Fraudsters work their way into groups their target belongs to and work to gain their trust. After they create strong relationships, they convince people to invest in their scheme. Find out how to avoid affinity fraud.
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What is affinity fraud?
Imagine you’re newer to Canada and English is not your first language. You find comfort in a community group that shares your language and customs. Over time, a member of that group introduces you to an investing opportunity. You trust them because they’ve been in Canada longer and they seem to want to help you succeed. But once you invest, things stop adding up and your money is gone. This is called affinity fraud.
Fraudsters will use their targets’ group identity to gain their trust. Once they have established strong relationships, they convince people to invest in their scheme. For some groups, especially those with many new Canadians, the fraudsters may have been in Canada longer and present themselves as someone that other community members can trust and rely on.
Fraudsters exploit the behavioural bias known as the halo effect in affinity fraud. The halo effect takes place when positive impressions of a person in one area positively influence our impressions of that person in another area. For example, affinity fraud often takes place when fraudsters infiltrate a volunteer group or religious community to befriend the members. The fraudster’s friendliness causes victims to overestimate their trustworthiness — due to the halo effect. Find out more about how fraudsters take advantage of behavioural biases to promote their scams.
A common type of affinity fraud is a Ponzi or pyramid scheme. These schemes promise everything from making big money working from home to turning $10 into $20,000 in just six weeks. Or, you may be given the chance to join a special group of investors who are going to get rich quick on a great investment.
Investors who get into the scheme early may receive high returns fairly soon from what they think are interest cheques. They’re often so pleased that they invest more money, or recruit friends and family as new investors. But the investment doesn’t exist, and the “interest cheques” are paid from the investors’ own money and money from new investors. Eventually, new people stop joining the pyramid. There’s no more money to pay out and investors stop seeing any returns. This is often when a fraudster will vanish, taking all the money with them.
How do you avoid affinity fraud?
There are a few steps you can take to avoid affinity fraud:
1. Check before you invest
One of the best ways to avoid investment fraud is to make sure that any person offering you an investment or investing advice is registered to do so. In general, anyone selling securities or offering investment advice must be registered with their local securities regulator. Checking registration is quick and easy, visit CheckBeforeYouInvest.ca for more information.
2. Get a second opinion
Be skeptical of unsolicited investment opportunities that you might receive over the phone, online or from acquaintances. Before you invest, call the Ontario Securities Commission or get a second opinion from someone you’ve confirmed is a registered advisor. You may also want to consult a lawyer or an accountant.
3. Take the time you need
Be suspicious of limited-time offers and high-pressure salespeople. You should never feel pressured to buy an investment on the spot. Take the time you need to make an informed decision.
4. Research the investment
Before you make any investment, understand how it works and the risks and fees associated with it. Don’t be afraid to ask questions and make sure that it fits with your financial goals. Find out more about researching your investments.
How do you report affinity fraud?
People who have had money taken in various scams often don’t report it because they are embarrassed or ashamed. In affinity frauds, reporting can be even more complicated. A person may worry they are betraying their circle and fear backlash from the group if they report the scam. They may try to resolve problems within the group, which can leave other groups vulnerable to the same scam.
Reporting is critical to stop the scammer from taking money from more members of the community.
If you’ve been defrauded, it’s important to report the fraud. You can help prevent a friend, family member or someone in your community from having money taken by a fraudster.
To report a fraud, contact:
- Your local police – You should file a police report as soon as possible
- The Ontario Securities Commission (OSC) – The OSC Inquiries and Contact Centre can help if you have a complaint about an investment or think you may be a victim of investment fraud. You can reach the OSC by Online Form or call 1-877-785-1555.
- The Canadian Anti-Fraud Centre (CAFC) – The CAFC helps law enforcement by maintaining a central repository of information to assist with investigations. You can report online at reportcyberandfraud.canada.ca or call 1-888-495-8501
Find out more about what to do if you have been scammed.
Want to help a family member avoid fraud but English is not their first language? Investing Introduction has helpful information and resources in 23 languages.
Summary
If you’ve been approached by someone with an investment opportunity — no matter how trustworthy they may seem — you should:
- Check before you invest — make sure that the person offering you an investment or investing advice is registered to do so.
- Ask for a second opinion with a registered advisor, the Ontario Securities Commission and consider consulting a lawyer or accountant.
- Take as much time as you need to make an informed decision — you shouldn’t feel pressured to buy investments.
- Research the investment and understand its risks and fees.
- Report investment fraud if you suspect you’ve been approached by a fraudster.
