3 Eye Opening Affinity Scams & What You Can Do About Them

The biggest threat to your clients’ financial security may be closer than they think.

The Internet and widespread adoption of social media create conditions ripe for affinity fraud, which uses a potential investor’s faith, ethnic background, country of origin and even fondness for football as a lure. The fraudsters are either members of the target group or pretend they are.

In almost all cases, the investment is fake or, at the very least, the promoter lies about vital details, including risk, return and his or her own credentials and track record. Often affinity fraud plots are structured as Ponzi or pyramid schemes, which purport to financially reward investors for bringing more people into the fold.

In some cases early investors receive payments to support the illusion that legitimate investment takes place. In almost all cases, the fraud organizers pocket the money, spend it for their personal use and disappear – or try to.

Affinity Fraud Exploits Group Identity

The most troubling aspect of affinity fraud is its blatant exploitation of group identity, trust and friendship. Promoters target a group leader, who unwittingly recommends investing to others. When things go bad, duped investors are embarrassed and often reluctant to contact authorities. This is especially true within immigrant and religious communities.

A partial list of recent affinity fraud scams is long and sobering. Investor.gov, a consumer information division of the U.S. Securities and Exchange Commission, cites schemes that have targeted seniors; Christians; gay men; Dominican and Brazilian immigrants; African-American churchgoers; and Persian Jews in Los Angeles, among others.

Some eye opening examples:

Fake NFL IPO

A “boiler room” call operation used high-pressure tactics to persuade seniors and other investors into buying stock in a company that had developed new technology for use during the 2013 Super Bowl.

At least 200 people invested in the company and its alleged “laser-line” system that would show a green first-down marker not only on television but also for players, fans in the stadium and officials. The money was not used to develop technology and the company had no agreement with the NFL, according to the SEC.

Small Business Development Scam

Organizers used the Internet, radio ads and live “wealth tour” presentations at predominantly African American churches to sell promissory notes with alleged annual interest rates of 12 to 20 percent.

The promoters also sold “sweepstakes machines” claimed to generate returns of up to 300 percent in the first year. The leader described himself as a socially conscious investor and convinced multiple victims to turn over self-directed IRAs to support small businesses such as a laundry, juice bar, or gas station.

Worldwide Scheme Defrauds Asians, Latinos

The SEC in 2014 shut down an investment program that raised more than $65 million in one year with false promises of a 100 percent return on investment in 100 days.

Billed as a cloud services venture, the operation awarded “points” for making investments and enrolling others. Promoters, who claimed investors could convert points into equity of new high-tech companies, targeted Asian and Latino communities in the U.S. and abroad.

Beyond Buzz: Advise Clients to Check Credentials

Perhaps your client’s uncle does have a “hot tip.” Or he could be an unknowing victim of affinity fraud. A pastor is usually not a qualified investment adviser.
Exaggerated credentials and promises of mammoth, quick investment returns should be red flags to any client. Legitimate sellers of investment products must be registered and licensed, and checking to make sure they are takes only minutes.

Fraudsters are savvy. They use the Internet, infomercials, social media, inflated credentials and bogus titles to create the appearance of legitimacy. Encourage your clients to contact you if they hear about an awesome investment that sounds too good to be true because it probably is – and you will earn trust and legitimate business by coaching them to investigate before opening their wallets.