Retail Fraud Schemes Essay PDF

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Retail Fraud Schemes

Fraud in business is at somewhat of a high right now. Business fraud consists of dishonest and illegal activities perpetrated by individuals or companies in order to portray a preferred financial outcome to those invested in it. Corporate fraud refers to illegal activities undertaken by an individual or company that are done in an unethical manner. Where there is an economy under pressure, fraud will always exist. Fraud is motivated by motive, rationalization, pressure, or opportunity. Some of these include meeting earnings expectations, concealing the company's deteriorating financial condition, strengthening performance for debt financing, and increasing management compensation. While fraud is at somewhat of a high, its direct correlation is with retail stores and online payments. Technology continues to transform the retail industry and revolutionize the way businesses operate. However, this comes with new challenges for retailers in terms of fraudulent shopper activity. Some popular types of fraud that is experienced in retail is credit card fraud. It is important to update your Point of Sale (POS) and use the “I am not a robot” from Captcha with your online orders. Credit card fraud includes using a stolen credit card to make a purchase and using a counterfeit card to make a purchase.

Internal fraud in a retail work environment differ from that of the corporate environment. Even though both share the same motives of greed and both involve the stealing of money/assets by employees, the methods and basis

of theft differ. Internal Retail Fraud usually involves a cash register transaction. Merchandise and cash are the most stolen things through fraudulent transactions involving refunds. Corporate Retail Fraud involves crime at the office level. The departments that have the most opportunity for fraud are typically Accounts Payable, Accounts Receivable, Payroll, and Sales Audit. Criminal opportunity does depend upon the size of the company and corporate culture.

Let's discuss some of the most popular forms of retail fraud. Employee fraud is when an employee knowingly lies, deceives, or steals from a company with the intent to obtain benefits or compensation. It is reported that employee theft is responsible for 1/3 of all business bankruptcies. The most common way employee frauds are discovered is through tips. Internal control weaknesses are responsible for nearly 1⁄2 of frauds. Employees committing fraud who had been with their companies longer stole twice as much. Back to the fraud triangle, employees who commit fraud usually fit into at least one of these categories, such as an employee living beyond their means, an unwillingness to share duties, being under pressure on the job, divorce, and legal problems to name a few.

Refund fraud, referred to as a “whitehouse scam,” involves abusing a merchant’s policies to returning goods that are ineligible for the refund to a retailer in exchange for money or other goods. It is estimated that 9% of total losses this year were the result of refund abuse, totaling to a $27 billion

loss. These goods might have been stolen, marked as final sale, or tampered with that would make them ineligible for return. Some examples of refund fraud include claiming that a package never arrived or that it was stolen from the porch where it was left, insisting that the goods weren’t packed properly (ex. saying that the box was empty when it arrived or that some of the goods were missing), purchasing an item with the intent to use it once and then returning it later for a refund, and altering, switching, or manipulating the price tag on an item to obtain a bigger refund. Gift card abuse is another form of refund fraud. This is where a fraudster uses a

stolen gift card balance to make purchases that can be converted to cash through a refund. A buyer can find someone who knows how to manipulate customer service channels, and who can secure merchandise returns on the buyer’s behalf in exchange for a cut of the profits. Some steps to take to stop refund fraud is learning how to separate the repeat offenders, those who abuse your return policies, from your loyal customers. You can try identifying goods based on unique serial numbers, or issuing credits that can only be used on certain items in the same category as the goods returned. You can also flag customers who submit an abnormally high number of refund requests within a certain period and subject these requests to investigation. No two items are ever the exact same, which means no two returns are exactly alike. You should develop and implement policies that are clear and adaptable to a wide range of scenarios including the product category, location, and currency. Also, be sure to explain any exceptions such as

nonreturnable and final-sale items. More ways to mitigate refund fraud is to implement time limits for returns, authorizations must be submitted, and any product-specific information such as serial numbers should be included. Discount abuse uses a legitimate function of your point-of-sale system. A problem with spotting discount abuse is that it appears on the books as a weakening of profits rather than an actual crime. The customer pays full price for your merchandise and your employee collects the total amount. It is the use of the discount to purchase merchandise for people not eligible for this benefit in exchange for monetary benefits. By implementing a video surveillance system with video analytics, this can help retailers identify a pattern of abuse as well as connecting employee discount abuse to a specific employee. Employees misuse their employee discounts to skim cash off your retail operation. First, your customer pays full price for your merchandise and your employee collects the total amount. Then the customer leaves, and your employee swipes their employee discount card to lower the invoice amount. Then they keep the price difference for themself. False discounts remain undetected from accounting because the sale is entered into the point-of-sale system. The invoice shows the merchandise items that were sold, and that the amount of cash collected plus the employee discount equals the total sales amount. What the invoice doesn’t indicate is who actually purchased the merchandise. Accounting systems and cash controls can help detect employee skimming. You can prevent this by periodically counting the cash daily yourself instead of letting an employee do it. Video

surveillance tactics and analytics can help you identify and monitor which employees are responsible for generating “No Sale” transaction invoices. It will record unrecorded sales, and monitor inventory counts and compare the actual number to your electronic inventory. You can look for count discrepancies, significant changes in your inventory shrinkage amount, and excessive write-offs for damaged merchandise. To discover false discounts, place a dollar limit on the discount amount an employee can take each month, or personally approve an employee discount before it is used. You can mitigate fraud further by understanding your employee discount benefits, developing proper security measures with your point-of-sale system, and auditing your benefit program for risks will better protect your retail store from employee discount fraud. Misuse of the employee discount by an eligible user will result in revocation of the eligible user’s discount and can result in termination of the employee. Again, some examples include reselling items purchased with the discount for profit and giving your discount number to another person to use when purchasing merchandise online. In regard to price adjustments, employees may receive a one-

time price adjustment within 14 days of purchase if the price of the item has been reduced. You should outline employee return guidelines; they must be accompanied by a receipt, returns will be credited to the original form of payment, and employees may not utilize Merchandise Credit Cards as a form of payment.

In the retail industry, sweethearting is a form of theft by employees at the cash register, where they give away merchandise to a "sweetheart" customer, such as a friend or family member, for free or at a discounted price. Cashiers are able to do this in many ways such as scan avoidance, price overrides, refund and gift card fraud, void fraud, and invoicing scams. Sweethearting is the most common type of employee theft. In a study, they found that sweethearts had significantly more favorable intentions toward both the employees and the firm. Those customers who have developed sweethearting relationships with your employees really liked coming back to your stores just to get free or discounted merchandise that they are receiving from dishonest employees. Some controls to mitigate sweethearting is pre-employment screening tests that look for high scores on personal ethics and low scores on approval from others. Vendor fraud involves fraud schemes in which the fraudster manipulates a company’s accounts payable and payment systems for illegal personal gain. Vendor fraud falls under three categories: billing schemes, check tampering schemes, and bribery or extortion schemes. Billing schemes involve an employee using false documentation to manipulate a company’s billing system to create a false payment for their own benefit. Two common billing schemes are Fictitious Billing, where the fraudster creates a fake vendor and bills the company for payment and Duplicate Invoice Payments, where the fraudster manipulates the account of a real vendor, causing double payment of a real invoice. Both result in the payment being diverted to the fraudster.

Check tampering schemes occur when an employee physically manipulates checks so that they can be deposited into their bank account, including forgery. Bribery or extortion schemes happen when an employee receives inappropriate personal payments from a vendor, so that the vendor gains a sale. Ways to combat vendor fraud include due diligence in the vendor setup process for all new vendors. Examples would be comparing the mailing address for vendors against the mailing addresses for employees, checking vendors with only a post office box for a mailing address to verify their legitimacy, verifying that each vendor has an assigned tax ID number, confirming ownership of the vendor through state business registration databases, and looking for any potential employee conflicts, and having someone outside of the vendor setup process reviewing a list of new vendors on a monthly basis. Segregation of duties never hurt. There should be division between the person receiving goods with those processing invoices and those processing payments, and there should be divisions between those that process payments, those that receive the bank statements, and those that reconcile the bank accounts. Another control that could be useful is a policy that states that payments over a stated threshold should all be processed and approved on a specific day of the week. Data mining is also a great way that companies can detect and prevent fraud. Data mining involves the targeted analysis of the entire population of data to identify trends and identify anomalies, which enables a company to detect fraud and internal control breakdowns. One way to use data mining to beat vendor

fraud is to analyze vendor payments to establish benchmarks. You can then use these

benchmarks to identify anomalous payments. Basic trend analysis is the best place to start. By understanding the usual amount of payments to a vendor/usual total amount paid per month, you can establish expectations. Some patterns to look for that may indicate fraud is occurring include payments that equal just below an approval limit, payments made by manual check, payments for round dollar amounts, payments where the vendor invoice numbers are out of sequence, payments where delivery addresses are different than payment addresses, and payments for a duplicate amount on the same date.

Cash Register Schemes. There are two types of Cash Register Schemes, one being False refund schemes which occur when an employee issues a refund for fake merchandise and keeps the money, and two, the employee overstates the amount of merchandise returned and skims the excess money. Also, there are False void schemes which occur when a register worker retains a customer receipt, processes a fake voided sale, and then keeps the money. Skimming is the theft of cash that has not yet entered the employer's accounting system, including money that should have been put into the cash register. For instance, a customer makes a purchase using cash, and the employee pockets the money and never rings up the item. The business owner is unaware of the theft because no record of the sale exists.

To mitigate cash register schemes, companies should routinely evaluate refunds, voids, and discounts to search for patterns of activity that might signal fraud. Cash disbursements should be recorded on pre-numbered forms and reconciled daily. Customers involved in voided sales and refunds should be randomly contacted to verify the accuracy of the transactions. Access to the control keys for refunds and voids should be restricted to supervisors. Multiple voids or refunds for amounts just under review limits should be investigated. An employee other than the register worker should be responsible for reviewing register totals. Customer complaints in regard to payment errors should be investigated. All “No Sale" receipts should be accounted for. Companies should restrict access to register areas to authorized employees. Altering the transaction tape should be investigated.

Wardrobing is a form of return fraud where an item is purchased, used, and then returned to the store for a full refund. It is most often seen with expensive clothing, but the practice holds true with tools, electronics, and computers. To prevent this practice, some stores make certain items unreturnable. According to the National Retail Federation, fraudulent returns in the U.S. reached $24 billion last year. The number gets worse around the holidays, where about 1⁄4 of holiday shoppers buy items specifically with the intention of returning them. The impact of wardrobing on retailers is a huge issue for many reasons, including the fact that only about 1⁄2 of what’s returned can actually be resold at full price. “Wardrobers” increase their fraudulent actions when they are confident the store won’t reject their

merchandise. Some motivation for wardrobing is driven by dishonest shoppers who often want to impress people on social media. This has a huge impact on business because once an item is returned it doesn’t just go straight back on display, the business pays for these items to go to these processing centers and warehouses where they are cleaned and repackaged. By the time the item comes back, they are usually out-of-season and need to be sold at a discount. Every item purchased with the sole aim of returning it later increases the risk of an out-of-stock scenario. How do we stop this? In retail, wardrobing requires a cost-effective solution that does not negatively impact honest shoppers, such as a visible tag that cannot be replaced on the garment after taking it off. These garments

cannot be returned for a full refund unless the tag is still on it. Retailers could create a written return policy, or make their current policy stricter, which gives consumers less time to return the clothes. They should NOT accept clothes back with stains or soiling. The need for effective controls against wardrobing has never been more crucial in retail today with the huge rise of online shopping as competition. To mitigate all of these fraudulent examples, you can upgrade your point of scale system, implement eligibility verification, and streamline policies and procedures.

A popular $50 million case of Organized Retail Crime involved CVS in San Francisco, CA. Fraudsters took advantage of minimal police activity and closed court systems during the 2020 pandemic. More than $8 million in

razor blades, white strips, over-the-counter medications, and other health and beauty merchandise was recovered. These products were in high demand and low supply as factories shutdown during the pandemic and could not provide such supplies. CVS worked with the ORC police in recovering the merchandise. Professional thieves are hard to detect. They use distraction and concealment techniques to avoid attention. ORC teams are created to be the mechanism retailers that defend themselves and mitigate the risk of perpetrators that cannot be stopped by traditional methods. They identified and monitored the movements of bad actors involved in the resale of stolen merchandise through online marketplaces, which included identifying the origin of products being offered. They gathered information on the movements of the professional thieves that had just been identified. They were also able to determine where the stolen products were being sold. Investigators were led to an organization in the Tenderloin neighborhood of San Francisco that was purchasing and then selling the stolen property to those operating a distribution warehouse in Concord, CA. They then tracked the stolen goods to three residences, two distribution warehouses, and 11 storage units across the Bay area. A man has allegedly been selling goods online through a shell company, using online marketplaces such as eBay, Craigslist, Facebook Marketplace, and Amazon. The money this man received from these illegal sales was then allegedly laundered through real estate investments and other businesses.

$8 million in merchandise was recovered. The total value of the case based on investigative findings is approximately $50 million in stolen merchandise....