Affinity scams are not something new and time and time again we read in the newspapers how people have been ripped off by someone they thought was “one of them,” someone that belongs to the same group as they do.

Couple gave away a million

Susan Pepperell recently reported how a couple lost almost a million in a a so called affinity fraud.

NC3 is investigating the South Island case, in which the couple transferred more than $1m of their savings to a Nigerian scam in several deposits over the last few months.

Police say the couple responded to an email from a man who said he had access to oil stock investments but needed money to get to them.

The couple, who did not question his credentials, believed the man’s story because he claimed to belong to their church.

“There was every possible indicator there that this was a scam but they simply didn’t want to believe it,” a police spokesman said. He described the couple as “very, very gullible”.

“Police had a heck of a time convincing them they were the victims of a scam. It’s unbelievable. In the end police had to send them a formal letter with very strong wording telling them what was going on.”

After the couple made several deposits into an overseas bank account, they were sent a credit card by the man as a sweetener. It was declined and when the couple questioned the man about it he told them he needed more money to activate it. It was at that point the couple became suspicious and spoke to police.

The police inquiry has been under way for about two weeks, and while they are following leads in several Third-World countries, they expect to turn up only dead ends.

The couple are now relying on members of their church for financial support.”

What is affinity fraud?

Affinity fraud could be described as a type of scam that targets members of a specific demographic group such as ethnic groups, elderly, or very popular, people that go to a specific church. The scam artists portray themselves as being a member of the same group or people who relate to members of a specific group in order to gain trust. In the end however these scam artists are after your money.

More than once affinity scams are related to ponzi schemes, pyramid schemes, and other shonky investment schemes where in the end you will lose out, and if you are gullible enough big time.

The essence of the scheme is the exploitation of the trust that exists within the group. In that sense the affinity part of the fraud is usually to be seen more as an instrument or tool to assist the scam artist in selling people into the underlying scheme. In some instances the scam artists even claim that part of the proceeds will go to a charity of some sort.

Ponzi type of schemes are usually popular whereby the money of new investors in the scheme is use to pay the “interest” to others in the scheme, that is of course until the scheme collapses due to shortage of new recruits or because the number of victims have grown to such proportions that not enough new people can be recruited to cover the “interest.”

In an increasingly complex world  knowing who to trust becomes harder. The recent events worldwide have shown us that this is especially true  when it comes to investing money. In addition many people do not really understand how our financial markets work, and more importantly how to thoroughly research an investment and its salesperson (due diligence). Affinity fraud is dangerous in that undercuts or circumvents the usual warnings signs about investment schemes promoted by strangers.

A techniques used by those scam artists to gain that trust quicker is to start selling first to the top or prominent members of the group and subsequently the rest. Once the connection is clear skepticism and carefulness seem to go out the window. The fact that those prominent members may well be highly enthusiastic at the time you are receiving a similar offer is no way a guarantee that the scheme is ok. Especially those stepping in early are receiving high returns to keep the enthusiasm high, which makes recruiting new victims easier.

Another dangerous aspect about these scams is that once a victim finds out he or she is a victim, they are often reluctant to come out in the open about it. As a result the scam remains hidden for longer than necessary. Elderly may be afraid that they will be seen as no longer capable to take care of their own interests, members ( especially prominent members) of a group may not know how to deal with the feelings of guilt for dragging others in or simply the loss of status in the group. In other instances there seems to be a tendency to try and solve it within the group instead of bringing things out in the open and reporting it to the authorities. That of course helps the fraudster as others victim (groups) will not be  alerted.

Favoured victim groups

Some groups are of course more attractive than others.

Elderly

The elderly form an attractive group in that they are more laid back and less alert. Their trust is earned easier, especially those that are neglected will be happy wit just the attention. Most importantly regularly these same elderly have some “nest-egg” that is an attractive target. In addition, once elderly find out they are a victim they may well have a tendency to keep it quiet so as not to be seen as incapable to take care of theirselves.

Churches /congregations

Churches are one of the favoured demographic groups since there is such an almost natural feeling of community and fellowship in which proper values are actually being celebrated as part of religious life. In such an environment many of the more known cases have taken place. Trust of fellow members comes almost natural. In addition they offer the additional advantage for the fraudster to  sell some of these schemes as religion based.

Minority groups/ immigrants

The scam artists play on the sense of loneliness and isolation to gain trust besides and most importantly the strange mechanism that people seem to trust their fellow countrymen more easily. The isolation may well be a factor considered by the scam artist because it could well mean that these “marks” have less access to information and less options to verify the claims made by the scam artist. Some of the members of these groups have been accumulating substantial amounts of money over time (to get the family over or get back) and are regularly more willing to guve back to their communities. A great entry point for any scam artist.

The Perpetrators: not always criminals

It is good to understand that there there are two types of perpetrators here:

• The Infiltrator: the scam artist who infiltrates in specific groups or communities for the sole purpose of gaining the trust of that group. For instance a group of people that all go to the same church.
• The misguided victim or participant in some kind of gifting scheme or pyramid scheme. Some MLM’s have been known to recruit amongst people from specific churches.

Some other examples

New Zealand

This is not the first time an affinity fraud has hit kiwis.  A  July 2004 news bulletin of the Securities Commission mentions some cases:

An American evangelist who defrauded New Zealand investors out of $8.5 million was sentenced to six years jail in June 2004. Donald Eugene Allen, a minister, preacher and motivational speaker was convicted of fraud in the Auckland District Court. Allen was convicted, together with Murray Christie, Dianne Ruth Christie and Stuart Alfred Buckland, of conspiring to defraud investors with false promises of returns of up to 15 per cent a month, equal to 431 per cent a year. Paul Davison QC, prosecuting for the Serious Fraud Office said they used Christianity to give the enterprise an aura of integrity and benevolence.

Many people from the Nelson, Hutt Valley and Tauranga areas were defrauded when they paid money to IMI Pacific Group Limited and Walakahai Pacific Corporation Limited in 1999. Two directors of these companies, Willard Karaitiana Amaru and John Edward Baylis were subsequently convicted of fraud and sentenced to prison terms. More than $8 million dollars were lost by investors attracted into the schemes by promises of unusually high rates of return. Promoters of the schemes targeted M?ori groups.

The Millionaires of the World (Part of the Hope Foundation Members Association S.A.) and the Wairua Tahi Trust (Goldrush) schemes, were promoted in Tauranga, the Waikato and Auckland during 2000. The promoters and their agents targeted church groups. Contributors were required to send money to offshore bank accounts in Lichtenstein, the Isle of Man or Panama. Many people lost money in these schemes before the authorities were made aware of them and warned people against them.

An investment scheme offering improbably high returns was illegally promoted by Lakeland Wealth Creators Limited during 2002 and 2003. People in the Bay of Plenty paid at least $14 million into the scheme. Church groups were targeted. The Commission banned advertisements for the scheme because they did not comply with the law, and warned people about the risks of any scheme promising unusually high rates of return.

A scheme run by Donald Moris Rea collected some $30 million during 2001 to 2003. The scheme was promoted to members of church groups in the Bay of Plenty. The scheme ran by paying the first investors from money contributed by later investors. This makes it appear that the investment is working. Quite a lot of money is unaccounted for, possibly sent to overseas bank accounts for the personal benefit of Rea and his associates.

United States

Source www.sec.gov.

Ponzi scheme solicited elderly members of Jehovah’s Witnesses congregations

The SEC complaint alleges that the defendants operated a Ponzi scheme and used investor funds to pay lavish personal expenses. The defendants raised over $16 million from more than 190 investors nationwide. Many of the victims were elderly members of Jehovah’s Witnesses congregations and were promised returns of up to 75 percent.

Fraudulent real estate investment scheme directed at retirees

SEC charged various real estate investment companies and their principals with defrauding senior citizens and retirees out of $15 million by conducting transactions in which they issued promissory notes in real estate investments they owned and operated. To make the sales, the defendants made gross misrepresentations about the financial conditions of their investment companies.

Ponzi scheme targeted African-Americans and Christians

Defendants perpetrated an affinity fraud, raising at least $16.5 million from mostly African-Americans and Christians by falsely representing they would receive returns through investments in, among other things, real estate, small businesses, and “markets of the world.”

California Investment Adviser bilked Korean Investors
Investment adviser raised more than $36 million by inducing members of the Korean-American community to invest funds with promises of large returns. Investors funds were not invested in accounts of a New York brokerage firm as represented; rather defendants put funds in bank accounts and fabricated monthly account statements. The adviser has pleaded guilty to related criminal charges.

Armenian-American community loses more than $19 Million
This affinity fraud targeted Armenian-Americans with little investment experience, for some of whom English was a second language. The architect of this fraud was later indicted.

Criminal charges against South Florida man for $51.9 million fraud

African-American victims of this investment scheme were guaranteed that their investments would generate a 30% risk-free and tax-free annual return.

“Church Funding Project” costs faithful investors over $3 Million

This nationwide scheme primarily targeted African-American churches and raised at least $3 million from over 1000 investing churches located throughout the United States. Believing they would receive large sums of money from the investments, many of the church victims committed to building projects, acquired new debt, spent building funds, and contracted with builders.

Baptist investors lose over $3.5 Million

The victims of this fraud were mainly African-American Baptists, many of whom were elderly and disabled, as well as a number of Baptist churches and religious organizations located in a number of states. The promoter (Randolph, who was a minister himself and who is currently in jail) promised returns ranging between 7 and 30%, but in reality was operating a Ponzi scheme. In addition to a jail sentence, Randolph was ordered to pay $1 million in the SEC’s civil action.

More than 1,000 Latin-American investors lose over $400 Million

The victims sought low risk investments. Instead, the two promoters (who received prison terms of seven and 12 years respectively) misappropriated their funds and lied about how much money was in their accounts.

125 members of various Christian churches lose $7.4 million

The fraudsters allegedly sold members non-existent “prime bank” trading programs by using a sales pitch heavily laden with Biblical references and by enlisting members of the church communities to unwittingly spread the word about the bogus investment.

$2.5 million stolen from 100 Texas senior citizens

The fraudsters obtained information about the assets and financial condition of the elderly victims who were encouraged to liquidate their safe retirement savings and to invest in securities with higher returns. In reality, the fraudsters never invested the money and stole the funds.

Hopefully the examples will give you some insight in how these things work.

How to avoid becoming a victim of affinity scams

Most investment scams can be avoided if you use your common sense. Don’t be afraid to ask  questions. If you are offered an investment opportunity that sounds attractive, and may of the affinity scams are brought like that, the following may help you avoid becoming a victim:

• Ask for the Investment Statement. Almost all investments offered in New Zealand are required by law to have an Investment Statement. The few types of investments that do not require an investment statement are required to have other documents with similar information about the investment. This document contains important information about the investment, the risk and the people behind it. If there is no Investment Statement there’s a good chance you’re dealing with a scam.
• Be skeptical:  the fact that you share beliefs or interests is no importance when it comes to handing your money over to someone else. Remember that the investment is something entirely different. Even the fact that you may have known someone “all your life” is of no relevance as the promoter may well be a victim him or herself.
• The recommendation of a friend is no basis for investment. The person who told you about the scheme may well be a victim him or herself. Do your own due diligence if you know what you are doing or better get independent advice from a financial adviser, lawyer, or accountant. An oh yeah, of course nit that lawyer and accountant that are sitting next to you every Sunday in church.
• Don’t fall for promises of spectacular or even guaranteed returns. Tempting as it may sound: if it seems too good to be true, then it probably is.
• Don’t fall for the no risk trap. Investing is all about taking risk; always. The higher the risk the higher the return potential. Promises of quick high profits, with little or no risk, are classic warning signs of fraud.
• Walk away when you are told to keep the opportunity secret. There is no reason why a legitimate investment needs to be confidential. The secrecy and often also short time offered to think about it are all about keeping you away from good information or advice and building pressure. TELL OTHERS ABOUT IT.
• Take as long as you need to think over the investment. Ignore pressure get in quickly or risk missing out on (yet another) “once in a lifetime opportunity.” Talk about it with others maybe you are missing something, or seek professional advice.
• Never and I mean never invest into something before you completely understand what the scheme is about. Those offering the schemes are obliged to provide you answers. Keep on asking until you do understand. THE DUMBEST QUESTION IS THE ONE NOT ASKED. You are handing over hard earned cash, make sure that you know what you are doing, and if in doubt or uncertain seek independent advice.
• Spam: report it. Fraudsters are increasingly using the Internet to target particular groups through spam. If you receive an unsolicited e-mail from someone you don’t know, containing a “must act now, can’t miss, risk free, guaranteed” investment, your best move is to pass up the “opportunity” and report it as spam.

Report scams or suspected scams to the police or the Securities Commission. If you don’t contact the authorities the fraudsters may go on to target another group of victims. And if in doubt, do not hestitate to contact Dierckx & Associates, we are here to help you.

Filed under: HEADLINES, SCAMS AND SCHEMES