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The Allure and Danger of Affinity Fraud

by Jim Marasco, The Daily Record, August 2014 Affinity frauds usually represent investment schemes that target members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The perpetrators who promote affinity scams are usually members of the group and usually escape prosecution because of the tight-knit structure that exists. Those that fall victim feel embarrassed and usually try to work things out themselves versus seeking outside assistance. This compounds the ability of law enforcement officials to become aware of an affinity scam.

How it works

According to the SEC, people who perpetrate affinity frauds often enlist respected community or religious leaders from within the group to spread the word about the scheme by convincing people that a fraudulent investment is legitimate and worthwhile. Many times, those leaders become unwitting victims of the perpetrator’s ruse. Ponzi or pyramid schemes are typically popular among affinity frauds. Since Ponzi frauds need to attract new investor money into the scheme to pay out earlier investors, a pipeline of potential victims is crucial to its survival. To assist in attracting “new money”, the best promoters are satisfied investors. Accordingly, members of church congregations, social groups, etc., are prime targets since there’s an element of trust amongst members and a sizeable population to solicit. As they boast about their returns to other members of the group, new victims are easily enticed to invest and forgot their normal cautious skepticism. Affinity fraud offenders know exactly what they are doing when they fleece their victims. They take advantage of the trust factor that exists between church members, ethnic communities, social organizations, etc. When things start to unravel, members refrain from turning on them because:

  • They may feel they can resolve the problem internally
  • They possess a desire not to prosecute “one of their own”
  • Trust of law enforcement may be lacking
  • They refuse to believe someone in their group would take advantage of them 

Recent affinity fraud schemes 

The SEC’s Division of Enforcement displayed a sample of recent affinity fraud cases in an Investor Bulletin found at www.investor.gov. The cases involve all types of groups and organizations such as:

  • African-American Churchgoers – a promoter was selling promissory notes bearing interest between 12 – 20%. The money was to be used to invest in numerous small businesses. Investors lost $11 million.
  • Christian Investors – $6 million was raised from 80 evangelical Christian investors through unregistered security offerings.
  • Persian-Jewish Community in Los Angeles – a $7.5 million Ponzi scheme perpetrated by a member of the community was halted by the SEC. They lured investors by promising pre-IPO shares of well-known companies.
  • South Florida Cuban exile community – a Miami-based developer raised more than $135 million from more than 400 investors from the community in a giant Ponzi scheme. In addition to paying old investors with new money, a portion of the funds raised were squandered by the perpetrator. 

Identifying an affinity fraud offender 

One of the largest affinity fraud perpetrators to-date is Bernie Madoff. He attracted people through his affiliations and support of Jewish causes, his posh Florida and New York neighborhoods and his status on Wall Street. Investors had every reason to trust him and never felt the need to do any due diligence. Some common traits offenders have in common can include:

  • Predatory Behavior – they seek out organizations and groups with pursuable victims to con
  • Having strong interpersonal skills – they have charisma and can easily lead others to follow
  • Lack of empathy – they rarely feel compassion and exhibit narcissistic behaviors
  • Being manipulative – they are skillful in telling people what they want to hear, and stress a strong identity with the group or organization to strengthen trust

Protecting against an affinity fraud 

I’ve seen firsthand how difficult it is to attack affinity fraud. Potential victims succumb to the power of the group and lower their internal awareness, even as signs of trouble emerge. Before you trust your investments with anyone, keep in mind some simple rules of thumb. Don’t get caught up in the euphoria created by others in a group or organization you’re involved. Investigate any opportunity thoroughly and be wary of anything guaranteeing stellar results with little or no risk. Perform some due diligence on the individual making the investment offer no matter how trustworthy they appear to be. Stay clear of investments that aren’t registered, contain vague documentation, can’t be put in writing or are being offered to only those on the “inside.” If you’re asked to keep the investment opportunity confidential, be skeptical. Find out how liquid your investment is, where the money is being invested and how it is going to be reported. Don’t settle for answers that include, “we’ll let you know once we fully fund the investment.” Don’t be pressured into making an investment. Rarely will a “once in a lifetime opportunity” pass you by before you can fully research it. Finally, seek the professional advice of someone not affiliated with the group or solicitor to evaluate the opportunity. It’s frightening to think that a white-collar criminal can invade your “circle of trust” and use that position to defraud you. As we’ve discussed, these perpetrators can strike any affiliation; profit or non-profit. The best defense is a healthy dose of skepticism, some due diligence and the services of a trusted professional. James Marasco, CPA, CIA, CFE, is a partner at EFPR Group, Certified Public Accountants and Business Consultants.

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