What is Religious Affinity Fraud?

In some way or another, everyone is connected to a group, association, or community-based organization. Our backgrounds and interests naturally lead us to form affiliations that fulfill our needs. When a person gains the trust of others because of a shared affiliation, such as religion, race, ethnicity, career, or some other social characteristic, and then defrauds them in a financial transaction, it is called affinity fraud. This type of investment scam specifically preys upon members of identifiable groups. Affinity scammers frequently are members of the group they prey upon, and they often enlist respected leaders from within the group to perpetrate their scheme – oftentimes without the leader’s awareness. Most affinity scams involve Ponzi or pyramid schemes, where new investor money is used to pay earlier investors and give the illusion of a successful investment. This tricks new individuals into investing and lulls existing investors into believing their investments are secure. But the fraudster almost always steals the money for personal use, and when the supply of investors dries up, the whole scheme collapses and investors discover their money is gone.

Religious affinity fraud

One of the most widespread types of affinity scams is religious affinity fraud. Victims of religious affinity fraud often say they trusted the scammer because he or she “had the same values and beliefs.” In Florida, a former host of a Christian radio show, It’s God’s Money, was arrested for defrauding 38 people out of $6 million. Gary L. Gauthier’s victims were listeners of his Tampa radio show, and they specifically relied upon Gauthier’s statements because they were made on a Christian radio station. Most of the victims were elderly and were persuaded to deposit their life savings in the fraudulent company set up by Gauthier and his partner, David George Dreslin. Gauthier would provide his listeners with a telephone number and then meet them at their homes to discuss their investments. He’d then convince them to liquidate their annuities, cash out their retirement accounts and, in some instances, take cash out of the equity in their homes. Gauthier’s scheme lasted from April to August 2005, and impacted a significant number of people that faithfully believed what Gauthier told them over the radio because of his religious affiliation.

Perhaps Gauthier got the idea for his scam from Patrick Kiley, the host of another Christian radio show, Follow the Money, who was involved in a $194 million Ponzi scheme in Minnesota. Kiley’s radio program was carried on more than 200 stations around the world. He told his listeners he was a senior financial advisor and warned them about a “coming financial Armageddon,” which could only be avoided by investing in his foreign currency trading scheme.

In another recent case of religious affinity fraud, a Mississippi single mother was defrauded by a pastor she looked to for emotional and spiritual advice as she went through a difficult divorce. The pastor, Samuel Ray Palasota, created a fake investment program and provided the victim false documentation. He sent her letters infused with religious references to assure her she had done the right thing investing with him. Palasota then used the victim’s $650,000 to buy luxury cars and computers.

These are only a few examples of scams that use religion as the means to prey upon investors. Affinity fraud exploits the trust that exists in groups of people with something in common, and it undercuts typical warnings associated with investment schemes promoted by strangers. The normal investment process of cautious skepticism is replaced by group feelings of loyalty and solidarity. The tight-knit structure of such groups makes it difficult to detect the scam. It’s hard to conceive of a more despicable scheme than to defraud people whose trust was gained through shared values.

Avoiding affinity fraud

First, investors should know that increased returns almost always come with increased risk. Nearly every scam is premised on convincing investors that the proposed investment will give high returns with little or no risk. Those investments are usually the opposite of what they promise – all risk, with no return. It is also important to remember that diversification mitigates risk and avoids a single scam wiping out your entire life savings. No one should invest a significant portion of their funds in any one investment, and you should avoid private investments if possible. Private deals are typically illiquid, not subject to supervision by the SEC, often don’t have audited financial statements, and are not very transparent. Consider a globally diversified portfolio of funds appropriate for your tolerance for risk. Lastly, use a major custodian for your assets, like T.D. Ameritrade, Fidelity, or Charles Schwab. Funds should be deposited directly with the custodian, and your account should be web accessible. Following these simple rules can help ensure that you won’t be a victim of a scammer, regardless of his religious persuasion.

If you have been the victim of affinity fraud, give us a call. We may be able to help you get your savings back.

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