What is Return Fraud and How to Prevent It

return fraud

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

If you think fraudulent returns aren’t a problem, think again. American hospitality and retail sectors reported $33.9 billion worth of merchandise was affected in 2019.

What Is Return Fraud?

So what exactly is return fraud? Trying to return stolen merchandise for a cash refund qualifies as well as using falsified and/or stolen receipts. Other methods are called price arbitrage and open box fraud. Employees also work scams where workers return stolen merch for a full refund.

Long story short. It’s the crime of defrauding a retail store through its returns process. Here are some more numbers on the subject. The National Retail Federation reports the number of returns has jumped due to the pandemic. That means return fraud will also increase.


Why Does Return Fraud Happen?

People who commit return fraud are abusing a company’s policies. And the returns themselves are increasing. Deloitte expects the rate to hit 10% this year. And there’s increasing 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’s a list of 7 types you need to be aware of when dealing with customer returns.

Price Switching

This is about returning a purchase for the one bought at a lower price. Dishonest customers switch out the labels and they get the return for the higher price.

Receipt Fraud

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

Open Box Fraud

Bad shoppers purchase an item. Then they return it opened to get it at a lower cost under the store’s open box policies.

Returning Stolen Items

In this case, fraudsters return merchandise they didn’t pay for. Finding receipts and shoplifting the same item is one way of committing this crime.

Employee Fraud

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

Switch Fraud

Bad actors start by purchasing merchandise that works. And they return a defective identical item that’s broken or damaged. This ties together with what’s called a cross retailer return. Where one item is switched out for a higher-priced item at another store.

Wardrobing or Free Renting

Clothing, computers, electronics, and tools get purchased and returned after being used. The intent makes this different from legitimate returns. Fraudsters only want to use the item for a short time.

Price Arbitrage

This occurs when scammers go about purchasing differently priced items. They return the cheaper item as the more expensive to pocket the difference.


How to Identify Fraudulent Returns When They Happen

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

1. A Jump In The Number of Returns.

Scammers work in groups. They focus on a weak retailer when they find one. If your returns suddenly increase, your business might be targeted. One way to find price tag-switching criminals is to know what the normal number of returns is. Your small business can keep track of return merchandise with the right software.

2. Watch for Serial Returners.

You can fight return fraud by watching other patterns too. A genuine customer who returns products constantly might be legit. Or they might make a few honest mistake slip-ups. More than likely they’re working on a fraudulent return. Watch for processing refunds to the same people at any retail store. Look at the types of products returned for a pattern.

3. Watch for Inconsistent Details

Friendly fraud attempts use fake information. For example, eCommerce merchants should look for different names used with the same email addresses for several purchases.

4. Store Location Matters

A franchise owner needs to watch for return abuse patterns. A spike at one store can mean a receipt switching scammer has targeted that place.

5.Keep An Eye On The Holidays

Fraud.net reports the return request numbers jump after a customer shopping list spikes. They say 25% of returns happen between Thanksgiving and New Year’s Day. Genuine customers need to be considered here to strengthen your customer experience. But there are scammers trying to steal money too.

Tips for Preventing Return Fraud at Your Business

Good fraud prevention is about 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 to bad actors. Offer store credits, exchanges off the store shelf, and gift cards instead.

7. Make your return policy clear

Put a reasonable limit on the time a customer can return something. Seasonal return policies can combat someone who likes to steal receipts.

8. Consider a restocking fee

If you implement these on items like clothing and electronics, you put a kink in a fraudster’s plan. These fees work best on an item purchased for high-end functions and/or seasonal events.

9. Track shipments

This makes it hard for people to report they didn’t get an item delivered at all.

10. Require proof of purchase

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

What Happens If When Someone Commits Return Fraud?

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

Is Refund Scamming Illegal?

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

Image: Envato Elements

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Rob Starr Rob Starr is a staff writer for Small Business Trends. Rob is a freelance journalist and content strategist/manager with three decades of experience in both print and online writing. He currently works in New York City as a copywriter and all across North America for a variety of editing and writing enterprises.

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