Affinity Fraud: How it works & how to avoid it

by Natalie MacLellan on May 12, 2010

in Fraud Prevention, Red Flags of Fraud

Beware of swindlers who claim loyalty to your group

In a world of increasing complexity, many people are searching for a way to know who they can trust. This is especially true when it comes to investing money.

Unfamiliar with how our financial markets work, often people don’t know how to thoroughly research an investment and its salesperson. Many fall prey to affinity fraud in which a con artist claims to be a member of the same ethnic, religious, career or community-based group.

“You can trust me,” says the con artist, “because I’m like you. We share the same background and interests. And I can help you make money.”

Another equally effective pitch, if the con artist is not a member of your union or association, is to lull members into a misplaced trust by selling first to a few prominent members, then pitching the scam to the rest by using the names of those previously sold.

The effect is the same: Once the connection to the group is understood, the natural skepticism of the individual member is overcome, and one more group name is added to the sales column.

Once a victim realizes that he or she has been scammed, too often the response is not to notify the authorities but instead to try to solve problems within the group. Swindlers who prey on unions or associations play the loyalty angle for all its worth.

How to avoid affinity fraud

  • Beware of the use of names or testimonials from other group members. Scam artists frequently pay out high returns to early investors using money from later arrivals. Accordingly, early investors may be wildly enthusiastic about a scheme that may collapse entirely once you’ve invested. (As with a Ponzi scheme, for example.)
  • Obtain a prospectus or other form of written information that details the risks in the investment and procedures to get your money out.
  • Ask for professional advice from a neutral outside expert not in your group—an accountant, attorney or financial planner—to evaluate the investment.
  • Before investing any money, call your check with the Nova Scotia Securities Commission to learn more about the salesperson and firm. The simplest inquiry is to ask if they are registered to do business in Nova Scotia, and if the investment isallowed to be sold. If one or the other is not registered, that is a sure warning to inquire further.
  • Don’t take the word of a salesperson! Check out the investment yourself.

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