Have You Been a Victim of Affinity Fraud?

Human beings are social by nature. We self-identify in a variety of ways, but one of the most common is to identify with the groups we belong to. It’s why we have alumni groups and business associations. It’s part of why we go to church and take up hobbies. It’s these very activities that also make us susceptible to something called affinity fraud.

At Addition Financial, we always want our members to be aware of how to protect themselves and their money from people who are unscrupulous. In this post, we'll explain what an affinity fraud scheme is, how to recognize it and what you can do to avoid being taken in by it.

What is Affinity Fraud?

The concept of affinity financial fraud is one you may not be familiar with yet, but you should be. It's a common way for a fraudster to gain unwitting victims trust and take their money.

We asked some of our favorite financial experts to talk about an affinity scam and explain how it works. Ann Martin, the Director of Operations at CreditDonkey, told us this:

“Affinity fraud is a kind of investment fraud in which people try to convince members of an in-group that an investment opportunity is legitimate when it is actually an investment scam. Usually, affinity frauds target group members of a racial, ethnic, or religious minority.”

Jake Hill is the CEO of DebtHammer and offered a similar take:

“Affinity fraud relies on trust within groups. An affinity fraudster often preys on religious groups attended by the elderly, isolating members and attempting to convince them an investment is legitimate.”

While our experts focused on groups based on racial, ethnic or religious affiliation, a member of any identifiable group can perpetuate affinity fraud. Some examples include the following:

  • Professional associations
  • Neighborhood watch groups and HOAs
  • Community organizations
  • Hobby or activity groups or clubs
  • Alumni associations
  • Fraternal organizations

As we noted above, we all have a tendency to identify with and trust people who belong to the same groups as we do, whether they’re casual friend groups or professional groups. While most of the people in your favorite groups may be trustworthy, the presence of even one person who isn’t can lead to affinity fraud.

How to Recognize Affinity Fraud

The best and easiest way to avoid being an affinity fraud victim is to learn to recognize it when you see it. Here are some red flags that indicate you should be wary of an investment opportunity:

  1. It comes from someone who either belongs to a group that you belong to or claims to belong to it. Keep in mind that verifying their membership is not enough to ensure that the person is someone you should trust with your money, even if they are a respected community member.
  2. They make an offer that claims to be reserved for members of your group or imply that you’re getting early access. Again, this could be legitimate but it’s a good rule of thumb to be wary of any high-pressure tactics related to an investment.
  3. Their offer sounds too good to be true. For example, if someone promises a high return on your investment – spectacular profits – they are almost certainly not going to be able to deliver. It may be a Ponzi or pyramid scheme where their intention is to pay early investors with money from new investors – or they could just be planning to run off with all the money.
  4. The person offering the investment isn’t a licensed financial advisor but rather, a layperson who claims to have inside information.
  5. You’re being pressured by the person or, in some cases the group’s leader or other members, to invest in something that you’re not sure is legitimate.
  6. You’re told not to research or investigate their claims or the investment itself, or they tell you that religious-based investments are not regulated.

Some of the best-known cases of affinity fraud have been perpetuated by people who had a real connection to the group being defrauded. One example is a Persian-Jewish man who used his group affiliation with his community in Los Angeles to defraud people of $7.5 million in a Ponzi scheme.

Legit Investment Opportunity or Financial Scam?

Tips to Avoid Being a Victim of Affinity Fraud

While affinity fraud is common, there are some steps you can take to minimize your risk and protect yourself from people who want to take your money.

The first thing you should do is to employ skepticism as a tactic. Jake Hill told us:

“Never trust the word of one person, no matter what they tell you. Ask lots of questions and get proof of their affiliation. Even if they are a member, get a second opinion.”

It might feel unnatural to be skeptical but think of it as a way of shielding yourself. No trustworthy person will be upset that you want to verify their information and the investment itself. In fact, it’s a huge red flag if they try to tell you not to ask questions and get proof of who they are and what they’re offering.

The next thing to do is an extension of the first, which is to avoid investments operated by people who aren’t licensed professionals. Ann Martin said this:

“You can resist them by avoiding taking financial advice about investments from anyone but professionals. Don't trust someone just because they are a part (or appear to be a part) of your community.”

You can use the BrokerCheck feature on FINRA’s website or the SEC Investment Advisor website. A legitimate person will tell you which regulatory entity governs their job and encourage you to verify their credentials.

Here are some other tips to protect yourself from affinity fraud:

  • In addition to checking the credentials of the person offering the investment, do a Google search to see if people are talking about the investment online.
  • Keep in mind that if the person telling you about the investment heard about it from someone else, they may have been duped. Avoid pushing back (for now) and do your due diligence. You can warn them later if you find out that it’s a scam.
  • Don’t trust no-risk investments. Every investment carries some risk. Some are lower risk than others, but it’s a sure sign of fraud if someone tells you that there’s no risk to you.
  • Be just as wary of guaranteed returns. Again, some investments offer high returns but nobody can guarantee them.
  • Ask questions if someone you know is suddenly receiving advice from a new friend or caregiver regarding investments or money.
  • Get everything in writing – and don’t trust someone who isn’t willing to put a deal in writing. Reading contracts may be a chore but they exist for a reason. It’s a lot harder for someone to get away with fraud when you have a written record.
  • Speaking of contracts, make sure to read every word and if possible, get a lawyer to review the contract as well. Fraudsters specialize in using convoluted language that’s difficult to understand but a good lawyer will be able to see through it.
  • Don’t let yourself be rushed. Even if you think an investment opportunity is legitimate, it’s a good idea to take a deep breath and give yourself some time to think about it.

In most cases, a little research and a few pointed questions will either reveal that the investment is legitimate or scare away the person who’s trying to defraud you.

What to Do if You’re a Victim of Affinity Fraud

One of the trickiest things about affiliate fraud is that when it happens, people get embarrassed and ashamed that they fell for it. As a result, they may be reluctant to take legal remedies and report the fraud to the relevant authorities, so the perpetrator can be brought to justice.

If you or someone you know has been a victim of affinity fraud, you should visit the SEC’s Complaint Center and file a complaint. 

You should also visit the North American Securities Administrators Association website to find your state’s securities administrator and report the fraud to them as well.

Make sure to keep records of everything. You may find that some members of your group are reluctant to report the affinity fraud but you will be doing them and potential future targets a favor by getting the SEC involved. 

The SEC investigates and prosecutes affinity fraud all the time. They know what to look for and how to track down the scammers who prey on people’s trust. The best way to prevent other victims from losing money is to report the crime and provide any relevant information to the authorities. They’ll do the rest.

Nobody wants to believe that someone they know would fall victim to fraud or perpetuate it. The nature of affinity fraud is that it preys on people’s trust to convince them to invest their money. Taking investment opportunities with a healthy dose of skepticism can help you avoid affinity fraud and keep your money safe.

Are you looking for legitimate ways to invest your money and save for retirement? Click here to read about Addition Financial’s retirement accounts and investments. We’re here to help.

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.