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The Devil You Know



Wednesday, February 26, 2020

Affinity Fraud

You know the phrase, “better the devil you know than the devil you don’t,” but it isn’t true when talking about investment fraud. Specifically, I’m talking about affinity fraud. It’s a financial scheme that involves a scammer who appears to be part of a community or interest group. The scammer builds trust within the group and exploits that trust to push fraudulent, non-existent, and too-good-to-be-true investments on other members of the group.

Simply put, affinity fraud is the wolf in sheep’s clothing.

Affinity fraud is most likely to occur in groups or communities of like-minded people. You’ll find it almost anywhere that people gather around a shared belief, interest, or goal. Examples include:

  • Places of worship
  • Tight-knit ethnic or immigrant communities
  • Country clubs
  • Professional organizations
  • Places of business
  • Online forums

Why It Works

Affinity fraud is successful for a few reasons. For starters, it’s human nature to trust people who are similar to us. I played a game once with some fourth graders who were visiting the Indiana Statehouse for Statehood Day. In the game, I played the role of an affinity fraudster, and a coworker played the role of a victim. The common interest that my character exploited was a love of the Colts. I started by hyping up the team and sharing stories about watching football. Once it seemed clear the victim saw me as someone trustworthy because of our shared interest, I mentioned a “great investment opportunity.” The victim was excited to hear more. That’s when she turned to the kids, asking if they thought she should invest. They quickly informed her that I could not be trusted, and my greatest joy was having one of those children call me - the fraudster in the skit - a “dirty liar.”

Another reason why affinity fraud works is that victims are often reluctant to report someone who they feel is part of their group. The victim could be afraid that they won’t be believed or that other members of the group will be angry with them. The fear of reporting allows the fraudster to remain within the group, conning more and more members.

Here’s an example of affinity fraud shared by the North American Securities Administrators Association (NASAA):

Desiree has been attending the same church for many years. One day, the pastor introduces a new member of the congregation, Jim. Jim spends the next several months getting to know parishioners, and even reads scriptures and gives sermons for the pastor on occasion. Everyone loves Jim!

Jim gathers a group of parishioners one Sunday after service, including Desiree, and tells them about an exclusive investment opportunity that he has just for them. Jim’s investment pays more than their savings accounts and has zero risk, but he needs a check or cash before he leaves church that day. Desiree knows Jim and trusts him, so she gives him a check for $2,000. Like clockwork, the interest checks come in and the statements Jim gives her show huge gains in her account!

Desiree is so impressed that she gives Jim the rest of her savings and tells her sister Nicole, who also invests with Jim.

Two months later, Desiree stops getting the promised returns. Jim assures Desiree that everything is okay, it’s just an issue with a supplier of the company that is funding the returns. Desiree believes him and agrees to wait it out. Jim stops coming to church, and stops responding to Desiree, Nicole, and the rest of the church members that invested with him. When they report the matter to their local securities regulator, they find out that Jim and the product were unregistered, and that their savings are likely gone forever.

Protect Yourself

So how can you protect yourself? First, know that affinity fraud is common. It happens every day all over the U.S. You should be cautious if you’re ever approached about an investment opportunity at church or in a community group.

  • Don’t act on personal feelings. People who commit affinity fraud are usually very likable and seem trustworthy. Investors should never let their comfort with a person’s character and status in the community replace adequate due diligence. Ask questions.
  • Don’t act too quickly. If someone offers you a can’t miss investment opportunity and puts you on the spot, don’t be afraid to walk away. Never make an investment decision without understanding where your money is going, how it will be used, and how you can get it back.
  • Everything has risk. There is no such thing as a risk-free investment, and anyone who promises otherwise is lying. Investors should always ask about the risks of the investment, and understand issues such as liquidity, investment time frame, rate of return, risk of loss, and how the proceeds of the investor’s investment will be used to turn the promised profits.
  • Trust but verify. Affinity fraud frequently involves someone that the victim has known for many years. The simple fact that you’ve known a person for 20 years does not replace the need to ask questions about any investment opportunity, and to take pause if you don’t understand it.
  • Always ask if the person and the security are registered. Contact the Indiana Securities Division or search FINRA’s BrokerCheck database to confirm if the salesperson is registered. Regardless of how long you have known a person or been conducting business with an individual, it’s worthwhile to do a quick search in the database to confirm up-to-date licensing and compliance. If the person isn’t registered, ask why, and carefully consider if the investment is worth the risk.

If you think you are a victim of affinity fraud, contact the Indiana Securities Division.

Blog topics:  Fraud Prevention, Investing, Archive