Many Unhappy Returns for Retailers

Hard hit by increasingly sophisticated scammers, merchants are joining forces to stem some $16 billion in annual losses

By Elizabeth Woyke

Time was when retail-return fraud meant buying an expensive dress or suit for a big soirée and returning the rumpled item, tags intact, the next day for a refund. But today's scams are far more sophisticated -- and costly.

Stores lost $16 billion to bogus returns in 2003, the most recent available data, up 23% from 2002, says consultant KingRogers International. Drug, food, and mass-merchant stores, which scammers perceive as being accessible and largely unpoliced, are particularly vulnerable. Geographically, stores off the major thruways of I-95 and I-5 (especially in Florida, New York and California) are popular targets.

The creativity of modern return artists is mind-boggling. One example: E-tailers report that crooks buy differently priced but similar-looking DVD players online, then return the cheaper version as the expensive one after switching bar codes (see BW Online, 8/5/05, "An Eagle Eye on Retail Scams").


  Processing centers don't always check returned goods closely -- in fact, Mark Hilinski, co-founder of The Return Exchange, a software company that provides fraud- and abuse-detection products to retailers, says he has seen bricks successfully returned in DVD-player boxes for refunds. He says this swapping scam is used on a range of goods, from hardware to watches. (For the latest tricks).

Elsewhere on the Net, blogs that give tips on how to scam particular retailers (and their liberal return policies) are proliferating, says Read Hayes, director of the University of Florida's Loss Prevention Research Council. So are Web sites that sell "live" or unexpired receipts (often used in fraudulent returns) and store gift cards (often obtained through fraudulent returns).

Gift cards are attractive to scammers because they're decidedly low-tech, lacking the holograms, signature verification and three- or four-digit security codes often found on credit cards. In a tactic called "shoplisting," a thief pays maybe $10 for an unexpired receipt covering $500 of electronics or clothing, shoplifts the listed items, and returns them for a refund or gift card. The cards can then be sold online. Britt Wood of the Retail Industry Leaders Assn. (RILA) says an independent investigation found potentially fraudulent cards worth hundreds of thousands of dollars within a two-month tracking period last year.


  Now, stores are banding together and employing technology to fight back. Suspecting that a handful of eBay sellers offering multiple gift cards worth thousands of dollars were obtaining those credits through retail fraud, RILA successfully lobbied eBay (EBAY ) to change its policy on gift cards. Starting in the summer of 2004, eBay sellers have been limited to one gift-card auction per week, with a maximum value of $500.

In July, RILA began testing InfoShare, a national Web-portal/database that tracks thefts and alerts member stores. And in August, the National Retail Federation (NRF) will roll out an online database to provide cops with incident reports and bar-code information on stolen items.

To ease privacy concerns, retailers say they will report only major crimes by type, with no shopper IDs. "These have to be significant incidents: robberies, burglaries, or organized retail crime where thousands of dollars are lost," says Joe LaRocca, the NRF's vice-president of loss prevention.


  Return fraud appeals to thieves because it's viewed as low-risk and high-reward. "Why would an offender try to find a fence [middleman] to sell his stolen goods to for 10% to 30% on the dollar when he can go into the safe environment of a store and get dollar-for-dollar value?" Hayes points out.

The Web's anonymity and networking capabilities have made return scams even more appealing. "The Internet has replaced the flea market," says King Rogers, CEO of the eponymous consulting firm. "It has become much easier for thieves to get liquid on their [stolen goods]."

Receipts are the linchpin of most fraudulent returns. An underground market for them has been growing for years, as store return policies have become more generous, says Hayes. In 2003, Los Angeles police arrested a group suspected of committing $1.26 million in fraudulent cash refunds. A search of the ring members' homes turned up more than 900 fake receipts and several printers and scanners used to counterfeit them, says Hayes.

In April, the U.S. Secret Service charged eight Baltimore-area people with defrauding local Marshalls stores out of more than $250,000 by stealing men's suits and returning them for cash using dummy receipts.


  Security-minded execs at big retailers have boosted attendance at the NRF's annual loss-prevention conference by 40% in the last three years. They say the new systems are a step in the right direction. Whether they can put a dent in the thriving business of return scams remains to be seen.

"Some of these individuals are making so much money that they're willing to invest in their trade, if you will," says the RILA's Wood. "They get very advanced as soon as we come up with new ways of prevention." In the arena of return fraud, it appears tech will continue to battle tech.

Tricks of the Trade


Fraud figures in approximately 9% of all returns in the U.S. and cost the retail industry an estimated $16 billion annually. Here's a breakdown of some popular return-fraud schemes:


An item is purchased legitimately, used or worn and returned as if new, enabling the purchaser to "rent" the merchandise for free.

Receipt fraud:

Items are purchased legitimately or shoplifted/stolen, then returned for a profit using forged or purchased receipts.

Price arbitrage:

Two similar-looking but differently-priced items are purchased. The cheaper one is disguised as the more expensive one by switching bar codes or packaging, then returned for a profit.

Woyke is an intern at BusinessWeek

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