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Scanning for scams

Mention retail theft, and most of us think first of shoplifting. But while shoplifters head straight for an exit, other retail thieves head for the nearest cash register — anxious to swap the goods for cash.


May 20, 2016
By Linda Johnson


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Fraudulent returns put a huge dent in retailers’ profits every year. According to the Retail Council of Canada, merchandise return fraud last year cost the Canadian retail industry between $1.1 and $1.7 billion. Retailers must constantly adapt their policies and seek effective ways to identify the criminals, often operating in organized rings, all the time trying not to deter legitimate customers.

“Best practices are always evolving,” says Don Berezowski, divisional vice-president, loss prevention and health and safety, at Toronto-based Sears Canada. “During the last 10 years, retailers have had to change a lot of things.”

One big change most retailers have made is introducing a policy requiring proof of purchase, he says. Five to 10 years ago, it was very easy for a return fraudster to go into a store, steal an item and, without any bill, return it for cash.

“There was a time when these organized rings were hitting us for millions of dollars, so most retailers have made a change that you can’t just come in without a bill and get cash. At Sears Canada, we said, if you don’t have a bill, you get a merchandise gift card, which means you cannot get cash for it. You’ll see that with other retailers, as well: it’s very difficult to get cash now,” he says.

Retailers should also have extensive exception reporting tools, Berezowski says. “We monitor all types of refunds and look for trends. A fraudster doesn’t use his own name but often uses the same information: the same address but a different name or different phone numbers but the same address. Through software we’ve developed, we’re able to monitor those folks and try to identify them. In most cases the people doing return fraud are hitting store after store, but without that exception reporting it’s hard to see the pattern.”

A retailer’s first line of defence against return fraud is having a good returns policy, says Rui Rodrigues, a Toronto-based loss prevention and retail professional and former national director of loss prevention at Staples Canada. Procedures should be clearly stated and staff trained so that those procedures are always followed.

Some fraudulent transactions, he says, can be prevented by insisting that returns always be made to the same method of purchase. This is particularly important with online returns, he says. Online shoppers sometimes use false credit cards to buy an item and then request the return to a different card. Online retailers should make sure a credit goes back to the same credit or debit card used to buy the item to prevent this kind of fraud.

Stores should also have a firm policy on non-receipted returns. Rodrigues agrees with Berezowski that issuing merchandise cards is a possible alternative, especially where a retailer fears offending legitimate customers by refusing all no-bill refunds.

The proviso here, however, Rodrigues adds, is that some people may take a store merchandise card, buy something and then try to return the new item for cash because the receipt often looks like a cash bill. For that reason, it’s important to make sure staff are trained to be aware that the receipts may look similar and know they must not return cash for a store merchandise card.

For higher-value items, he says, one method of preventing fraudulent returns is to introduce a restocking fee. Knowing they will have to pay $25, for example, and not receive the full credit, will deter many criminals.

Retailers should invest in their point-of-sales systems to reduce refund fraud, Rodrigues says. For example, a store can protect itself against people who duplicate receipts and then use them to return items they have just picked up by installing technology at the POS system that will not allow a return on a transaction number already used for a refund. “That eliminates a whole part of the counterfeit receipt fraud,” he says. “Most retailers should be doing that, but it’s surprising how many don’t.”

It’s also important to have software at the POS that will track activity by product, geographic area or purchase method. “It’s critical for retailers to have the alerts and the awareness to know where to target their efforts. And if retailers don’t make that investment in technology, knowing the bad guys are technology-savvy, they’re behind the curve,” he says.

Once a company has established its return policies, he adds, it’s essential they stick to them and support sales associates who follow them.

“The organization needs to take a stand: our policy is our policy, and we don’t deviate. Too often, the message comes down that, if a customer argues loudly enough, the corporate office will overturn that decision. Organizations need to support their policies and not acquiesce to the upset customer.”

A recent survey on consumer returns in the U.S. indicated retailers are becoming more stringent in their refund policies, says Robert Moraca, vice-president of loss prevention at the National Retail Federation (NRF) in Washington, D.C. The survey, issued in December, found that more than 20 per cent of retailers were tightening up their return policy. For example, 85 per cent of retailers said they now ask for proof of identity with non-receipt returns.

Generally, Moraca adds, refund fraud increases after holiday shopping times. This past Christmas was no exception, with the amount of return fraud in line with previous years. The big difference was the reported increase in false returns done with e-receipts. Criminals have discovered they can create counterfeit receipts for online purchases. By going to a company website to get their logo, they can make up a fairly official-looking receipt and then show up at the store with a stolen item.

“Now, the cashier has to make a tough decision. ‘It looks like a receipt, but I haven’t seen this one before.’ Often, the retailer will think, maybe that’s what came through shipping. They don’t know every receipt that every shipper sends. So they take it,” he says. “The organized retail gangs are getting more sophisticated in their efforts.”

“Wardrobing” refers to the practice, common among apparel retailers, of buying something, using it and then returning it. In the NRF survey, 72.6 per cent of respondents said they had experienced this type of fraud.

“The piece of clothing will still have a tag on it, and they have a receipt for it,” says Ravinder Sangha, marketing manager at Richmond, B.C.-based Halo Metrics. “It’s a free rental of the outfit, so to speak. And with the return policy that most retailers have, they will most likely accept the item — unless there’s a red flag, such as a big wine stain on the outfit.”

For the retailer, he adds, the problem is that items that show wear will be more difficult to sell, and they may be compelled to discount them, affecting the profitability of the business.

Wardrobing is most effectively prevented by attaching some kind of tag to a visible part of the clothing. For example, Sangha says, Halo Metric’s “Shark Tag” is a red security tag that the retailer clips onto an item in a prominent place, such as the neckline. The disposable tag is designed to be taken home and cut off by the user.

“Most of the time, you want a security tag to be discreet. You don’t want to overpower the item that it’s protecting because the retailer will say it makes the display look ugly. But for this tag, it’s totally the opposite. You want it to be very visible.”

At the same time, the store should have a clearly stated return policy that the garment cannot be returned if the tag is not attached. In fact, Sangha adds, some retailers will attach a small card to the tag stating the tag must be in place for a return. Along with that policy, store staff must be trained to look out for wardrobing examples and refuse to do a return unless the tag is on.

Refund fraud is a growing problem, Rodrigues says, with the growth being driven primarily by the ever-increasing popularity of online shopping. Online fraud is safer and easier in large part because the perpetrator doesn’t have to use up eight hours of their day visiting retail store fronts to conduct a fraud.

“Refund fraud today is clearly migrating to omni,” he says. “As the online space continues to grow and change the way the consumer interacts, refund fraud will grow exponentially just because the space is so much bigger.”

Moraca agrees refund fraud is on the rise. For the first time in 21 years, he says, citing NRF survey figures, organized retail crime has outnumbered reported internal store thefts.

“That’s significant. Organized retail crime seems to be increasing, and as that increases, you’re going to see an increase in return fraud because that’s where they make their money. It’s a crime of conversion, converting stolen property to cash,” he says. “At the end of the day, that’s what they want.”  

Linda Johnson is a freelance writer based in Toronto.