Not a bad scam, really. Any renter paid the price willingly. The scam is against the owner stuck in a force-placed RC agreement.
This greedy trend is diminishing the housing stock. The landlords are often in on it: they get a higher rent under the table in exchange for overlooking the lawbreaking, and of course must be in on any renovations that are needed to break up an old seven-room prewar apartment into little hotel-room-sized units.
The only way to fight it is with secret renters, but who has the time and money for that?
In addition to destroying housing stock, the practice brings in people who are not part of the “community” of the building, such as it is. They are not your neighbors. And because of the collusion of the landlords, you can’t complain about them effectively.
I’d be cool with this if she wasn’t getting a huge break on her rent. She should pay the actual rent and continue to rent the apartment out. What she is doing is fraud.