Affinity is only skin deep -- INSIDIOUS FRAUD OF FAMILIARITY

From:  http://www.acfe.com/AffintySkinDeep/

March/April 2013
Frank S. Perri, J.D., CFE, CPA; Richard G. Brody, Ph.D., CFE, CPA

Fraudsters know no boundaries, even when it comes to their supposed friends and family. Affinity fraud is a particularly insidious crime in which fraudsters use their similar characteristics to others to gain trust — ultimately exploiting that trust for their own financial gain.

Cambodian fraud victims said that fellow immigrant Seng Tan arrived at their homes in a black Mercedes S500 to outline investment opportunities. With her Canadian-Cambodian citizen husband, James Bunchan, Tan impressed many of her uneducated fellow Cambodians with appearances of wealth and the way she dressed. Like them, Tan had fled the horrors of the Pol Pot regime. She knelt in their temple to pray, and they cried and laughed together over their shared experiences. The immigrant families, who didn’t have enough cash to invest, collected money from relatives, cashed out retirement accounts and took out equity loans on their homes. Fraud victim Tai Kim said she thought “God sent her here to help Alleged Pyramid Scheme Offered Kinship, a Dream” by Yvonne Abraham, Feb. 19, available for a fee.)

Bunchan and Tan used their ethnic heritage to infiltrate a Cambodian community by speaking its language, professed their religious piety as the group did; exploited the group’s cultural propensity of maintaining a distant relationship with outsiders who could, therefore, not have knowledge of the fraudulent investments; and used the group’s leaders to legitimize their reputation and their alleged investments.

Bunchan and Tan were found guilty of fraud in 2007. Tan was sentenced to 20 years in federal prison. Bunchan also was convicted in a murder-for-hire plot in which he had discussed targeting 12 of their Ponzi scheme victims and a Massachusetts federal prosecutor. He was sentenced to a combined 60 years in federal prison. (See “Appeals Court Upholds 20-Year Prison Sentence of Seng Tan,” PatrickPretty.com, March 27.)

BUILDING FRAUD THROUGH CONNECTIONS

Affinity fraud is a financial scheme practice that relies on building trust with victims based on shared affiliations and characteristics — such as age, race, religion, ethnicity or professional designations — for financial gain.

We’ll discuss the concept of affinity fraud, the ease with which Bunchan and Tan perpetrated it in the Cambodian case and the difficulty fraud victims have in reconciling the “special trust” they believe they shared with predatory white-collar criminals.

We also examine affinity fraud offenders’ behavioral characteristics and psychological techniques of persuasion to show how they overcome victim skepticism. The concept of projection bias supports our position that building trust creates a synergistic effect that makes it easier for fraud to occur. Finally, we outline anti-fraud measures to minimize the risk of affinity fraud.

STEALING FROM THOSE CLOSEST TO YOU

Affinity refers to a sense of “kinship” or likeness based on characteristics common to a specific group, such as racial, religious and ethnic communities, the elderly or professional groups. The offenders who promote affinity scams frequently are — or pretend to be — members of that group. A common strategy is to enlist respected community or religious leaders from within the group to spread the word about the scheme by convincing the leaders that a fraudulent investment is legitimate and worthy of advancing the social and economic interests of the group.

Once the fraudster has convinced the leader, the fraudster uses the leader as a pawn to convince his followers to invest with him or her because the offender is assumed to be trustworthy. The inherent trust individuals inure to others who belong to the same group can be construed as a weakness to be exploited by those who may share those traits but have ulterior motives.

Many people don’t know how to thoroughly research an investment and its salesperson. Affinity fraud poses dangers because it undercuts the usual warnings about investment schemes promoted by strangers. In these cases, fraudulent investments may come to one’s attention as the result of a contact from a friend, colleague or someone who inspires a bond of trust. “You can trust me,” says the scammer, “because I’m like you. We share the same background and interests. And I can help you make money.” The normal cautious skepticism is replaced by social banter.

As another fraud victim defrauded of $35,000 indicated about her experience, “He told me that he had been guided by the spirit to people who are struggling financially, and he had the revelation that he should come to me and he would be my financial rescue. … [T]hese people who target and are doing affinity fraud, they know what they’re doing, and they’re good at it, and they just work you until you have their trust.” (See “The optics of fraud, by Frank S. Perri and Richard G. Brody, Journal of Financial Crime, volume 19, issue 3.)

Defrauding investors in church-based settings is particularly effective because con artists can reach an entire congregation. However, perpetrators also use Internet sites, ethnically affiliated media and conferences or other social gatherings to gain access.

Securities regulators at all levels have expressed concern about the dramatic growth of affinity fraud; since 1998, affinity fraud has been ranked one of the top five investment schemes. (See “Top Investor Traps,” by NASAA, 2011.)

One nationwide survey found that between 1984 and 1989, affinity fraudsters cheated 13,000 investors out of $450 million, and from 1998 to 2001, more than 90,000 investors in 28 states lost more than $2.2 billion. (See “ The Thin Line Between Love and Hate: Why Affinity-Based Securities and Investment Fraud Constitutes a Hate Crime",” by Lisa M. Fairfax.)

In all, affinity-fraud losses in America are estimated at $50 billion annually. (See “Fleecing the flock,” The Economist, Jan. 28.) Recently, Utah citizens who belong to faith-based organizations have been defrauded of more than $1.5 billion. (See “Bills would crack down on affinity fraud in Utah,” by Emiley Morgan, Jan. 31, 2011.)

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