Affinity-Based Fraud

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Affinity-Based Fraud

The U.S. Securities and Exchange Commission recently added a new page to its Web site devoted to what has become known as affinity fraud.1 This term refers to scams that target identifiable groups, such as religious or ethnic communities, the elderly, or professional groups.

For example, in Corona, California, when a member of Crossroads Christian Church offered to help other members of the congregation and the pastor to invest their money, they never doubted that he could be trusted. After all, he attended services regularly, made generous donations to worthy causes, and even sang in the church choir. Because they knew him through their common involvement in the church, any sense of skepticism melted away.

By the time the con artist was unmasked as a fraud, he and his partners had stolen more than $50 million from their clients.

This is a particularly insidious form of fraud, because it preys on something that is at the heart of human nature: our need to be part of a community of like-minded individuals. All people are social by nature, and in fact, scientific research has shown that not being part of a group is actually bad for your health. People with social support groups live longer, and fall ill less frequently, than those who are connected.

Because this tendency goes to the heart of who we are, people are particularly vulnerable to this type of fraud. In fact, many of those who commit affinity fraud are members of the very group on which they prey. They frequently enlist other members of the group — sometimes very influential ones — to further their schemes.

Here are some recent examples of this type of scheme:

Over $16 million was stolen from more than 190 elderly members of the Jehovah’s Witnesses congregation. The victims were promised returns of up to 75 percent on their investments, while the scammers used the money to pay lavish expenses.

The SEC charged several real estate investment companies with bilking senior citizens and retirees of some $15 million by issuing promissory notes in real estate investments they owned and operated.

A group of African-American Christians was defrauded of $16.5 million in real estate, small businesses, and so-called “markets of the world.”

An investment advisor stole more than $36 million from Korean-Americans using fake funds that didn’t exist. Instead, the thief deposited the money in a personal bank account and sent out fabricated monthly statements to the investors.

Members of the Armenian-American community who spoke little English were targets in a similar scheme...

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