Affinity fraud

Investment fraud that spreads through a community whose members already trust one another - a congregation, a professional body, an alumni network, a diaspora group.

Example

An early investor is paid out on time, tells the rest of the community, and becomes the scheme's most effective and entirely sincere salesperson.

Important

Membership of the group substitutes for verification, and the checks that would catch the fraud feel like an insult to the person who introduced you. That social cost is the mechanism, not a side effect.

Related terms

• Ponzi scheme — A fraud in which money from new investors is paid out to earlier ones and presented as investment returns, because the stated investment activity either does not exist or does not produce the reported profits.
• Herding — Taking a position mainly because many others are taking it, treating the crowd's activity as though it were evidence about value.
• Due diligence — The work of independently verifying the claims made about an investment before committing money to it - the documents, the counterparties, the registrations and the numbers.

Lessons that explain it

• Fraud, and the tells that give it away — Most investment fraud does not look exotic. It arrives through someone you already trust, offers returns that are only slightly too good, and fails a small number of checks that take an afternoon. (12 min)

All 578 terms in the Investing glossary