Combating Affinity Fraud: Scrutiny & Safety Among Groups

March 2015

IN THIS ISSUE

— Affinity Fraud: Exploiting a Sense of Safety and Common Purpose
— Scrutinizing From Within: Tools to Fight Affinity Fraud

GREETINGS!

Welcome to the March edition of our newsletter! In this issue, we’ll examine the ways in which affinity fraud is perpetrated, and what you can do to help your clients avoid becoming victims.

AFFINITY FRAUD: EXPLOITING A SENSE OF SAFETY AND COMMON PURPOSE

Human beings naturally form groups, in part to help create order and security in a chaotic world. Whether a religious group, condominium association or alumni group, these groups can provide comfort to the afflicted, and help members feel a sense of common purpose and unity.

Yet these same enclaves can be easily exploited, either by outsiders or members of the community who see a desire to trust others as a weakness to be taken advantage of. Bernie Madoff was one such example, circulating among Jewish charities and civic-minded individuals, claiming to get them amazing returns — which would help their efforts further the good they could do — while secretly leaving certain members of these groups (and others) victimized by being at the end of the Ponzi scheme chain he had created,

SCRUTINIZING FROM WITHIN: TOOLS TO FIGHT AFFINITY FRAUD

Affinity fraud among such groups is a white-collar crime, driven as much (or more) by a desire for money as it is a need to obtain status within a given community. This type of fraud also preys upon the human instinct to most trust persons like ourselves, creating tunnel vision toward what is actually occurring. Some states have taken notice and are instituting proactive steps to help communities become aware of such frauds. Utah, which has a large Mormon (Latter-Day Saints) population, recently created white-collar fraud registry focusing on affinity fraud, so that consumers, and law enforcement, have a central resource for identifying the past patterns and practices of such convicted fraudsters, after they’ve depleted one geographical area’s resources and moved to another part of the state.

While such tools are useful, there are other efforts which can help protect you & your clients. If a client is approached about an investment opportunity requiring large sums of money, but is told that the adviser will “handle all of the details” and is not shown terms and conditions, that adviser may be running a scam. Checking complaints with state attorneys general, as well as FINRA (or other regulated industry) registration, as well as a subject’s litigation record, can help you identify whether an adviser has a history of defrauding the people who trust him the most.