The Tennessee Department of Commerce & Insurance's Securities Division is warning Tennessee investors about how to avoid becoming a victim of a type of fraud known as affinity fraud.
What is affinity fraud? Affinity fraud occurs frequently anywhere groups of people gather around a shared belief, interest, or goal such as places of worship, in tight-knit ethnic or immigrant communities, at country clubs, in professional organizations, online forums and elsewhere. That shared interest – the reason a group gathers in whatever form it does – creates camaraderie and trust among the members.
Scam artists and fraudsters use the trust they build to convince members to invest in investment schemes or phony business projects to line their own pockets, leaving investors broke. The scammer gathers money from investors in the group, and often pays returns using new investor money. The scammer perpetuates this as long as he or she can.
Frequently, victims fail to report the fraud to avoid embarrassment or because they want to handle it within the group, allowing scammers to prolong their schemes.
What can investors do to spot fraudsters and avoid affinity fraud? Remember:
- Know that it's common. Affinity fraud happens every day, all over the United States and Canada. Investors should be cautious if they are approached about an investment at church or in a community group.
- Don't act on personal feelings. People who commit affinity frauds are usually very likeable and seem trustworthy. Investors should never let their comfort with a person's character and status in the community replace adequate due diligence. Ask questions.
- Don't act too quickly. If someone offers you a can't miss investment opportunity and puts you on the spot, don't be afraid to walk away. Never make an investment decision without understanding where your money is going, how it will be used, and how you can get it back.
- Everything has risk. There is no such thing as a risk-free investment, and anyone who promises otherwise is lying. Investors should always ask about the risks of the investment, and understand issues such as liquidity, investment timeframe, rate of return, risk of loss, and how the proceeds of the investor's investment will be used to turn the promised profits.
- Trust but verify. Affinity fraud frequently involves someone that the victim has known for many years. The simple fact that you've known a person for 20 years does not replace the need to ask questions about any investment opportunity, and to take pause if you don't understand it.
- Always ask if the person and the security are registered. Contact your local securities regulator, or search the Financial Industry FINRA's BrokerCheck, or the Canadian Securities Administrators' National Registration Search databases to confirm if the salesperson is registered. Regardless of how long you have known a person or been conducting business with an individual, it's worthwhile to do a quick search in the database to confirm up-to-date licensing and compliance.
For more information, contact the Tennessee Securities Division at (615) 741-2947 before investing your money. We're here to help with inquiries concerning securities broker-dealers, agents, investment advisers, investment adviser representatives, financial planners, registration status of securities or debt management programs, to report suspected fraud or to obtain consumer information.
About the Tennessee Department of Commerce & Insurance: Protecting Tennesseans through balanced oversight of insurance and regulated professions while enhancing consumer advocacy, education, and public safety. Our divisions include the State Fire Marshal's Office, Insurance, Securities, Regulatory Boards, Tennessee Law Enforcement Training Academy, Tennessee Emergency Communications Board, and TennCare Oversight.
To check a license of a professional regulated by the Department, go to http://verify.tn.gov/.