Sporting clubs, social networks, places of religion and cultural clubs are an integral part of our society.  Given the broad range of groups that this captures, in this article I will refer to them collectively as “Interest Groups”.  Interest Groups bring people together to share common interests, spiritual faith, cultural identities, values and hobbies.  They help us to meet and connect with new and interesting people and form strong relationships.  Unfortunately, Interest Groups also have a disturbing tendency to fall victim to some of the most damaging scams and, in particular, those scams that are commonly referred to as “Affinity Fraud”.

What is Affinity Fraud?

In its 2006 publication “Helping Consumers and Investors”, the Australian Securities & Investments Commission defined ‘Affinity Fraud’ as follows:

“Affinity fraud refers to investment scams that prey on a certain community, such as a religious or sporting group, an ethnic community or the elderly.  The fraudsters are group members (or claim to be) or they enlist respected leaders to spread the word about the scam.”

Interest Groups are often a place where people feel safe, trust and respect one another, and share common experiences, thoughts, opinions and this might include providing recommendations or advice.  It is therefore understandable that in this environment, one might more readily trust someone from within the Interest Group (as opposed to those outside the Group).

This trust is the very characteristic of Interest Groups that “Affinity Fraudsters” prey upon.  By aligning themselves with a particular Interest Group and holding themselves out as sharing the beliefs, interests, perspectives, aspirations or values of the Group, they can attract or convince people that might otherwise view them with scepticism.  As mentioned above, the fraudster will often use leaders within the Interest Group to perpetuate the fraud by obtaining endorsements and recommendations from those people that the members of the Interest Group place in a position of authority and special trust.

The ‘fraud’ might take the form of an illegitimate investment scheme, donations to a particular cause that are diverted elsewhere, taking payment for services that might never be performed or goods that never arrive.  We don’t need to travel too far from home to find notable documented examples of where ‘affinity’ or affiliation was used as a tool to perpetuate some untoward activities.  The Agape Ministries scandal in South Australia was but one example.

Why are Interest Groups vulnerable to Affinity Fraud?

Some of the main virtues and strengths of an Interest Group can also be the very things that make the members vulnerable to affinity fraud.  For example:

• Providing an environment where strong and dependent social & emotional bonds are formed.  This can mean that members are reluctant to believe that ‘one of their own’ could be involved in the scam and the fraudster may use emotional tactics to manipulate the Group’s perception of what has occurred.
• Members rely exclusively on the Group for support and advice.  Sometimes this will mean that Group members are reluctant to share certain concerns or queries with those that are outside of the Interest Group.  It can also mean that Group members are relying on support and advice from those that are also caught in the scam, even if that advice is well-meaning.  This characteristic has also been found to hinder investigations into certain scams because Groups are reluctant to betray the trust of the perpetrator by reporting the conduct to authorities or think that the Interest Group is equipped to deal with the problem alone.
• Endorsements carry weight.  Leaders within particular Interest Groups are often held in high regard and provide direction, guidance and support to members.  If a leader endorses a certain product, investment, service or person, then that can carry very significant weight with the Group’s members.  This means that sometimes leaders can unknowingly perpetuate the fraud.
• Interest Groups provide a captive audience.  The close-knit social structure that provides the basis of a healthy functioning Interest Group can also unfortunately provide a solid platform from which a fraudster can spruik a particular scam.  A broad range of trusting people can be reached through mediums such as the Group’s weekly gathering or at a fundraiser or sports event, and there might not be the same controls or filters on what can be promoted or encouraged at these gatherings as there may be in, say a business meeting.

This blog is part 1 of a two-part series.  Make sure you check out next week’s blog where we’ll talk about some simple tips and safeguards you can put in place to avoid some of the pitfalls and risks associated with doing business with ‘friends’.

For further information, please contact the author.

This article is posted in Adelaide, South Australia by Tri-meridian Corporate & Commercial Law and is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. We do not accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your professional adviser.