not obtain required earned income verification
reports to verify eligibility. In addition, HUD should require its contract administrator for
Beverly Place to ensure that the owner’s recently implemented quality control program is
working as designed.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
Finding: HUD Paid Subsidies to the Beverly Place Apartments for Nonexistent,
Unqualified, and Questionable Tenants...................................................................................... 4

Scope and Methodology ...........................................................................................8

Internal Controls ....................................................................................................10

Appendixes ..............................................................................................................11
         A. Schedule of Questioned Costs .................................................................................. 11

         B. Auditee Comments and OIG’s Evaluation ............................................................. 12




                                                             2
Background and Objective
The Beverly Place Apartments is a 124-unit complex at 5307 Gulfway Drive in Groves, TX.
B Properties-Beverly Place, LLC, located in Corpus Christi, TX, has owned the property since
2007. The U.S. Department of Housing and Urban Development (HUD) subsidized rents for 99
units through a yearly housing assistance payments contract.
The contract summarized the terms and conditions for subsidy payments. The owner determined
how much rent each tenant was responsible for, based on the tenant’s income, and submitted
monthly claims to HUD for the difference between the tenant’s portion of the rent and the total
rent for the unit. Between January 2013 and December 2015, HUD paid the owner $1.8 million
in tenant subsidies.
Southwest Housing Compliance Corporation was HUD’s performance-based contract
administrator 1 for Beverly Place’s Section 8 program. Due to national litigation between HUD
and other parties, HUD amended its contract with the administrator on October 1, 2011, to delete
certain monitoring tasks. As a result, the administrator did not perform onsite monitoring
reviews of Beverly Place between May 2011 and the end of our fieldwork in January 2017.

In October 2015, we received a complaint that a tenant had been denied assistance at a different
apartment complex. The tenant was listed as an assisted tenant at Beverly Place, although she
had moved out 2 years earlier. The complainant also alleged that she paid cash to rent the unit
when she lived at Beverly Place. The Office of Inspector General’s (OIG) Office of
Investigation conducted an investigation and determined that onsite managers engaged in
identity theft and manipulated tenant income documents. It further determined that the managers
and a local law enforcement officer stole more than $230,000 in more than 5,000 reimbursable
utility allowance checks intended for 176 assisted tenants 2 between 2009 and 2015 and obtained
three convictions. The managers no longer work at the complex, and those who were convicted
received sentences including time in prison.
Our objective was to determine whether the owner administered Beverly Place’s project-based
Section 8 program in accordance with HUD regulations and guidance.




1
    According to HUD’s contract with the owner administrator, a performance-based contract administrator is a
    public housing agency that HUD contracts with to monitor and enforce the Section 8 program owner’s
    compliance with the terms of its housing assistance payments contract and HUD regulations and requirements.
2
    This number is not the total number of tenants who received assistance. It represents only the number of tenants
    who had utility allowance checks stolen.



                                                          3
Results of Audit

Finding: HUD Paid Subsidies to the Beverly Place Apartments for
Nonexistent, Unqualified, and Questionable Tenants
Beverly Place’s owner did not administer its project-based Section 8 program in accordance with
HUD regulations. Specifically, the owner billed HUD for at least 97 tenants who did not exist or
whose income eligibility was either falsified or unsupported. This condition occurred because
the managers defrauded the tenants, HUD, and the apartment owner, and because the owner did
not implement sufficient internal controls to detect or prevent the fraud. The owner did not
ensure that tenants listed on subsidy reports lived in the subsidized units or that managers
properly verified and reported tenant income and eligibility. As a result, HUD paid the owner
more than $800,000 in subsidies for units that were either vacant or no longer occupied by an
approved tenant and for tenants with unconfirmed income.
                                    Table 1: Issues and questioned costs
                                      Ineligible            Unsupported
             Issue                                                                                    Total
                                      payments                payments
    Nonexistent tenants                 $574,930                                                    $574,930

    Falsified income                                                   $150,082                       150,082

    Questionable income 3                                                 77,621                       77,621

    Totals                               574,930                        227,703                       802,633

The Owner Billed HUD for Nonexistent Tenants
Beverly Place improperly submitted housing assistance payment vouchers for units with
nonexistent tenants and tenants who had moved out of their subsidized units. According to HUD
requirements, Beverly Place could bill HUD only for occupied units. A comparison of utility
records to rent rolls showed that 68 tenants did not live in their units at the time HUD paid their
housing subsidies. 4 Further research showed that the tenants were nonexistent or ghost tenants
because they either never lived in those units or had moved out of the units while HUD
continued to pay subsidies for them. These ineligibile payments totaled $574,930.




3
     Included unconfirmed income, missing enterprise income verification reports, and missing tenant files
4
     Utility records showed that the utilities were either in the complex’s name or the name of another person not on
     record as living in the unit.



                                                           4
The Owner Billed HUD for Tenants With Falsified and Questionable Income
A review of tenant files showed that 113 of 193 5 assisted tenants at Beverly Place claimed
regular cash contributions of $30 to $200 per month as their sole source of income. When a
tenant claims contributed or gift income, HUD Handbook 4350.3 requires third-party verification
of the income. Beverly Place obtained this verification through a notarized statement or affidavit
signed by both the tenant and the person providing the assistance. In interviews and other
verification efforts, 11 former and current tenants stated that they either did not know the person
listed as a contributor or did not receive money from that person. 6 Further, two contributors
confirmed that they did not contribute money to the tenants. Both tenants and contributors
denied signing the notarized statements and affidavits. 7 Since the tenant files did not contain
authentic income documents to support the subsidy calculations for these 11 current and former
tenants, HUD’s payments to the owner for the units, totaling $150,082, were unsupported.

In addition, 18 assisted tenants with minimal cash contributions as their only income were
questionable because the files did not contain evidence that the apartment managers attempted to
obtain required Enterprise Income Verification reports 8 and the owner could not provide files for
5 tenants. Since the tenant files did not contain the required Enterprise Income Verification
reports or the owner could not provide a tenant file, HUD’s payments to the owner for the units,
totaling $77,621, were unsupported.

Apartment Managers Defrauded Tenants, HUD, and the Owner
Apartment managers defrauded tenants. Apartment managers used personal identification of
previous tenants and applicants to apply for Section 8 assistance. Most of the tenants did not
speak or understand English well and were unaware that they were supposed to receive
assistance or the amount of assistance to which they were entitled. This condition allowed the
managers to require them to pay cash for rent, which the managers deposited in personal bank
accounts instead of the project account as required. Managers further falsified the tenants’
documentation to show little or no income, resulting in reimbursable utility allowance checks,
which the managers also diverted to personal private bank accounts. After the complaint,
apartment managers changed income sources in tenant files, corrected rent amounts, stopped
pocketing cash rents, and began providing tenants their reimbursable utility allowance checks.

Apartment managers defrauded HUD. Apartment managers billed HUD for units that did not
house Section 8 tenants. They also minimized tenant income, which maximized HUD


5
    The number of assisted tenants (193) exceeded the number of assisted units (99) due to tenant move-ins and
    move-outs during the audit period.
6
    Confirmations were made through interviews with tenants and reported contributors by OIG investigators and
    auditors.
7
    The 11 cases do not include cases included in an Office of Investigation referral for administrative action to the
    Departmental Enforcement Center or cases included in the ghost tenant portion of the finding.
8
    The Enterprise Income Verification system is a web-based computer system containing employment and income
    information on individuals participating in HUD’s rental assistance programs. Regulations at 24 CFR (Code of
    Federal Regulations) 5.233 and HUD Handbook 4350.3, REV-1, require its use as a third-party verification
    source.




                                                           5
assistance, including reimbursable utility allowance checks, which the managers directed into a
separate bank account.

We found instances in which

    •   Tenants moved out of Beverly Place, yet managers continued to use the tenants’
        information to make it appear that they still lived in the unit and continued billing HUD.
    •   Managers used personal information obtained from persons who applied to live at the
        project but did not end up living there. They then applied for assistance in the
        applicant’s name, using falsified information, and either kept the unit vacant or rented it
        to a non-Section 8 tenant and kept that tenant’s rent.
    •   Managers minimized income for otherwise eligible tenants to maximize the reimbursable
        utility allowances. The result was an unwarranted increase in HUD’s assistance
        payments for the units.

These actions resulted in HUD’s paying the owner more than it should have paid in subsidies for
ineligible units and inflated utility allowances.

Apartment managers defrauded the owner. Apartment managers defrauded the owner by
falsifying the tenant records and making it responsible for repayments to HUD for ineligible
housing assistance payments. After the complaint, managers tried to cover up the falsified
information and ghost tenants by conducting interim certifications, in which they changed
income from fictitious gifts to self-employment for tenants who continued to live at the project,
and changed tenant status to “moved out” for tenants who no longer lived at Beverly Place.

The Owner Did Not Have Controls to Detect or Prevent the Fraud
The owner did not detect the fraud or prevent the apartment managers from committing fraud
against it and the tenants because it had not implemented adequate controls to ensure that
managers correctly calculated and processed rent subsidies. Further, the owner did not verify the
information that managers provided when it certified the accuracy of its monthly requests to
HUD for subsidy payments. On the requests for subsidy payments, the owner certified that each
eligibility and assistance payment was computed in accordance with HUD requirements and the
unit billed was occupied. The certifications were incorrect, and the owner received ineligible
and unsupported payments totaling $802,633.

The owner relied on HUD’s project-based contract administrator to detect and prevent
occupancy errors through periodic occupancy reviews. However, the administrator reviews were
not effective as the Office of Investigation determined that the scheme managers used to steal the
reimbursable utility allowance checks had existed since 2009, 2 years before the administrator
performed its last occupancy review due to litigation. Implementing additional procedures and
strengthening the occupancy reviews will assist the administrator in detecting and preventing the
fraud, which was the basis for the nonexisting tenants and falsified income discussed in the
report.




                                                 6
After the audit began, the owner implemented control policies to increase the oversight and
monitoring of its managers. These policies included plans to (1) hire a quality control specialist
to perform monthly monitoring of compliance with required earned income verification report
procedures, (2) review monthly tenant submission reports to track tenants paying minimal rent,
and (3) change procedures for disbursing reimbursable utility allowance checks. We did not
review files after the audit period to determine whether the owner’s new control policies were
effective.

Conclusion
The owner violated its housing assistance payments contract with HUD for its Section 8 program
and submitted erroneous certifications by charging HUD for vacant units and for tenants whose
income and tenancy had been falsified or not properly verified. These conditions occurred
because the owner had not implemented effective controls to properly oversee its managers and
ensure the accuracy of the subsidy certifications that it submitted to HUD. As a result, its
managers defrauded the tenants, HUD, and the owner. HUD paid the owner at least $802,000
for ineligible and unsupported subsidies.

Recommendations
We recommend that the Southwest Region Director of Multifamily Housing require Beverly
Place’s owner to

    1A. Repay HUD $574,930 for subsidized units that were not occupied by qualified tenants.
        Repayment must be from non-Federal funds.

    1B. Provide support to show that the subsidies for 11 tenants with falsified income were
        accurate or repay HUD $150,082 for those subsidies. Repayment must be from non-
        Federal funds.

    1C. Provide support to show that the subsidies for 18 tenants without files or without
        adequate income documentation in their files were accurate or repay HUD $77,621 for
        those subsidies. Repayment must be from non-Federal funds.

    We further recommend that the Southwest Region Director of Multifamily Housing

    1D. Require its contract administrator for Beverly Place to verify that the owner’s recently
        implemented quality control program is working as designed.

    1E. Ensure that the project-based contract administrator’s review process includes steps to
        obtain reasonable assurance that tenants being reported as subsidized at Beverly Place
        live in the subsidized units.




                                                 7
Scope and Methodology
We performed our fieldwork at Beverly Place’s office located in Groves, TX, and the OIG
Offices of Audit and Investigation in Houston, TX, from August 2016 through January 2017.
Our audit period was January 2013 through December 2015. This period was expanded as
necessary to meet our objective.


To accomplish our objective, we
     •    Reviewed relevant HUD regulations and requirements.
     •    Reviewed the owner’s policies and procedures.
     •    Reviewed the contract administrator’s management and occupancy review report for
          Beverly Place, dated May 17, 2011.
     •    Reviewed Beverly Place’s latest Real Estate Assessment Center 9 inspection report.
     •    Reviewed interviews performed by OIG investigators and auditors.
     •    Interviewed owner staff.
     •    Reviewed and analyzed the monthly Tenant Rental Assistance Certification System 10
          reports for the audit period.
     •    Reviewed utility records subpoenaed by the Office of Investigation.
     •    Reviewed a nonstatistical sample of 11 subsidized tenants.
     •    Identified and reviewed 76 tenants reported as having moved out of their units after or
          prior to the complaint.
     •    Interviewed tenants or their reported income contribution donors when we could locate
          them.

Of the 193 subsidized tenants during our review period, there were 148 subsidized tenants living
on the property during 2015, the year of the complaint. We selected a sample of 11 of these
tenants based on their tenure in the apartments, excluding those who moved in or out of their
units near the time of the complaint and based on whether we could locate the tenant file. 11 We
reviewed their files to determine whether they supported the tenants’ eligibility and rental
charges. The test results refer only to the tenants tested and cannot be projected to the population
of tenants. Based on the results of this review, we expanded our review to the entire population


9
     The Real Estate Assessment Center’s mission is to provide and promote the effective use of accurate, timely, and
     reliable information assessing the condition of HUD’s portfolio; to provide information to help ensure safe,
     decent, and affordable housing; and to restore the public trust by identifying fraud, abuse, and waste of HUD
     resources. It collects data from various sources to assess the condition of HUD’s housing portfolio.
10
     The Tenant Rental Assistance Certification System is a HUD computer system developed to help improve
     financial controls over assisted housing programs by automating manual procedures and incorporating
     automated controls.
11
     All tenant files located at the apartment office were confiscated by the OIG investigators. Some files were not
     located.



                                                           8
and selected all tenants we identified as potentially fictitiously reporting minimal monthly gifts
as their only source of income.
Of the 193 subsidized tenants during our review period, we identified 76 that could have been
nonexistent tenants or tenants with fictitious incomes. The tenants moved out after or prior to
the complaint date. Further, most reported gifts as their sole income source, the income appeared
to be falsified, and their utility allowance reimbursement checks were stolen. Finally, the tenants
were not reported as living on the property in January 2016 when the OIG investigators obtained
the utility records. For these 76 tenants, we compared information in the utility records to
various Tenant Rental Assistance Certification System reports, including move-in and move-out
reports and payment histories, and a stolen check list obtained from investigators for the 76
tenants. We determined that 72 of the tenants were clearly nonexistent. We excluded 4 tenants
that the investigators included in their criminal complaint and reported the remaining 68
nonexistent tenants in this report.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                  9
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

•   effectiveness and efficiency of operations,
•   reliability of financial reporting, and
•   compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.

Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

•   Policies and procedures that Beverly Place’s owner implemented to ensure that its project-based
    Section 8 program was administered in accordance with HUD’s rules and regulations.
•   Policies and procedures the Beverly Place’s owner implemented to provide adequate
    oversight of apartment managers at Beverly Place.
•   Policies and procedures that Beverly Place’s owner implemented to ensure that its monthly
    HUD billings were accurate and included only occupied units.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiencies
Based on our review, we believe that the following item is a significant deficiency:

•   The owner did not have sufficient controls in place to ensure that it implemented its project-
    based Section 8 program in accordance with HUD’s rules and regulations, including that its
    monthly billings to HUD were accurate (finding).




                                                  10
Appendixes

Appendix A


                          Schedule of Questioned Costs
                  Recommendation
                                   Ineligible 1/ Unsupported 2/
                      number
                          1A             $574,930
                          1B                               $150,082
                          1C                                 77,621

                        Totals            574,930           227,703



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.
2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                              11
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 1




                               12
Comment 1




Comment 2




Comment 3


Comment 4




Comment 5




            13
14
                         OIG Evaluation of Auditee Comments


Comment 1   The owner did not fully agree with the report assertions that it did not administer
            the project in accordance with HUD requirements, that it did not have effective
            internal controls systems, and that the lack of effective internal controls systems
            allowed its employees to commit criminal acts, not fraud. The owner said it had
            always been actively involved in the areas covered by administrative requirements
            regarding providing a safe, decent, and sanitary environment, meeting local
            building codes, and providing quality affordable housing options, and there is
            evidence of this. The owner noted that its yearly independent public accountant
            audits and contract administrator reviews included reviews of randomly selected
            files and that neither the auditors nor the contract administrators detected signs of
            illegal activity. It further noted that contract administrator reviews resulted in
            satisfactory or above average ratings. The owner concluded it is unreasonable to
            hold the owners responsible for the actions of its employees.
            The owner did not have sufficient control systems in place to ensure it
            administered the project in accordance with HUD requirements as shown in the
            audit. The report stated that the managers took advantage of owners, HUD, and
            the tenants by committing fraud. However, the owner is responsible for ensuring
            that its monthly billings and signed certifications to HUD were correct. We also
            acknowledge that neither the independent public accountant’s audits nor the
            contract administrator reviews detected the illegal activities by the apartment
            managers. However, those reviews are not designed solely to detect fraud, and
            they do not alleviate the owner of its responsibility. During the audit, the owners
            implemented additional internal controls to increase management oversight and
            monitoring. However, the best protection against fraud is employing strong
            internal controls that are continually reviewed and updated.
Comment 2   The owner stated that the notarized income statements appeared to be a legitimate
            third party verification.
            On the surface, the notarized income statements appeared to be a legitimate third
            party verification. However, an effective control system could have questioned
            some of the indicators related to the statements. For instance, statements were not
            always notarized during the required yearly income recertifications. The owner
            may have discovered the scheme sooner if it had taken additional steps to directly
            confirm the information with the parties who reportedly signed the forms.
Comment 3   The owner believed it could provide necessary documentation for 18 tenants
            questioned in the report, because it had provided this information to the OIG
            investigators in September 2015.
            We reviewed files obtained by the investigators for evidence of earned income
            verification. We found 18 instances in which there was no evidence that earned
            income verification reports were obtained or that an attempt was made to obtain


                                              15
            them. The missing reports included 5 files that were never provided and 13 files
            that were provided but did not contain the evidence. If the owner can find the
            documentation, it should provide it to HUD during the audit resolution process.
Comment 4   The owner stated that HUD procured the contract administrator and relied on it to
            detect and prevent occupancy errors or criminal activity. The owner disagreed
            with our statement that it relied on the contract administrator to detect and prevent
            such instances. The owner also commented that the fact that the occupancy errors
            or criminal activity went undetected does not bring into question the competency
            of the contract administrator.
            HUD procured the contact administrator to review program operations. In
            addition, we based our statement in the report on an audit interview in which the
            owner stated that because the contract administrator did not detect the problems,
            there was no reason for the owner to expect wrongdoing. The last review by the
            contract administrator, at the time of our field work, was in 2011. Further,
            although we did not question the contract administrator’s competence, the report
            contains two recommendations that will help the contract administrator ensure
            that both it and the owner implement effective controls to help prevent future
            similar frauds.
Comment 5   The owner stated that it did not agree with the $802,000 questioned in the finding
            and should not be held responsible for the criminal acts, and provided various
            court documents showing that the individuals involved had been convicted and
            were responsible for restitution to HUD. The owner stated that the two former
            on-site managers were each responsible for $393,583, and the third person who
            was not an employee was responsible for an additional $187,706.
            As stated in the report, the owner violated its housing assistance payments
            contract with HUD for its Section 8 program and submitted erroneous
            certifications by charging HUD for vacant units and for tenants whose income and
            tenancy had been falsified or not properly verified. The amounts reported in the
            court documents were based on the stolen reimbursable utility allowance checks
            and assistance payments for 5 units. We removed the reimbursable utility
            allowances and payments for the 5 units from the universe of payments during the
            audit. Therefore, the questioned costs do not duplicate the court ordered
            restitution. After the exit conference, we provided documentation to the owner
            detailing the questioned costs.




                                              16