In last week’s blog we discussed the concept of ‘affinity fraud’ and some of the features of Interest Groups (such as sporting clubs, social networks and places of religion) that may make those groups vulnerable to fraud. In this week’s article, we’ll talk about some of the other risks associated with doing business with friends and some of the simple safeguards you can put in place to avoid some pitfalls and risks.
Business with ‘Friends’
Issues relating to the ‘affinity’ risk are not confined to fraudulent activities. The same applies in your general business interactions. Just because someone is affiliated with your particular Interest Group and appears to have similar beliefs or values is not a good reason for getting into business with them. I am reminded of a quote that is attributed to John D Rockefeller:
“A friendship founded on business is better than a business founded on friendship.”
Any business proposition needs to be considered in the cold hard light of day, outside of the confines of an Interest Group or friendship, with your particular financial and business goals in mind and with a healthy dose of scepticism. Often, you will not be the appropriate person to administer such scepticism to the situation. You need someone that has no vested interest in the venture or in the Interest Group that can ask all sorts of questions and objectively consider the answers.
The Art of Healthy Scepticism
Now, before I proceed, I understand that lawyers have a reputation for trampling on all things that are good about the world and so, with this in mind, I should make it clear that I am not, in any way advocating that there be a mass exodus from churches, community groups or sporting clubs. I am not suggesting that we all become bitter, cynical and suspicious. Nor am I suggesting that we must all give our treasured friends the cold shoulder. Quite the opposite.
What I am advocating is transparency and “healthy scepticism”. Being in business is risky. Investing is risky. It is unrealistic to expect that all risks can be eradicated simply because you appear to share common interests, beliefs, values or cultural background with the person that you propose to do business with. If that person is promoting an investment, business venture or scheme that offers great rewards and little or no risk and is heavily promoting it through your Interest Group, then it’s time to exercise a little healthy scepticism and proceed with caution.
An Interest Group should be a place for constructive, transparent relationships and when these relationships are tainted by fraud, misplaced trust or a bad business decision it can have devastating and far-reaching ripple effects throughout what should be a tight-knit and supportive community.
So here’s six simple tips to help you develop the practices of a ‘healthy sceptic’ and avoid affinity fraud or other risks associated with mixing friendship with business:
1. Endorser Beware
If you are in a position of leadership, be wary about who is promoted or endorsed through your Interest Group, especially if members of your Interest Group are being encouraged to invest money or otherwise have financial dealings with that person. It is a good idea to develop an ‘endorsement policy’ with your fellow leaders. Likewise, if you are a member of an Interest Group, learn to treat endorsements/ recommendations with caution and rely on your own ‘healthy scepticism’ or, indeed the scepticism of an independent professional advisor.
2. Background Check
If someone is asking you to have financial dealings with them, it is critical that you conduct certain background checks on that person, even if they are a member of your Interest Group. For example, if they are offering you an investment, at the very least you need to check that the person has a current Australian Financial Services licence. If you are being asked to invest in a business venture, then you need to check that the business is actually registered, trading and viable. There are discreet ways of doing this and your legal and financial advisors should know how to help.
3. Put Pen to Paper
Before accepting any offer or handing over any money, make sure that you get the proposal set out to you in writing but do not sign anything until you have had the opportunity to obtain independent advice. Never accept an excuse such as “I don’t have time to put it in writing” or “this is for a limited time only” or “because you are a member of [Interest Group], we don’t need to put it in writing, you can trust my word”.
4. Protect your Friendships
It is completely normal and natural to drop your defences in the context of an Interest Group but it’s important to recognise those situations that call for objectivity and healthy scepticism. If you value your Interest Group and the friendships within it, then you need to put certain safeguards in place to ensure that the friendships are not torn apart by poor investment/ business decisions or scams.
5. Say ‘No’ to Peer Pressure
Just because everyone else in the Interest Group is doing something, doesn’t mean that you have to. Sometimes this can be a difficult decision, particularly when you are placed under pressure by those that you know and trust.
6. See a professional ‘healthy sceptic’
It is the job of an independent professional advisor to exercise ‘healthy scepticism’. We are trained to identify risks and help you to develop strategies to avoid them. Too often people only seek advice after they have made an investment or parted with their savings. Always get independent professional advice before you invest.
For further information, please contact the author.
This article is posted in Adelaide, South Australia by Tri-meridian Corporate & Commercial Law and is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. We do not accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your professional adviser.