What is Affinity Fraud?
Table of Contents
- Affinity Fraud Definition
- Ponzi Schemes vs. Pyramid Schemes
- What are Identifiable Groups?
- Recent Examples of Affinity Fraud
- How to Avoid Affinity Fraud
- Knowledge and Vigilance Help In the Wake of Affinity Fraud
- By Bryan Lee
- Nov 18, 2022
It's a misconception that we only need to be on guard for ill-intentioned strangers when it comes to scams. An attack can bloom inside any social circle, no matter how tightly knit that group may be. Using a tactic known as "Affinity Fraud," criminals set up traps by leveraging our closest relationships against us.
This includes angling the scheme through a colleague, friend, or family member—the people who have earned our trust over many years. A creative and malicious scammer will use anything they can to access their target.
Affinity Fraud Definition
Affinity fraud encompasses any scam targeting groups with identifiable characteristics such as age, ethnicity, religion, or familial relation.
It starts when a trusted or well-liked group member pitches an investment opportunity and asks for money. The request typically involves buzzwords like "a sure thing" or "guaranteed return." The target assumes this person they trust wouldn't steer them into a wrong decision and chooses to invest.
Portions of the money stolen from new investors are used to pay previous ones, and this chain of events runs like cancer through entire communities. It doesn't end until someone reports the scam or the pool of potential investors runs dry.
While the term affinity fraud isn't widely known, two famous types of scams fall under its umbrella. These are Ponzi schemes and Pyramid schemes.
Ponzi Schemes vs. Pyramid Schemes
In a Ponzi scheme, investors put money into a program thinking they will get high returns, while their actual pay comes from later investors' funds. These schemes come from Charles Ponzi, who defrauded an estimated $15 million using this method in 1919. The investors he tricked were fortunate to see a return of 30 cents to the dollar.
Ponzi schemes are the poster child for affinity fraud as they rely entirely on cash flow from new investors to keep the scam going.
Pyramid schemes can be harder to identify because there are usually legitimate products for sale in addition to illegal activity. But at their core, pyramid schemes focus on generating revenue from recruiting new participants rather than selling any authentic product or service.
What are Identifiable Groups?
An identifiable group is a group of people who share common characteristics or are distinguishable in some way. Affinity fraudsters center their attacks around these groups because it makes their fraudulent investment offers more likely to spread.
The most common identifiable groups include:
- The Elderly
- Professional Groups (dentists, lawyers, etc.)
- Ethnic Communities
- Religious Groups
Recent Examples of Affinity Fraud
Ponzi schemes sound like a trope plucked from a time most of us imagine in black-and-white. However, they're very much alive. A report by Marquet International found that nearly $50 billion in reported losses occurred in the US between 2000 and 2010.
In 2013, the Securities and Exchange Commission (SEC) investigated a scheme targeting military members in Houston, Texas. An identifiable group of Lebanese and Druze inhabitants was convinced to invest in a "high-frequency trading program" after receiving fake brokerage records convincing them of the program's success.
The meteoric rise of social media and new technologies in the past decade has only increased scammer's options for peddling their lies. It doesn't help that new and frequently misunderstood investment opportunities like cryptocurrencies magnify their power. In August of this year, the SEC uncovered a pyramid scheme involving 11 fraudsters and over $300 million invested.
How to Avoid Affinity Fraud
Avoiding any investment scam is all about recognizing the danger signs and asking the right questions. Fraudsters rely on their targets to experience a unique pairing of fear and trust. These emotions cause people to make hasty decisions they would otherwise avoid or think through a little more.
Check the credentials of the person you're dealing with - ask for references, check out their website, do a reverse phone lookup, or verify with another trusted source.
Signs of Potential Affinity Fraud
One of the biggest tells for a fraudster in your midst is if a newcomer is heavily playing up their group identity. This means constantly reminding others that they belong with your group. This behavior leads to a poor first impression, but most people chalk it up to social anxiety. Don't be one of those people.
You should run if someone who over-emphasizes their place in the group offers an investment they can't explain in detail. This common tactic uses someone’s position as sway to help early investors get in on a deal, allowing those early buyers to later serve as testimonials to establish trust with the larger group. This tactic is common amongst identifiable religious groups like the Church of Latter-Day Saints.
Double Check Official Sources
A well-informed target is a fraudster's worst nightmare. Fact-checking any claims they use to explain why their investment is a great idea. This can be anything from an emerging ethnic group in the city to whether particular real estate is even on the market. This won't be difficult as they probably won't have many facts to give in the first place.
If the person offering the investment provides a company name, then scour that company's website. Make sure it looks legitimate; if there's no contact information or they list an address that doesn't match up with Google Maps, then stay away from this business altogether!
Verify and Check Investment Licenses
An investment license permits an individual or firm to engage in specific financial activity. Verifying the license of ANYONE offering their services is a must-do.
The Financial Industry Regulatory Authority (FINRA) or the SEC can pull the records on investment licenses. If the records show complaints filed against them, research the cause and find out what went wrong. This will give insight into their legitimacy.
Knowledge and Vigilance Help In the Wake of Affinity Fraud
Being betrayed by the people you trust is unthinkable. But the unthinkable only needs to happen once to ruin a life. In affinity fraud schemes, the perpetrators trick our loved ones into believing they're doing us a favor. That's what makes their attacks exceptionally vile.
T.S. Eliot hit the mark when he said, "most of the evil in this world is done by people with good intentions."