What is return fraud and how to prevent it

When bad actors take advantage of return policies, it results in return fraud. It’s the act of defrauding businesses using its returns process and it’s a problem in the retail industry.

If you think fraudulent returns aren’t a problem, think again. The U.S. hospitality and retail sectors reported $33.9 billion worth of goods affected in 2019.



What is return fraud?

So what exactly is returns fraud? Attempting to return stolen goods for a cash refund is permissible as well as the use of falsified and/or stolen receipts. Other methods are called price arbitrage and open box fraud. Employees also run scams where workers return stolen goods for a full refund.

Long story short. It is the crime to defraud a retail store through their returns process. Here are some additional figures on the subject. The National Retail Federation reports that the number of returns has jumped due to the pandemic. This means return fraud will also increase.

Why does return fraud happen?

People who commit return fraud abuse a company’s policies. And the yields themselves increase. Deloitte expects the rate to reach 10% this year. And there’s growing pressure on people like Amazon workers to process returns quickly.

Types of return fraud tactics

Small businesses that want to minimize return fraud need to be able to identify it. Here is a list of 7 types you should be aware of when dealing with customer returns.

Price change

This is to return a purchase for one purchased at a lower price. Dishonest customers change the labels and they get the return for the higher price.

Fraud on receipts

This type of fraud can use someone else’s receipt or one that has been stolen to obtain cash refunds. Bad actors even forge a valid receipt with this type of refund fraud.

Open box fraud

Bad buyers buy an item. Then they return it open to get it for less under the store’s open box policies.

Return of stolen items

In this case, the fraudsters are returning goods that they have not paid for. Finding receipts and shoplifting the same item is one way to commit this crime.

Employee Fraud

Employees help someone return stolen goods at full retail price with sales tax.

Switch Fraud

Bad actors start by buying products that work. And they are returning a faulty identical item that is broken or damaged. This is related to what is called a cross-retail return. When an item is replaced with a more expensive item from another store.

Wardrobe or free rental

Clothing, computers, electronics and tools are purchased and returned after they have been used. Intent makes this different from legitimate returns. Fraudsters only want to use the item for a short time.

Price Arbitrage

This happens when scammers purchase items at different prices. They return the cheapest item as the most expensive to pocket the difference.

How to identify fraudulent returns when they occur

Being able to spot return fraud when it happens is critical. Here’s what to look for when fighting return fraud. These red flags will help you stop losing money in your retail business. And spot bad actors when they return stolen goods.

1. A jump in the number of returns.

Scammers work in groups. They focus on a weak retailer when they find one. If your yields suddenly increase, your business could be targeted. One way to find criminals who switch price tags is to find out what the normal number of returns is. Your small business can track merchandise returns with the right software.

2. Watch for streak returns.

You can combat return fraud by monitoring other patterns as well. A genuine customer who constantly returns products may be legitimate. Or they might make some honest mistakes. More than likely, they are working on a fraudulent statement. Monitor the processing of refunds to the same people at any retail store. Look at the returned product types for a model.

3. Watch for inconsistent details

Friendly fraud attempts use false information. For example, e-commerce merchants need to search for different names used with the same email addresses for multiple purchases.

4. Store location matters

A franchise owner should watch for patterns of return abuse. A spike in a store may mean that a receipt change scammer has targeted that location.

5. Keep an eye on the holidays

Fraud.net reports that the number of return requests jumps after a customer’s shopping list increases. They say 25% of returns happen between Thanksgiving and New Years Day. Genuine customers should be considered here to strengthen your customer experience. But there are also scammers who try to steal money.

Tips to prevent return fraud in your business

Good fraud prevention is being proactive. Here are some ideas for tweaking the way you return items.

6. Offer store credit instead of cash refunds

A cash refund is tempting for bad actors. Instead, offer store credits, in-store exchanges and gift cards.

7. Clarify your return policy

Set a reasonable limit on how long a customer can return something. Seasonal return policies can fight someone who likes to steal receipts.

8. Consider restocking fees

If you implement them on items such as clothing and electronics, you put a trick in a fraudster’s plan. These fees work best on an item purchased for premium functions and/or seasonal events.

9. Track shipments

This makes it difficult for people to report that they haven’t received an item at all.

10. Require proof of purchase

Asking for receipts is your best line of defense against return fraud. Beware of invalid reception red flags like a faded logo.

What happens if someone commits return fraud?

Return fraud has different consequences. An empty box scam might just be a misdemeanor. But you can still spend a year in jail and pay up to $1,000 in fines. A more serious offense can cost you $10,000 and three years behind bars.

Is the refund scam illegal?

Yes. According to the law, it’s like petty theft or shoplifting. But intent to steal must be proven under California law.

Image: Envato Elements


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