Retailer Beware: Refund and Exchange Scams

The good news is that for many retailers, the 2004 holiday shopping season turned out better than expected. The bad news is that with all that purchasing going on, there will be a commensurate number of post-holiday returns and refunds requested. While no retailer is thrilled about taking back merchandise, the chaos of the after-Christmas store scene makes returns and exchanges an even more bitter pill to swallow because of the very real possibility that all those transactions just might not be legitimate.

Thieves and fraudsters play their con games all year long, but the end of the year is an ideal time to hide in the crowd of legitimate shoppers who really don't like the scarf from Aunt Mary or who won't use the tennis racquet from Uncle Fred in a million years. People who return items they don't like or that don't fit aren't going to cost the store much more than a small amount of aggravation and a little of the cashier's time. And a store with well-trained employees has an opportunity to convert that returner into a customer by offering them additional merchandise while they're standing inside the store. But those who are running a game can gouge the retailer in several ways.


Some thieves attempt to return merchandise that was stolen from the same store or another store in the hopes that they will receive cash back or a store credit that they can use to make a legitimate purchase, which they then try to convert to cash.

Others attempt to "launder" money by paying for merchandise with a bad check, then attempting to return the item for cash before the store finds out that the check has bounced.

Computer-savvy swindlers electronically dummy up a real-looking store receipt using a scanner, computer and printer. They present this seemingly legitimate piece of paper along with a stolen item at the counter, looking to get cash back. The less technologically inclined will comb the trash near the store entrance, looking for discarded receipts they can use to make "returns" of matching items they pull off the shelves.

The more brazen -- or desperate -- ones simply pick up merchandise inside the store, walk it over to the customer service desk, and request money "back" in exchange.

Sometimes, instead of asking for a full "refund," con men (and women) will bring in merchandise that they purchased at less than full price, or at a discount elsewhere, and try to return it for full price, thus pocketing the difference.

Another trick is to bring in a higher-priced item and request an exchange for lower-cost merchandise, with cash back for the difference. The advantage is that the fraudster not only receives money, but also walks away with a legitimate receipt for the new item -- which he can later return for a full refund.

Some thieves engage in a variation of distraction theft, which occurs during a return or exchange. Usually, the bad guys work in pairs to pull this con. They bring in an item, ostensibly to return it or exchange it for another piece of merchandise. One member of the pair engages the employee's attention or distracts the employee. Meanwhile, the other thief replaces the genuine item that was brought in for return or exchange with a counterfeit one. When the employee turns his or her attention back to the item, he or she doesn't realize that it is not the original one that was presented. Employees who work with small, expensive items, such as jewelry, are most vulnerable to this scam.


In order for a store to avoid hemorrhaging money because of fraudulent refunds and exchanges, appropriate policies must be developed and adhered to, and excellent records of such transactions must be established and maintained. Depending on the size of the operation and the technological savvy of the owners or managers, records can be as simple as written logs, or they can be as simple as the use of refund software. Neither is too difficult to implement, and both have their advantages.

The first thing to do is to make sure that a sensible return and exchange policy is developed and that all employees understand it and commit to adhering to it. Consumer laws vary, and stores may be obligated to provide refunds or exchanges for particular reasons or within specified periods of time under state and federal statutes. A basic step is to be sure that management is familiar with these requirements and that they are incorporated into store policies. The policies should be posted at the register and/or customer service desk so that consumers aren't surprised if they should with to make a return.

To avoid being burned by bad checks, retailers often establish a cash refund ceiling. For refunds over a certain amount, in other words, the store will not give out cash, but will send a refund by mail. However, this is one policy that it's best not to post -- if thieves know what the ceiling is, they will grab items with prices just under the limit off the sales floor and try to return them for a cash refund.

Gift receipts and credit vouchers are good deterrents to refund and exchange scams. A gift receipt is given to the purchaser, who includes it with the gift item. These receipts make returns easier for recipients, but it doesn't include the price. Unless the person wants to exchange a gift, he or she won't know the amount the giver paid. However, the store maintains that information.

A credit voucher can be issued when a customer wants to return an item without a sales slip, when the return is attempted a fairly long time after the original purchase was made, when the merchandise is a gift, or when the items were purchased by a third party, who paid for them with a check or credit card. The voucher allows the person to make the return, yet the store does not have to part with any money to keep the customer happy. Dishonest people generally do not want to fill out forms or show identification, so requiring basic information when issuing a credit voucher can help eliminate fraud. Credit vouchers should be numbered sequentially and require the signature of a manager or supervisor to be issued. Here's where a log or computer software system comes in handy: by keeping track of the recipients and scrutinizing repeat customers.

Also, it's important to pay attention to the clerks who initiate these credits. If one employee is particularly active in this area, it could be a sign that the person is issuing fraudulent vouchers and using them or passing them on to friends who redeem them for merchandise. As with other cash management functions, a manager or supervisor should be required to authorize and countersign any refunds.


It's also a good idea to establish and maintain a database of refund recipients, which can be done on the store's desktop computer or through professionally designed software systems.

Less formal, in-house databases allow cross-checking of refund or exchange recipients' names and addresses to spot repeaters. If someone's name appears more than once, a manager should review all the refund transactions. If the same item is being refunded several times -- especially if the person hasn't presented a sales slip for it - it's a sign that the person may be committing fraud.

To put an end to it, a manager can call and let the person know that they have appeared on the store's radar screen. Inquire what the problem might be with the product, and let the individual know that this is the last refund that the store will issue without a sales receipt. This type of record keeping also allows the store to cross check the date that the item was purchased with store records for that day.

If the same address appears on several refunds, that also bears investigation. Go through the personnel records, or use an Internet-based reverse directory to determine whether an employee might be supplementing his or her income by mailing store refund checks home. If a particular employee or several employees seem to be responsible for initiating most of the refunds, take a harder look to determine whether all of the refunds are legitimate. Also, double-check any vouchers that are processed out of sequence. This could be an indication that employees are falsifying a manager's signature.

A good supervisory technique that does double-duty as refund verification and customer service is to follow up with mail and/or phone calls inquiring about the customer's refund or exchange experience with the store. Send out a letter or postcard to all customers who receive refunds, asking questions such as "Was your refund handled promptly? Did our employees extend courteous service to you during the refund transaction? Would you shop in our store again?" As an incentive for the customer to respond, the store can offer a $5 coupon good toward the customer's next purchase. Mail that is returned because the address doesn't exist or because no one with that name lives at the address indicates that something is fishy

Likewise, managers or supervisors should pull refund vouchers out at random intervals and call the recipients, especially those who have received a high-dollar amount back. If someone professes not to know anything about receiving any refunds, there is a problem. If the refunds are legitimate, it offers managers an opportunity to impress upon the customers how important their business is to the store.


Professional refund and exchange databases, such as the systems provided by The Refund Exchange, provide refund authorization services through the retailer's POS system.

The cashier swipes the customer's driver's license or state ID card to initiate a product return. Similar to the way that credit card or check verification works, the data is transmitted to the host server for an approval for return authorization. Each store sets its own rules and policies. A return can be refused if it breaks the retailer's basic return policy, such as a return without a receipt, a return after the allowed return period, or multiple returns beyond the quantity of returns allowed within a given period. The system will also refuse returns based on overall return behavior that indicates return fraud or abuse, which is detected through the utilization of deterministic rules and statistical models.

The system is also set up to determine abuse, such as when a customer purchases merchandise without intending to keep it, or "rents" it. Renting occurs when someone purchases merchandise without intending to keep it, uses the item, and then returns it, such as an evening gown that is returned the day after the party.

Regardless of which method a store chooses to implement, tracking refunds and returns is necessary to avoid playing Santa Claus to thieves during the post-holiday frenzy -- and all year long.

About the author: Liz Martinez is the author of "The Retail Manager's Guide to Crime and Loss Prevention: Protecting Your Business from Theft, Fraud and Violence" (2004, Looseleaf Law), and is a retail security/loss prevention consultant and an instructor at Interboro Institute in New York City. She can be reached through her website at