The Biggest Crime You've Never Heard of -- Return Fraud -- and How the Criminals Do It

by www.SixWise.com

While returning the bright pink sweater your aunt gave you for the holidays may hurt her feelings, it's certainly not unusual. Retailers expect that nearly 9 percent of gifts will be returned from the holiday season -- a disappointment to sales? Yes. Illegal? No.

Return fraud cost retailers $3.5 billion during the 2006 holiday season alone.

There is, however, an immoral and often illegal phenomenon that's costing retailers billions of dollars and, in turn, making shopping more expensive and inconvenient for all of us: return fraud. According to the National Retail Federation (NRF), "Criminals commonly take advantage of companies' return policies to receive cash for stolen merchandise, launder money or return an item after it has been used."

This return fraud cost retailers an estimated $3.5 billion during the 2006 holiday season, and a full $9.6 billion for the entire year, according to NRF. Some estimates even say return fraud amounts to $16 billion in losses to retailers each year.

"Retailers have often viewed lenient return policies as a cost of doing business with honest shoppers," said Joseph LaRocca, NRF vice president of loss prevention. "Unfortunately, due to an increase in return fraud, retailers are being forced to strike a delicate balance between servicing loyal shoppers and discouraging opportunistic criminals."

How is Return Fraud Committed?

The most common form of return fraud, according to the NRF's Return Fraud Survey, is returning merchandise that has been stolen, either for cash or for store credits. An alarming 95.2 percent of retailers said they had had stolen goods returned within the past year (you can check out an example of this return fraud caught on tape in this ABC News video).

"These people are going from store to store, mall to mall, stealing merchandise thousands of dollars at a time, and then coming back and returning it to the store," LaRocca said. "They can make millions if they're very good at it."

Another type of return fraud occurs when criminals return merchandise that was originally purchased with fraudulent or counterfeit tender. Over 69 percent of retailers had experienced this fraud within the past year, and another 52.4 percent had had returns made using counterfeit receipts.

A practice known as "wardrobing," though not illegal, per say, is also a form of return fraud that's affected 56 percent of retailers. Wardrobing describes the consumer who intentionally returns merchandise that's not defective, but that has been used. For instance, buying a prom dress, wearing it once, then taking it back for a refund (this also happens with high-end electronics like digital cameras).

Aside from costing retailers money (they must either discard the merchandise or resell it at a steep discount), wardrobing can strip stores of merchandise in the most popular colors, sizes and styles so that other customers cannot purchase it.

There's also a con known as price arbitrage, which consists of buying items that look similar but have very different prices, then returning the cheaper item as though it's the more expensive one. For instance, buying two watches, switching the boxes and returning the less expensive one for the more expensive price.

See Return Fraud

Criminals in Action See how these criminals netted hundreds of thousands of dollars by engaging in return fraud in this exclusive ABC News video.

As criminals get more and more brazen, they may even fill the box with a completely different item, such as a deck of cards, and return the item for a full refund (betting on the fact that the clerk won't take the time to look inside the box).

More Return Fraud Means More Expense, and Less Convenience, for Consumers

As retailers lose billions of dollars to fraud, they're being forced to raise prices to honest consumers to make up for the losses.

"You and I as consumers are paying a little extra at the register, almost a hidden crime tax, to cover those losses committed by people stealing merchandise and taking advantage of retail return policies," LaRocca said.

Meanwhile, many retailers are making their return policies stricter than ever, a change that will impact consumers this year. Over 69 percent of retailers said they'd changed their return policies in the past to address return fraud, according to the NRF survey, and another 25 percent plan to tighten their policies this year.

While some stores are enlisting investigators to search online for stolen merchandise or sites selling fraudulent receipts, others are scanning driver's licenses every time a return is made to keep track of people who are making excessive returns in short periods of time.

Still other stores are putting unique numbers on merchandise to keep better track of whether an item has been returned or purchased before, shortening return periods, charging significant restocking fees or limiting the amount of returns one customer can make.

"We are used to liberal return policies, but the liberal return policies are fading away," said Edgar Dworsky, founder of ConsumerWorld.org, a Massachusetts-based consumer resource guide. "They are being replaced with these far more complex ones, and ones that I call 'sliced and diced.' Different categories of items have different return rules."

The bottom line is, if you plan to make any returns this year, make sure you keep your receipt and ask the store to spell out exactly what their return policy entails.

Recommended Reading

The Unethical but (Mostly) Legal Retail Shopping Tactics of Devil Consumers

Shopping as a Form of Therapy? According to Some Research, You Bet!

Sources

Kansas City Star December 26, 2006

CBS News December 22, 2006

National Retail Federation

ABC News

BusinessWeek.com