The Watchdog Report

By Comptroller General Richard Eckstrom

 

 

Affinity fraud is a rapidly growing category of financial crimes.   Affinity fraud occurs when one person first gains the trust of folks who share a common bond and then manipulates them in a scam involving some sort of financial transaction.   These scams are among the most unscrupulous because community, church, or personal loyalty is used as the bait to attract unsuspecting innocent victims.

 

Affinity fraud poses a unique danger since it short-circuits the natural caution followed by people when evaluating investment schemes promoted by strangers.  In such cases an investment opportunity may come to a person’s attention through a friend, a fellow church member, or someone else who inspires a bond of trust.  The normal process of cautious skepticism is replaced by the natural comforts produced by shared social connections.

 

Because of the tight-knit structure of many groups or communities, it can be difficult for law enforcement officials to detect or deal with affinity scams.   Victims often try to work things out within the group and delay telling authorities or pursuing legal remedies.  This is particularly true when the unscrupulous promoter is a respected community or religious leader.  As a result, the damage done through affinity fraud can be extremely widespread before the scam is brought under control.

 

Investing always involves a certain degree of risk.  Scam artists, including promoters of affinity fraud schemes, always bring additional unique risks.  The bottom line is this: scam artists simply want your money and in the end they don’t care whether or not you lose.  But with a little homework you can reduce the risk that you or your friends will lose money through affinity fraud.  Ask questions and get the facts before you invest.  Invest with your head rather than with your heart.

 

To help avoid affinity fraud you should follow four basic guidelines.  First, check out the details of the investment offering.   Never make an investment based solely on a social connection.  Unfortunately, even otherwise popular community leaders may try to use trust to convince others to invest in high-risk ventures.   Investigate each investment thoroughly and check the truth of everything you are told about the investment.  Consult with state securities regulators in the state attorney general’s office or with trusted investment experts.

 

Second, don’t fall for promises of spectacular profits or “guaranteed” returns.  If an investment seems too good to be true, then it most likely is.   Always be suspicious of quoted rates of return that are much higher than normal market rates.  Assurances of fast and high profits, with little or no risk, are classic warning signals.

 

Third, get it in writing.  Even “friends” should avoid simply shaking hands on something as risky as an investment deal.  Be suspicious of a salesman who can’t find the time to put the deal in writing or who tells you to keep the investment opportunity confidential.

 

Fourth, don’t be pressured.  Be especially skeptical of investments that are pitched as “once in a lifetime” opportunities based on “inside” or “confidential” information.   Never invest when you are told you must do so immediately in order to qualify.  Avoid any promoter who tries to shame you or make you feel guilty for asking questions.

 

Remember that an educated investor is the best possible defense against fraud.   Avoid investments that target themselves to a specific group or community.   Realize that just because a friend, associate or prominent citizen has supposedly made money, that doesn’t mean you will too. 

 

Money saved through many years of hard work and sacrifice should never be entrusted to someone promising to make you “easy money” with your hard earned money. Be cautious.  By being alert to potential affinity fraud you can be an effective watchdog for your family, friends, and community.  In stopping an affinity fraud scheme before it snowballs throughout a community, you can save your friends and neighbors from countless years of heartbreak that would result from having their trust betrayed and their savings stolen from them.