Real-Life Experiences in Combating Retail Refund Fraud

May 17, 2005
Keep a close eye on your registers -- we hear how to find and nail internal thefts and scams

Internal theft is a perennial problem in retail businesses. This issue can be aggravated by several factors, including the addition of part-time workers, the hurried hiring of seasonal employees, the employment of young workers, and the overall working conditions, to name just a few. However, even if everything were as perfect as they could be, given the nature of the retail environment, employees would still steal from the store.

Workers embezzle for a number of reasons, but they all boil down to one thing: the store has money, the employee needs money, so the employee takes it from the store. It doesn't really get much more complicated.

So, what can be done to curtail employee theft? Good management is, first and foremost, the key to reducing internal losses. Managers who take the time to get to know their employees a bit will notice when somebody seems desperate for more money (repeatedly asking for more hours or requesting a raise, for example), or all of a sudden seems flush (two weeks ago, the person didn't have two nickels to rub together, but today he or she is flashing a roll). Changes in appearance, dress, or any other personal habits can also tip off observant supervisors that something may be up.

These techniques are basic. Beyond good management skills, excellent security measures, including the liberal application of investigational tools, are necessary to combat internal theft. In this column, we look at some real-life examples of internal theft that have occurred and how you can prevent the same scams from succeeding in your store.


The story: A large national retail store recently had an internal theft problem with refund fraud. An employee was scanning items in as cash sales, then processing refunds for those items to the employee's own personal major credit card. The worker was using the refund amounts to pay off the outstanding balances on the credit card. When the refund amounts exceeded the balance due, the employee requested a refund check from the credit card company. A variation on this scheme occurred when another worker -- a confederate of the first employee -- processed similar transactions and had the refunds applied to his personal store credit card.

The solution: This type of transaction is difficult to gather information about because a third party -- the bank or other credit card issuer -- must be persuaded to give the victimized store information about the refund transactions in question, and card issuers are very sensitive to their obligation to protect the cardholder's privacy. They often are reluctant to release credit card transaction information without proof that a crime has been committed -- which, after all, is what the store needs the information to prove in the first place.

The transactions of the second employee were easier to trace because the fraudulent refunds were made on a store card, and the store has access to its own internal credit card transaction records.

In this case, the store also had surveillance cameras in place, as well as an excellent register transaction reporting system. Investigators ran register reports, which indicated that the credit cards in question were used only when a particular employee was on the register. The reports also pinpointed the fact that the cards were used only for returns -- never for purchases.

The store presented these facts to the local prosecutor's office, which opened a case and issued a subpoena for the major credit card transaction records, thus circumventing the Catch 22 mentioned above.

The advice: By running regular register reports and looking for patterns, stores can pinpoint which employees may be processing fraudulent refunds. Surveillance cameras trained on the registers can also help nail the culprits. Although it's pretty easy for a cashier to secrete a credit card in a pocket, it's best if employees are issued lockers for their personal items and prohibited from keeping bags and purses near the register where they have easy access during a shift. And of course, establishing a relationship with the prosecutor's office before any crimes are committed will work in your favor when you do need subpoenas issued and cases prosecuted.


The story: In a regional chain department store, two young workers and their non-employee confederates recently embezzled $7,700 in three weeks through fraudulent refunds of men's suits. These college-age employees passed the suits to their friends when working the cash registers. The friends took the suits back for cash refunds at other stores in the chain. The employees and their accomplices split the proceeds.

The solution: An alert security officer noticed that the two cashiers in question constantly had people at their registers, yet their total sales were low compared to the amounts that other cashiers were ringing up. In addition, the two young workers had a much greater number of credit slips in their drawers because they would exchange the slips brought in by their accomplices for cash from their registers. The security officer looked at surveillance tapes and noticed that the same "customers" appeared over and over at the same registers when the two employees were working. The officer compared the times that the accomplices showed up on the videotapes with the register transactions to establish the pattern of embezzlement.

The advice: Again, the register reports will help you see patterns to refunds that might add up to employee embezzlement. A sure sign that something is up is a much lower or higher rate of sales and/or returns at a particular register or when certain cashiers are working. Alternatively, a complete lack of refunds could also indicate that something is amiss, especially if that is not the norm for the other registers. A refund tracking program is also a valuable tool for managing returns by the same customers and putting a limit on the number of transactions or the dollar amount your store is willing to give an individual customer.

THE CASE OF THE MISSING EARRINGS - help us solve the case!

The story: At a jewelry concession in the middle of a large shopping mall, an entire display case filled with $1,800 worth of gold earrings recently walked away. The employees, who were all high school and college age, were rumored to pass merchandise to their friends constantly. But because the concession is freestanding, with no video surveillance, no one has been able to prove how or when the workers stole the case and/or how they passed it to confederates.

The solution?If you have a solution or advice about how this concession can prove the involvement of the workers or avoid a repeat theft, please let us know by e-mailing your ideas to [email protected]. We'll publish the best solutions in an upcoming Retail Security column. You can also post thoughts on how to solve this in our forums at the following link:

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 will be lecturing on "So You Want a Degree in Business Continuity, Security or Emergency Management? Here's How!" at the CPM West conference on business continuity in Las Vegas on May 25, 2005. She will also present retail business continuity case studies at the CPM East conference in November 2005. She can be reached through her website at