Affinity fraud: when the con man is one of us

Affinity fraud is a scam aimed at the members of a group with which the con man shares, or pretends to share, something important: religion, country of origin, language, profession, a club or a neighborhood. The group's trust takes the place of checking, and the victims themselves bring in the next ones. The best-known case is Bernard Madoff, who, according to the American press, found much of his clientele in the circles of the well-off Jewish community of New York and Palm Beach; his clients lost about $17.5 billion in principal. Affinity fraud is the SEC's own term, and it describes the warning signs in its investor alert on scams that target groups.

What is affinity fraud?

It isn't a specific product but a way of selling any fraud: a Ponzi scheme, a pyramid scheme, a fake investment. What defines it is the channel: the con man gets into a community, wins over its leading figures and lets trust do the rest. Often the con man really does belong to the group; other times, he imitates it. Sometimes the first people to spread the offer are victims who believe in it in good faith.

The group gives him three things no advertisement can buy: credibility (“if the club president is in, it must be serious”), reach (every member knows others) and silence (whoever suspects something doesn't want to look distrustful or embarrass their own people). That's why it's the purest form of trust-based fraud.

How does affinity fraud work, step by step?

1. The way in. The con man presents himself as one of them: he shares the faith, the origin, the language or the profession, or he leans on someone who does.
2. The endorsement. He wins over one or more respected members: a religious leader, a well-known businessman, the neighborhood doctor. Sometimes they're victims who have received the first payments.
3. The exclusivity. The investment is presented as a privilege “for us,” sometimes with the idea that outsiders wouldn't understand it.
4. The chain. The first ones get paid and tell everyone. The offer spreads from family to family.
5. The silence. When doubts appear, the group hushes them: asking questions means distrusting your own.
6. The collapse. When it falls, the damage is twofold: the money and the trust within the community.

How do you recognize a scam among people you know?

• The reason to invest is who's offering it, not what the investment is.
• “It's just for us.” Exclusivity based on belonging to the group.
• There are no third-party documents: no regulator's registration, no account in your name held by another institution.
• High, regular returns, explained vaguely or with faith.
• You're discouraged from asking outsiders: your bank, an adviser, family members who don't belong.
• Social pressure. Anyone who doubts is treated as disloyal.
• Recruiting happens at group gatherings: the church or temple, the association, the neighborhood chat, the club.

To run a specific offer through these red flags, use the scam checker.

What are some affinity fraud examples?

Bernard Madoff (New York and Florida, until 2008). A former Nasdaq chairman, he presented himself as a money manager who “didn't take just anyone.” According to the New York press, he worked the so-called “Jewish circuit” of the country clubs of Long Island and Palm Beach, and one of his big middlemen, J. Ezra Merkin, was a prominent figure in the Modern Orthodox community, which, according to The New York Times, opened the doors of universities and synagogues to him. Law of Deception No. 6 sums it up: “Prestige is the perfect alibi.” The Justice Department's fund has returned more than $4 billion to more than 40,000 victims. We tell the story in the case of Bernie Madoff.

Allen Stanford (Antigua, until 2009). His bank sold certificates of deposit through advisers who earned a commission on every sale, and it hit Latin American families hard, families looking to protect their savings from inflation and currency controls. Venezuela was the hardest-hit country: when the fraud broke, in February 2009, the Venezuelan government seized the local subsidiary. Stanford was sentenced to 110 years. It's in the case of Allen Stanford: “The saver's fear is the con man's capital.”

Lou Pearlman (Florida, until 2007). From 1989, the creator of the Backstreet Boys sold “employee” savings accounts that, he claimed, were insured. No insurance existed. The hardest hit were retirees who believed their savings were insured and who trusted him because of the glow of his bands. He was sentenced to 25 years in 2008. See the case of Lou Pearlman, with its Law No. 13: “Someone else's fame is no guarantee for your money.”

OneCoin (2014–2017). Ruja Ignatova's fake cryptocurrency sold especially well in communities where the seller was someone trusted: a brother-in-law, a neighbor, the pastor of the church. We tell the story in the case of Ruja Ignatova.

Why does it work?

Because it combines two of the five levers we study at MATERIUM: trust, which makes checking seem unnecessary, and shame, which delays reports when everything falls apart. Many victims don't just lose money: they lose friendships and their place in the community. We explain it in why people fall for scams and in the Laws of Deception.

What should you do if someone close to you offers it?

1. Separate the person from the investment. You can trust your friend and distrust the product. He may be a victim too.
2. Check the registration. In the US, look up the firm and the person on FINRA BrokerCheck and in the SEC's adviser search on Investor.gov; in the UK, on the FCA Register, and check the FCA Warning List.
3. Insist that your money be held in your name at an institution that keeps custody of it and isn't the same one that manages it.
4. Ask someone outside the group: your bank or a registered adviser.
5. If you've already invested and have doubts, don't bring anyone else in, keep the evidence and report it: in the US to the SEC and to the FTC at ReportFraud.ftc.gov; in the UK to Report Fraud, the service that replaced Action Fraud. Warning the other members can prevent new victims.
6. Be wary of anyone who later offers to recover your money: that's a recovery scam.