According to the Merriam-Webster online dictionary, the etymology of the word "affinity" has both Anglo-French or Latin origins, and dates to the 14th century. Affinity generally means "kinship" or a likeness based on connection. Business scams based on affinities are often disguised as investment deals or sales opportunities with organizers claiming a close identity with members of the targeted group.
Wide Scope of Affinity Scams
An affinity scheme can apply to a wide range of affinities. In a U.S. 7th Circuit Court decision issued on February 17, 2010, the facts of the case involved the United Airlines Employees' Credit Union (UAECU). The UAECU is a U.S.-based credit union where the affinity of the group is that its members are in the airline industry. The federal appellate court held that the UAECU had been defrauded and targeted as a professional associational group. See United States of America v. Ondray Pulley, (7th Circuit Court of Appeals, No. 08-3363, Decided 12/17/2010).
Affinity Group Fraud Uses Trusted Members: The Bernard Madoff Affinity Scheme
“New Era was an affinity scheme, in which the founder defrauded people of common interest: in this case, local nonprofit organizations and faith-based charities,” reported a commentator in the short article Surviving a Pernicious and Pervasive Culture of Corruption, LancasterOnline.com (Feb. 1, 2010). “Similarly, the recent fraud committed on the region's Plain communities, as well as Madoff's fraud on Jewish investors, are affinity frauds.”
Like the Madoff fraud scandal, affinity scams often use “Ponzi” or pyramid operations where new investor money is used to make payments to earlier investors to give the false illusion that the investment is successful. Once the “investor” supply dries up, the whole scheme collapses. The group loses most – if not all—of their money.
The business plan or operation of an affinity scheme is often presented as sales or investment opportunities that are “surefire” or “once in a lifetime.” An example of a frequently used business model that exploits affinity groups are recruiting individuals to sell credit cards or other types of non-government backed currencies.
How to Minimize Risk of Fraud
There are a number of ways to minimize the risk of being a victim to an affinity scheme fraud. Here are ten tips and considerations:
- The use of the term “affinity scheme” may lead the reader to associate affinity plans with a negative connotation. Remember, not all affinity schemes/plans are fraudulent.
- When parties are told to keep the investment “confidential” it is a red flag to increase the level of investigation and slow down the operator. Do not be afraid to request an opportunity to "think about it."
- Beware when testimonial sessions are overly aggressive. The mix of faith with fortune for the reasoned mind will make these sessions naturally uncomfortable. Remember, there is a core societal concern being addressed by making church and other religious operations not-for-profit in nature.
- Be aware that the person delivering the message about the investment may have been fooled into believing that the investment is legitimate when it is not. No need for the "I told you so." Anyone can fall victim of the Three Card Monte, Find the Lady, or Bonneteau swindle.
- Do not be afraid to ask for verifiable records or statements of purported performance. Get it in writing, preferably from a certified accountant whose license would be accountable if the business venture was discovered to be fraudulent based on fraudulent accounting practices.
- Always ask questions and request facts when income is only derived by bringing others on board. Just because someone has made money, or claims to have made money, doesn’t mean the money will trickle down to those at the bottom of the pyramid.
- Contact the Better Business Bureau (BBB) in the jurisdiction of the business operation. The BBB is a consumer protection resource to start investigating a business with products that seems too good to be true. There may be complaints of record on the affinity scheme, or a similar one, with the BBB.
- Inquire with the state department about the entity. Find out how long the business has been in operation and whether the entity's license to conduct business and annual reporting requirements are current.
- In the USA, the Security and Exchange Commission (SEC), a federal agency, actively investigates scams that prey on members of groups.
- Beware of affinity plans that come through email communications or solicit members through the Internet generally. Check the security of a business website and find out where the business is registered (see #8). This is the best insurance that the business can be made accountable under the rule of law in a court in the state of operations.
If a family member or friend is caught up in what appears to be a group affinity scheme, perform some investigative steps from the listed tips and consideration to present verifiable facts when conversing about the topic. The problem with uncovering affinity schemes is that victims are often too ashamed to tell authorities or seek legal remedies.
General Disclaimer: This article is for informational purposes only and should not be used as a substitute for tax or legal advice.
Vanessa Cross - Vanessa Cross is a freelance writer who writes about international trade, business law and small business development issues.
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