Retail Crime Becoming Wired

I just read an article from Business Week on the state of refund fraud.

According to the article, retail organizations allegedly lost $16 billion to bogus returns in 2003. This figure was presented to the author of the article by King Rogers International, a loss prevention firm catering to the retail industry.

The $16 billion in fraudulent returns allegedly represents about 9 percent of all returns. These statistics are from 2003, which is the latest data available and represents a 23% increase from previous years. Please note that the article is not specific on how these statistics were obtained.

My guess is that these statistics were gathered via a survey. Estimating the root cause of retail losses is very difficult. This is because losses are primarily determined by how much of their physical inventory is missing. Physical inventories at most retail organizations are conducted once, or twice a year. Other major contributing factors like customer theft, employee theft and even poor operational controls contribute to losses. Due to the complexity of a retail business, one can normally only make an educated guess as to which category caused what percentage of loss.


An additional problem with these statistics would be that one shoe doesn't fit all. I would imagine that there are varying reasons at different retailers for losses depending on how they operate, the quality of people they hire and their business controls.

Another expert cited in the article was Read Haynes of the Loss Prevention Research Council at the Universtity of Florida. According to Read Hayes, there are web sites that sell unexpired receipts, which are often used in refund fraud schemes. Hayes also says that gift cards, which are given for returns are often sold on auction sites.

Recently, E-Bay was lobbied by the Retail Industry Leader's Association after performing a study on gift cards tied to fraudulent refunds. E-Bay sellers are now limited to selling one card per week at a maximum of $500.00. Here is another article from E-Pay news on gift card fraud.

Gift Cards May Be A Vehicle For Returns Fraud

Unfortunately, there are other auctions sites and chat rooms, where gift cards are still being sold without regulation. We also need to take into account that a lot of gift cards are purchased with bogus financial instruments, such as checks and credit cards. My guess is that a lot of these circulate via the internet also. There is a link from the article listed above on this very subject.

Regarding the problem of counterfeit receipts, which are used to perform fraudulent refunds. A lot of major retailers now tie receipts to a transaction. This means they have to mirror a transaction in order to be valid for a refund, normally via a transaction number. In the article, Hayes is quoted as stating the reason for the higher losses is that return policies are becoming more generous within the retail industry.

I find this statement odd because as a consumer, I have noted return policies becoming tougher in recent years. The few times I have had to refund anything, I had to provide identification (which was recorded electronically), if I didn't have a receipt. If memory serves me correctly, even with a receipt, my personal information was sometimes recorded. Counterfeit receipts were supposed to be stopped in the late nineties by making them correspond (mirror) a transaction. If these scams are flourishing again, perhaps the cause is an increase in technological prowness of the fraudsters involved?

A very important issue to consider is when personal information is electronically kept, it could be used for identity theft. I would speculate that the professional criminals involved in this are probably very adept at identity theft. They probably already are defeating the systems in place by using multiple identities in addition to counterfeit receipts.

There is also the issue of privacy to be considered for the 91 percent of honest people (based on the statistics cited) of how their personal information might be used. Most people return merchandise because it is defective, or they were sold the wrong item. At a minumum, the cost of obtaining customer satisfaction could be their information being sold to information brokers. At a maximum, the system could be hacked, or even accessed by a trusted insider and their personal information could be used in criminal activity.

If counterfeit receipts are flourishing again, it might be for other reasons. Data theft (intrusions) and insider information obtained by plants seem to be happening everywhere. Retail organizations, which already gather personal information for marketing purposes probably aren't immune to this. The proverbial question is where is the information being obtained that these receipts use and how can repeat offenders be identified if they are using multiple identities?

Also mentioned in the articles is that the National Retail Federation (NRF) is setting up a database to track retail crimes and bar-code data. The Retail Industry Leaders Association is also testing a web database that tracks retail criminal activity. This information will be provided to law enforcement and retailers, who are members. It remains to be seen how effective these measures will be, but it is a start.

The internet is cited in the article as the new flea market, which is true. The difference is that with the internet, the reach is much farther and because of this, more deadly to the bottom line.

It's amazing how a lot of the different scam activities, (retail theft, refund fraud, check fraud, credit card fraud, phishing, pharming, auction fraud, identity theft, or collectively financial misdeeds) tie into so many business sectors of the world economy. There are recurring themes to be considered.

The criminal, who commits these types of crimes, counts on mutating and moving their activity in order to avoid detection. Since it would be safe to assume that their ultimate goal is money, they also might be hitting several different business sectors at the same time. The key to protecting people and business community is awareness, communication and a combined effort by all the different sectors to resolve the loopholes that allow these crimes to flourish.

For the original article in Business Week, click on the title of this post.