WHAT IS AFFINITY FRAUD?
At the beginning of Side 3 of Grand Funk Railroad's 1970 Live Album, Mark Farner shirtlessly tells the audience this (edited for clarity):
Brothers and sisters, there people out there that look just like you, or maybe your brother...but they're not. And when they hand you something, don't take it. Don't take it, okay?
Now, Mark was referring to the kind of party supplies that might circulate at a rock concert in 1970, but he also could have been talking about affinity fraud almost fifty years later.
Affinity fraud targets people who are members of a group, and uses that group identity to lure victims into the scam. Some of the most common targets are religious groups or church members, people with a shared ethnicity, or those who have served in the military. The con artist will be a member of the targeted group, or will claim to be, and attempt to recruit others to help bring in more victims.
Generally, these scams take the form of phony investments or Ponzi schemes.
There are a variety of ways to identify affinity fraud. Here are a few things to look for:
Is the person offering the investment using membership in your group as his "in?"
A shared identity can be a great way to build community, but remember that the human tendency to trust those we see as similar to ourselves can be used against us. Just because someone claims to be a member of your group doesn't mean they are. There is no physical barrier to lying; "I'm the same as you" can be uttered by anyone, whether it's true or not.
Are the investment materials (brochures, flyers, etc.) filled with symbols or phrases familiar to your group?
A con artist targeting members of a church might festoon his written information with symbols or scripture (some even go so far as to imply that the "opportunity" has been sent from above). On the other hand, a scammer going after veterans might use flags, ribbons or eagles. Humans are emotional, and we respond strongly to symbols, but be cautious around any kind of investment offer that seems to be hitting those symbols a little too hard.
Are the promised returns extremely high, or is the investment presented as guaranteed or having little-to-no risk?
Real investments carry risk. There is always a non-zero chance you will lose some or all of your initial investment. An investment presented as "risk-free" or "guaranteed" is always going to turn out to be a scam, because that's not how investing works. Any investment promising double-digit returns is to be taken with a grain of salt.
Do the returns hinge on you recruiting others into the fold?
That's a Ponzi scheme. You will lose all of your money.
Is the broker licensed to sell investments?
Never invest through an unlicensed broker. Whatever your (or your group's) opinion of regulations, licensing requirements, or government in general, anyone selling investments without a license to do so is breaking the law. What other laws is this person willing to break? What about the ones that make stealing illegal? And don't fall for excuses like, "I'm not licensed because the government doesn't want your group to have access to this amazing opportunity," either. That's just someone stoking your emotions to goad you into action.
The U.S. Securities and Exchange Commission has a nice PDF available for download that goes into more detail about affinity fraud and how to report it to the SEC.
(However, it doesn't contain a single reference to Grand Funk Railroad. You gotta read my articles for those.)
Stay vigilant out there.
