Affinity fraud

AFFINITY fraud refers to investment scams that prey upon members of identifiable groups, including religious, elderly, ethnic, and professional groups.

The fraudsters who promote affinity scams are group members, claim to be members of the group, or enlist respected leaders within a group to spread the word about an investment deal.

In addition, fraudsters are increasingly using the Internet to target groups with e-mail spams. These scams exploit the trust and friendship that exist in groups of people who have something in common. Because of the tight-knit structure of many groups, it is usually more difficult for regulators or law enforcement officials to detect an affinity scam.

Victims of such scams often fail to notify authorities or pursue their legal remedies, but are more likely to try to work things out within the group.

Many affinity scams involve ``Ponzi'' or pyramid schemes where new investor money is used to make payments to earlier investors to give the false illusion that the investment is successful. This ploy is used to induce or ``trick'' new investors to invest in the scheme and to lull existing investors into believing their investments are safe and secure.

In reality, the fraudster almost always steals investor money for personal use. Both types of schemes depend on an unending supply of new investors -- when the inevitable occurs, and the supply of investors dries up, the whole scheme collapses and investors lose most, if not all, of their money.

How to minimise risks

Making investment decisions can be risky. You can minimise the risk by asking questions and demanding the facts about any investment. To avoid affinity and other scams, you should:

* Check for everything -- no matter how trustworthy the person is who brings the investment opportunity to your attention. Never make an investment based solely on the recommendation of a member of an organisation, or religious or ethnic group to which you belong. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.

* Do not fall for investments that promise spectacular profits or ``guaranteed'' returns. If an investment seems too good to be true, then it probably is. Similarly, be extremely vary of any investment that claims to have no risks; very few investments are risk-free. Generally, the greater the potential return an investment offers, the greater the risks of losing money on the investment.

* Be sceptical of any investment not fully documented in writing. Fraudsters often avoid putting things in writing, but legitimate investments are usually in writing. Avoid an investment if you are told they do ``not have the time to reduce to writing'' the particulars about the investment. You should also be suspicious if you are told to keep the investment opportunity confidential.

* Do not be pressured or rushed into buying an investment before you have a chance to think about -- or investigate -- the ``opportunity.'' Just because someone you know made money, or claims to have made money, does not mean you will too. Also, watch out for investments pitched as ``once-in-a-lifetime'' opportunities, especially when the promoter bases the recommendation on ``inside''' or confidential information.

(Source: www.sec.gov)