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Fraud Facts: Christmas a busy time for retail return fraud

Gina Bliss

People that know me know that I don’t like to shop. If I go off to shop for clothing alone I’ll probably walk around in the store, pick up a few things to try on, think about how much work it is to try them on, put them back, and leave the store. One time I tried a different strategy. I didn’t try them on, but I didn’t put them back either. I bought them so I could try them on at home. Then I discovered something I liked even less than shopping. It was returning.

Some fraudsters have made returning their occupation. Return fraud is using the return process to defraud a retail establishment. Return fraud is basically a way to steal from a retailer without the risk of selling the merchandise on eBay or finding a fence for the stolen goods. Instead, the fraudster sells it back to the retailer.

Stolen or counterfeit sales receipts provide an easy way to return merchandise that was never purchased. Fraudsters can “find” these receipts in discarded bags, or in the store’s garbage. There are some websites that will re-create receipts for particular items. Some fraudsters forge them themselves, sometimes with the help of an employee of the store.

Once the fraudsters have a receipt they can either shoplift the item and return it later, or they can pick up the item and head right for the service desk to make the return. One stop is better of course. Right after Christmas there is so much volume in returns that the confusion and crowds make it easy to do.

Another return fraud requires price manipulation. The old-fashioned way was to buy two similar items at different price points, usually electronic merchandise. The fraudster would repackage the cheaper item in the package of the more costly one and then return it. The new improved method involves creating and switching the bar code. The fraudster picks up an expensive item, but covers the bar code with a bar code for the same brand item in a cheaper model.

Most stores still accept checks. Check fraud is alive and well, and can be combined with return fraud to increase the fraudster’s profit. If merchandise purchased with a bad check is returned before the check clears, the fraudster makes the full retail value of the merchandise with little effort.

Renting or wardrobing is by far the largest return fraud in terms of volume. It’s the return of used or worn merchandise. Many consumers who would never shoplift somehow rationalize this form of theft to themselves. The retailer has the cost of restocking, usually can’t put the merchandise out at full price, and sometimes can’t put the merchandise on the floor at all. Some purchasers will even damage the item in order to justify the return.

Retailers have an industry trade association that advocates for their interests. The National Retail Federation (NRF) is the world’s largest retail trade association, with membership that comprises all retail formats and channels of distribution (www.nrf.com). NRF has helped retailers address theft, inventory shrinkage and return fraud in a number of ways.

One initiative created a partnership between retailers and the FBI and other law enforcement agencies. Law enforcement has real-time access to the retail industry’s database where retailers track and report retail crimes. The increased intelligence translates to potential increases in arrests, prosecutions and recoveries of stolen merchandise. Online marketplace eBay also partners with NRF to curb e-fencing operations.

While the NRF works on retail theft in a broad sense, retailers have responded in new and different ways. If you consider the methods of return fraud and the return policies of most stores, you’ll see that that those policies would do nothing to curb these frauds. Tightening policies can irritate good customers, which is bad for business.

So retailers have adopted a consumer-based response. For years, retailers have been using third-party databases to track consumer purchases and returns. The data is so rich now that some consumers have been denied a return or exchange due to their history of return behaviors. Some online stores will deny a purchase due to return behaviors that mimic fraud. Only 1 percent of consumers get denied, and consumers can review their return activity reports.

This approach lets retailers be proactive about fraud while still extending liberal return policies that benefit honest consumers.

I don’t like to shop OR return, so I can’t believe that people flood the stores the day after Christmas, but they do. It’s the biggest day of the year for store returns. In an NRF survey retailers estimated losses of $2.9 billion due to fraud for the 2012 holiday season.

We should all remember to be ethical and considerate in following store return policies now that we know what retailers are up against.

Gina Bliss, CPA, CFE, is a senior manager at EFP Rotenberg LLP, Certified Public Accountants and Business Consultants, who specializes in internal audit, fraud audit and forensic accounting. She may be reached at (585) 295-0536 or by email at [email protected].