Affinity fraud

Warning: that charming fellow who made a presentation at your church or [ethnic group] community centre, promising to make you all millionaires overnight, does not have your best interests in mind:

Mr Madoff, whose victims lost perhaps $20 billion, perpetrated the largest “affinity fraud” ever. The term refers to scams in which the perpetrator uses personal contacts to swindle a specific group, such as a church congregation, a rotary club, a professional circle or an ethnic community. Once the scammer gains their trust, his scam spreads like smallpox. Most affinity frauds are Ponzi schemes, in which money from new investors is used to repay old ones, or is siphoned off by the promoters.

The Madoff fraud fed on multiple affinity circles: wealthy Jews in Florida and Israel, country-club types and European old money, lured with help from marketers running “feeder” funds. The next-largest alleged investment fraud of recent years, the $7 billion collapse of Allen Stanford’s empire, also concerned specific groups, including the Latin American and Libyan diasporas and Southern Baptists. Mr Stanford’s trial began on January 23rd. He denies wrongdoing.

Beneath the mega-scams swirls a mass of smaller cons, spanning the world. Any close-knit community can be a target. Last August a South Korean pastor was indicted for misappropriating 2.4 billion Korean won ($2.3m) that the faithful had handed over to set up a Christian bank. In Britain, Kevin Foster’s KF Concept targeted the former coal-mining towns of South Wales, bilking more than 8,000 victims with the help of glitzy roadshows.

The problem is a global one but best-documented in America. Besides the Madoff saga, Marquet International, a consultancy, has identified more than 300 sizeable Ponzi schemes from the past ten years, with combined losses for investors of $23 billion. It estimates that up to half of those were affinity-based. No one has a reliable number for smaller frauds over the same period, but guesses range from $5 billion to $20 billion. In all, affinity-fraud losses in America could be as much as $50 billion.

The FBI is probing some 1,000 cases of investment fraud, more than double the number outstanding in 2008. Six state securities commissioners contacted by The Economist all say the problem is growing.

[…]

Why do such people let their guard down? “Everyone is looking for a shorthand way to judge character, and affinity settings offer that, at least in theory,” says Jeff Robinson, head of the Utah County Attorney’s investigations bureau. Tribal ties foster trust, which is usually a good thing (see article). But it can be abused.

Another factor is the rise of “prosperity theology”, or the belief that God wants Christians to be rich as well as good. This idea has taken root fastest in black and Hispanic churches. The problem is that it puts pressure on congregations to invest successfully, which makes them more vulnerable, says Ole Anthony of the Trinity Foundation, which investigates church fraud.

Social media make affinity fraud quicker. Bonds that used to take years to establish can be forged in days on Facebook or Twitter. Fraudsters read potential victims’ online profiles, and use the information they glean to refine their pitches. In a recent case, the SEC won a restraining order against a scam targeting users of chat sites popular with the deaf.

If it seems too good to be true…

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