12.1.10 Case study: Affinity fraud

Cartoon shows Paul talks Sylvie into an investment fraud at her social club.


At a picnic with her social club, Sylvie's friends Oliver and Marie introduced her to Paul, a fairly new member of the group. Sylvie didn't know Paul well, but he came to every meeting and had led the last food bank drive. That was impressive.

"I want to tell you about an excellent opportunity," Paul said in a low voice. "It's exclusive, so I don't want just anybody to hear about it."

He told Sylvie about a brand-new trust fund. "It trades in high-yield foreign bank instruments in a prime bank trading market. Investors will receive a monthly return of 20 per cent for 12 to 18 months, and the return of your principal is fully guaranteed."

"Isn't it great?" said Marie. "We cashed in a $10,000 guaranteed investment certificate (GIC) to invest. I mean, three per cent on the GIC, compared to 20 per cent. You do the math!"

"And a portion of the profits go right back into the club," Paul said. "Just think of all the good work we'll be able to do!"

Sylvie considered. She had an adequate pension, but not much more. With an extra cushion, she'd be able to give more to her children and grandchildren, and she'd be supporting the club and all its worthwhile activities.

She wasn't a big investor and didn't like to take risks, but if the principal was guaranteed, then she wouldn't lose anything.

Sylvie decided to invest cautiously. She withdrew $5,000 from her savings and put it into the trust fund.

A month later, to her delight, she received a cheque for her original $5,000, plus 20 percent interest. She promptly sent presents to her entire family. Then she invested $10,000. Again she received the principal, plus interest.

Sylvie took out a loan for $50,000 and waited to receive her cheque.

The money never arrived. A few weeks later, Oliver and Marie came to a meeting looking shocked. Paul had disappeared. So had their money.

Sylvie was a victim of affinity fraud. Paul had gained the investors' confidence by building a relationship of trust, promising sure-fire returns and pretending to help the club. By making payments to early investors with funds raised from later investors, he had convinced them that the investment was successful. In fact, the prime bank trading program did not exist, and all of the investors' funds had been transferred to offshore accounts.

Lessons Sylvie learned:

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