January Return FraudFor many retailers, January isn’t just the first month of the year: It’s “return season,” when customers bring back their unwanted holiday gifts for refunds or exchanges. Return season can be fraught for businesses if, for example, a higher percentage of gifts are returned than stores expect. According to the National Retail Association, consumers are expected to have returned more than $816 billion of merchandise (almost 17% of goods sold) in 2022. Another major risk is retail return fraud. This is when customers trick stores into issuing illegitimate refunds. If you’re in retail, you must be proactive to discourage these schemes.

Cash Transactions

Return fraud perpetrators could be customers, employees or even a criminal gang working with employee accomplices. In perhaps the most common scheme, an individual steals merchandise, and then returns it and insists on a cash refund, despite lacking a receipt. Or a criminal steals merchandise from one retailer and then returns it to another for a cash refund.

Some thieves do supply receipts — but they’re fake. The “customer” hands over an altered or completely counterfeit receipt that the original payment was made in cash. The retailer then issues a full cash refund.

Other Common Schemes

Those aren’t the only methods thieves use, though. Also common are:

Stolen cards. Criminals make purchases using a stolen credit card, and then return the merchandise, usually on the same day (before actual cardholders dispute the charges). The goal is a full cash refund.

Damaged goods. Instead of returning merchandise in new, as-sold condition, customers return items that are worn, damaged or broken. They distract the employee processing the refund from closely scrutinizing the merchandise with conversation or other diversions.

Crooked workers. An employee discounts merchandise and sells it to an accomplice who subsequently returns it to the same employee for a refund at full price. Workers might also steal merchandise and then instruct their accomplices to return it without a receipt.

Make It Hard for Thieves

You can reduce the incidence of return fraud by making it hard for thieves to get their hands on cash. Consider issuing refunds only when they’re accompanied by an original receipt and only to credit cards. Scan receipts into your point-of-sale system to ensure they were produced by your store’s registers. If a purchase wasn’t made with a credit card — or if the customer doesn’t have the card on hand — refund it with a store credit. Consider asking customers to produce identification.

To help limit employee-perpetrated return fraud:

  • Provide antifraud training,
  • Install security cameras,
  • Ensure strong management oversight, and
  • Provide a confidential fraud reporting hotline that’s accessible to employees, customers and vendors.

In addition, monitor the frequency and value of returns processed by individual cashiers and investigate employees with higher-than-average return numbers.

Striking a Balance

During the height of the COVID-19 pandemic in 2020, many retailers expanded their return windows and offered more generous return policies. Now a majority are tightening their policies, according to goTRG, a retail returns logistics company. Work to strike a balance with your policy that reduces fraud but doesn’t alienate actual customers. Contact us to discuss fraud controls that can help reduce theft.

© 2023

Tony LaNasa

Tony LaNasa, CPA/CFE
Principal
anthony.lanasa@hwco.cpa

 

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