Return Fraud

Return fraud - also called refund fraud or refund theft - is the act of abusing a return or refund process for monetary gain. There are many types of return fraud, but most commonly, it consists of obtaining an item from a store (through purchase or theft), and then defrauding the store by returning it for a refund.

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Return processes are offered to customers to help them in a legitimate way; for example, you buy a shirt, and it doesn’t fit, so you return it. However, there are many different ways to abuse a return process, many of which can lead to monetary gain and all of which are to the detriment of the store in a way that was not intentional based on their return process.

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Shoplifting an item and then returning it to the store without a receipt for a full refund, or falsifying a receipt to make it look like you purchased an item are both common examples of refund fraud.

Yes, return fraud, refund fraud, or return theft are all illegal. Many fraudsters believe this to be a ‘victimless crime,’ but by governing bodies, they are considered a form of theft, as they can only occur by means of defraudation of stores and online eCommerce platforms.

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This crime is prosecuted much the same way as any type of theft, and the punishments - though varying from state to state or country to country - can include punishments such as:

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• Jail time
• Massive fines
• House arrest
• Probation
• Community service

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In 2019, for example, a Florida woman was charged for defrauding T.J. Maxx of $160,000 by means of a handbag scam that utilized return fraud. This fraudster bought expensive designer handbags as well as knockoffs from Amazon, switched the tags, and then returned the knockoffs to T.J. Maxx for a full refund.

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Many stores and eCommerce companies have struggled to combat return fraud, as it is very difficult to detect, and harder still to prevent because the regular refund policy often remains in effect even when fraud is detected.

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However, there are some typical ways return fraud occurs that leave some markers of how it can be detected.

There are a number of different types of return fraud, but the process of committing it is relatively similar across the types. This is typically what refund fraud entails:

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1. The fraudster would evaluate a physical store or eCommerce website’s return policy and find a way to abuse it.
2. The fraudster (as a customer) purchases an item or items from a physical store or eCommerce website, or ‘pretends’ to purchase the item.
3. Using one of the methods (see below) of return fraud, they manipulate the item or return process and return it to the store under false pretenses, asking for a refund.
4. The store’s return policy allows the return, so the refund is processed.
5. The fraudster makes a profit because they either (A) never paid for the item in the first place (stolen goods, receipt fraud), (B) intentionally ruined the product (damage, bricking, wardrobing), or (C) returned it under completely false pretenses or different circumstances (cross-retailer, price arbitrage, price switching).
6. The store is unable to make a distinction between a legitimate return and a fraudulent return, so the process can continue to be abused by this or other fraudsters.

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Here’s one concrete and common example of how return fraud might be committed:

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A fraudster finds a receipt in the parking lot of a store for 2 packages of Duracell AA Batteries. They then walk into the store with the receipt and pick up the same 2 packages of batteries off the shelf, bring them to the return counter, and ask for a full refund. The fraudster walks out of the store $40 richer having never purchased the items in the first place.

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This also creates inventory management issues; the store now thinks it received 2 items back, but in reality, it didn’t. Their inventory will show that there are 2 extra packs of batteries that they don’t actually have. This can lead to issues with inventory and supply chain management for companies.

While refund fraud may seem straightforward, there are actually a myriad of ways that fraudsters can take advantage of a marketplace’s refund policies. These are some of the most common types of refund fraud used in this process:

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• Wardrobing - Purchasing an item that can be worn, using it for a short time, then returning it as if it was not used.
• Receipt Fraud - Using a stolen or falsified receipt to return an item for a refund (for example, taking another customer’s receipt, then grabbing that item off the shelf).
• Cross-retailer Returns - Returning an item at a different retailer from where it was purchased to abuse a price difference or store credit policy.
• Bricking - Stripping electronics of valuable components and making them unusable, then returning them as a defective items.
• Price Arbitrage - Purchasing differently priced similar items and returning the cheap item as the expensive item.
• Employee Fraud - Utilizing an employee at a store to assist in stealing goods for return.
• Price Switching - Placing a higher price label on an item, then returning it to receive the inflated refund amount.
• Shoplifting / Stolen Goods Return - Stealing an item and returning it for a refund.
• Defective Return - Purchasing a new item that is the same as something defective or broken you already own, then returning the defective item.‍
• Tender Liquidation - Purchasing items on one form of payment such as a stolen credit card, then returning the item for store credit that can be used or sold.

For most marketplaces, refund policies aren’t just an option - but a must-have. While these policies can be fairly lenient or extremely rigid with allowing returns, it’s paramount for companies to have clear guidelines and rules about when and how products can be returned.

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Since most marketplaces allow some means of returning a product or service, it’s impossible to eliminate the problem fully. Fraudsters will always look for refund policies with loopholes that can be exploited for personal gain.

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Any organization that facilitates a return policy will face this type of fraud in some shape or form. While the methods used will vary based on the industry and return policy being used, fraudsters will attempt to take advantage in any way they can.

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It’s therefore always important to consider how refund policies could be abused, especially concerning your product or services. Design the policy to be as air-tight as possible, with clearly defined rules on how specific incidents are handled. Provide the policy to employers, making it accessible and facilitating adequate training to go with it. Make sure team members know how to handle different situations and how to enforce the refund policy.

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For online marketplaces, transaction monitoring will be extremely valuable, flagging suspicious transactions - even those that are being returned. Leverage activity monitoring to truly understand user behavior; and develop rules that look for certain series of activity that could signal refund abuse.

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Schedule a demo today to learn how Unit21 can help!

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