The High Cost of Financial Crimes in Retail Loss Prevention
David A. Picard
Financial Crimes Investigator
The Kroger Co.
According to the National Retail Federation (NRF), losses from retail fraud,
theft, and waste were $34 million in 2011. Check Point Systems Inc. estimates
retailers internationally lost $112 billion or 1.4% of sales due to shrinkage,
which is attributable to “shoplifting”, employee and supplier theft, organized
retail crime and administrative errors.”
A significant portion of shrink for retailers is attributable to financial
crimes committed in stores. There are multiple organizations reporting financial
losses due to check fraud and electronic card fraud. FINCEN reported in 2008
that check fraud in the United States was estimated at $1.024 billion. The
American Banking Association reported check fraud was $11 billion in 2010. In
2012, the U.S. Department of Justice reported credit card fraud in the United
States was estimated at $5.5 billion. From these various statistics it can be
extrapolated that retailers worldwide are losing millions, if not billions, to
check and electronic card fraud each year.
As evidenced from these statistics, retail financial crimes comprise a large
portion of overall shrink losses. Despite the large and growing losses from
financial crimes, many retailers often choose to down play or altogether ignore
financial crimes. This can be attributed to the “invisible and silent” nature of
financial crimes. Fraudulent checks and electronic card transactions are not
immediately identified or recognized as losses until weeks after the transaction
has been conducted. Due to the lack of immediacy and physical presence of the
fraudster being observed by loss prevention personnel at their stores, financial
crimes are often times ignored or never fully investigated and therefore, not
referred to law enforcement for prosecution.
Many retailers focus their loss prevention efforts on shoplifting, internal
theft and other forms of loss of property from criminal activities. Although
these are significant types of retail crimes, they are often elevated in
priority due to the physical and visual presence of the perpetrators at store
locations. Often time retailers choose to gloss over or minimize the impact of
financial crimes. Many of these financial crimes are surprisingly large in scope
and losses often times exceed those of shoplifting and theft cases. The lack of
effective and strong financial controls, aggressive investigations and
enforcement of retail financial crimes creates a culture and environment where
check and electronic card fraud can thrive, - externally and internally. Seeing
no aggressive investigation of financial crimes, or any enforcement or
prosecution, the employees themselves may take advantage of the situation and
conduct internal financial crimes for their own benefit.
There are substantial numbers of perpetrators who have cashed countless
fraudulent checks and electronic card transactions for many years with very
little concern in being apprehended, prosecuted, or convicted for their crimes.
Many retailers choose to simply absorb these financial crime losses as a “cost
of doing business”. This lackadaisical approach to retail financial crimes leads
to criminals conducting hundreds, and sometimes thousands, of fraudulent
financial transactions at stores with little fear of being caught or arrested
for their crimes. In cases where retailers do attempt to have the fraudster
arrested and prosecuted, financial crimes are not a high priority for law
enforcement.
In many cases, financial crimes are directly linked with Organized Retail Crime.
It is often the preferred method of acquiring retail goods and reintroducing
these goods back in to the supply chain. Many check and electronic card
fraudsters use these transactions to purchase high theft ORC items such as
laundry detergent, cigarettes, liquor and baby formula to sell to fencing
operations. Acquiring these goods with counterfeit checks and electronic cards
is usually a much easier and safer method for the criminals than shoplifting,
push outs or other methods used in acquiring stolen goods. The chances of being
apprehended prosecuted and incarcerated for using fraudulent financial
instruments to obtain stolen retail goods is far less than shoplifting or theft.
Criminals also use fraudulent financial instruments to purchase merchandise to
disguise the fraudulent nature of their transactions and later return the
merchandise and receive gift cards. This doubles the losses for the retailer in
terms of cashing the fraudulent financial instruments and the lost revenue from
the merchandise not being sold. The criminal proceeds from the fraudulent
financial instruments in purchasing these retail goods is often times used as
“seed money” to fund other criminal activities such as drug trafficking,
prostitution or supporting corrupt organizations here and potentially overseas.
The solution for retail companies in combating financial crimes is to
incorporate oversight and tight financial controls over all aspects of their
financial operations. Employees should be educated and trained to strictly
adhere to policy and procedures set forth by their company in conducting
financial transactions. When fraud is detected, there should be timely
intervention, investigation and prosecution of any financial crimes, both
externally and internally, using both civil and criminal remedies. Retailers
should consider establishing Financial Crime Investigation Units focused on
these specialized types of retail crimes. Law enforcement and prosecutors should
be briefed and educated on the significance of retail financial crimes and how
it negatively impacts and drives the overall criminal activities in their
communities.
Retailers ignoring or doing nothing in regards to financial crimes will most
likely lead to mounting financial losses, an internal employee environment which
is seen as conducive to dishonesty and an external reputation to criminals which
suggests financial crimes can be conducted at those retailers without impunity.
*Submitted on December 31, 2013
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