Detective James MacDonald, EPS Economic Crimes Section is an expert in investigating investment fraud cases.
Affinity fraud occurs when a fraudster pretends to be part of a group (social groups, religious groups, ethnic communities, etc.) Many times friends and family members are brought into the scheme as they too may be part of the group.
The fraudster convinces the leaders, or a selec tfew of the group, that an investment scheme is legitimate. The most common type of affinity fraud is a Ponzi scheme, or pyramid scheme.
How do Ponzi schemes work?
A fraudster will talk about a legitimate investment which pays significant interest payments. Once the fraudster has some investors,the interest payments they receive is actually their own money being given back to them. The victims then spread the word about the legitimacy and success of their investment to others. This brings in more investors who continue to spread the news about their investment successes.
The fraudster never invests the money and almost always uses the remaining balance for their personal use, lifestyle and vices.The problem with the scheme is that it requires a never-ending supply of new investors. Once new investors dwindle and inevitably stop so too does the flow of money to pay the interest payments. This is when the victims realize that their investment was not legitimate and that their investment principle is gone.
People can lose a lot of money, even their life savings
People can, and do, invest substantial amounts of money into these schemes. If a scheme is beginning to slow down the fraudster often offers higher rates of return for existing clients who invest even more money.
The fraudster will tell the victim to draw from their RRSP’s, HELOC’s, credit cards, and remortgage their homes. In the end the victim is on the hook for all of their borrowed money.
The words ‘easy money,’ are a bad sign
Easy money should be a large red flag for anyone inthe investment world. There are no sure things in any investments. All investors should conduct their own due diligence when it comes to investing(Google, ASC, Civil court, etc). Legitimate investments require a lot of signatures on multiple financial documents and are almost never paid in cash.
If you’re meeting your investment person at a coffee shop or parking lot and handing over several thousand dollars in cash with only a handshake or hand written receipt / promissory note for the transaction red flags should be flying.
When the victims finally catch on, there is usually no money left. The fraudster has spent all of the money on interest payments and on their own personal lifestyle and vices.
1. What should a person do if they’ve been victimized?
Gather up all of your documents provided by the fraudster, returned cheques, money orders, bank statements showing withdrawals of money. This may be your only evidence that you participated in the investment.
Report the investment to police. Some people do not report to police as the fraudster was,or still is, a member of their trusted tight knit group and they choose to work it out within the group.
2. Tips on how to avoid becoming a victim
Pay attention to the red flags: too good to be true, better rate of return than any other legitimate investments, cash payments, meeting in coffee shops,etc.
Do your own due diligence on the person before you are going to hand over a substantial amount of money to (Google, ASC, Civil court, etc).
Consult with an independent financial advisor or lawyer before you invest.
Fully understand what it is that you are investing in and how it works. If you do not fully understand don’t invest.
Never invest any money unless you are prepared to lose it.
If it sounds too good to be true then it is. No one to date has ever been able to beat the market.
TRUST is a key element to any scheme. TRUST is the most powerful tool for someone looking to separate you from your money.
If the only thing you are going on is trust you are not protecting yourself!