Tis the season for return fraud

A look at common return fraud scams and what retailers can do about it

Return fraud is no small problem for retailers. The National Retail Federation's (NRF) 2009 Customer Returns in the Retail Industry Report estimates industry-wide return fraud and abuse to be in the $9.6 to $14.8 billion range. Return fraud represents a particular problem during the holidays. NRF estimates that return fraud during the holidays is 23 percent above full year rates, due in large part to 20 percent higher return rates and seasonal hiring practices.

Yet with an estimated 34.8 percent of gift recipients returning at least one gift item during the holiday season, according to the same report, retailers simply must accept returns in order to provide good customer service. And so retailers pursue the delicate balance between serving their legitimate customers and protecting themselves against fraud. Here is some insight into the different types of return fraud and ideas for striking that balance between customer service and fraud prevention.

The many faces of fraudulent returns
Return fraud comes in many forms, offering criminals a variety of ways to steal cash and goods from the retailer. Each of the different ways takes advantage of different weak points in the retailer's return policy.

"Wardrobing" is a practice in which the customer purchases the merchandise, uses it, and returns it. This kind of fraud is generally perpetrated by the "personal use thief," who may not even perceive the practice as theft. The 16-year-old who really wants to wear a certain dress to prom may not realize the gravity of this activity. However, this leaves the retailer with used or damaged inventory which must be written off or significantly discounted. This kind of theft may also include the return of items that have been broken or damaged through use, claiming that the product was damaged prior to purchase. Although the damage was not the retailer's responsibility, many people feel "entitled" to bring it back to the store because the retailer will accept it.

Some fraud is perpetrated by organized retail criminals who are out to make large sums of money off of fraudulent transactions. They may return merchandise purchased with fraudulent tender. Organized retail crime (ORC) rings may also perpetrate large volumes of return fraud by using an extensive and elaborate network of players. Serious criminals work in rings and pay "boosters" to steal items from designated stores. Then they pay other people to go return those items for a refund. The use of a large network of individuals makes it difficult for retailers to flag individuals as high risk because each booster is conducting only a single part of the transaction. Another trick is to have someone enter the store and purchase a designated good to get the receipt for it, and then return to the store through a different entrance to steal one or more of that same item. Then they have a receipt as "proof of purchase" should they be stopped at the door, and they have a receipt to enable return of the stolen item. Using these rings, it is possible to perpetrate return fraud on a massive scale with any single retailer.

Internal theft is another category. This kind of fraud can get expensive quickly, as employees have full access to resources and can commit fraud as frequently as desired. The employee may receive a legitimate return from a customer and then simply rescan the item for a second time, taking the cash from the register for themselves. This type of return fraud costs retailers double, as they now have registered in the system that they have two of the returned items on hand in inventory, when they actually only have one. Another trick is to have a friend purchase an expensive item in closed packaging and then replace that item with another, lesser or no-value item before returning it in the packaging to the store. The employee then processes the return with receipt, purposely failing to open the packaging and, if questioned, claims that they did not think to look in the packaging.

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