Affinity Fraud

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Affinity fraud is a type of investment scam that targets members of identifiable groups, such as religious, ethnic, or professional communities. The fraudsters exploit the trust and camaraderie within these groups to perpetrate their schemes, often enlisting respected community leaders as unwitting accomplices.[1][2][3]

Overview[edit]

Affinity fraud typically involves a con artist who either belongs to or pretends to be part of a specific group. They use their perceived insider status to gain the trust of group members and convince them to invest in fraudulent schemes. These schemes often take the form of Ponzi or pyramid schemes, where money from new investors is used to pay returns to earlier investors.[4]

Characteristics[edit]

Key features of affinity fraud include:[5]

  1. Targeting specific groups based on shared characteristics (e.g., religion, ethnicity, age)
  2. Exploiting trust within close-knit communities
  3. Often involving respected community leaders as promoters
  4. Frequently structured as Ponzi or pyramid schemes
  5. Victims' reluctance to report fraud or seek outside help

Notable Examples[edit]

One of the most infamous cases of affinity fraud was orchestrated by Bernard L. Madoff, who targeted wealthy Jewish communities and institutions. His $50 billion Ponzi scheme, exposed in 2008, defrauded numerous individuals and organizations, including Yeshiva University and Holocaust survivor Elie Wiesel's foundation.

Prevalence[edit]

While affinity fraud is a global issue, it is particularly well-documented in the United States. A 2011 study by Marquet International Inc. found that the most common targets of affinity fraud were the elderly or retired, religious groups, and ethnic groups. Utah has been identified as having the highest per capita rate of affinity fraud in the United States, largely due to the tight-knit nature of the LDS Church community. In 2010 alone, Utah residents lost an estimated $1.4 billion to affinity scams.

Prevention and Detection[edit]

To protect against affinity fraud, experts recommend:

  1. Conducting thorough due diligence on investment opportunities
  2. Being wary of investments promoted solely through group affiliations
  3. Seeking advice from independent financial professionals
  4. Verifying the credentials and licenses of individuals offering investments
  5. Being cautious of promises of high returns with little or no risk

Regulatory Response[edit]

Financial regulators, such as the U.S. Securities and Exchange Commission (SEC), have taken action against numerous affinity fraud schemes. The SEC has issued investor alerts and educational materials to raise awareness about this type of fraud.[6][7][8]

Religious organizations have also responded to the threat. For example, The Church of Jesus Christ of Latter-day Saints has warned its members about affinity fraud and has imposed severe disciplinary measures, including excommunication, on members found guilty of perpetrating such schemes.[9]

References[edit]

  1. Affinity Fraud. Church of Latter-Day Saints.
  2. Types of Fraud. Investor.gov.
  3. Affinity Fraud. Investor.gov.
  4. The Allure and Danger of Affinity Fraud. Stone Bridge Business Partners.
  5. Stopping Affinity Fraud in Your Community. U.S. Securities and Exchange Commission.
  6. Pennsylvania Man Sentenced for Ponzi Scheme. FBI.gov.
  7. Affinity Fraud. U.S. Securities and Exchange Commission.
  8. Western Alliance to Protect Targeted Communities. U.S. Securities and Exchange Commission.
  9. Avoiding Investment Fraud in Your Faith-Based Community – Investor Alert. U.S. Securities and Exchange Commission.