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Thought Challenge 1-6-14
The D&D Daily e-Newsletter for the LP & Safety Industry
 


Thought Challenge
 

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
 

 

 

Thought Challenge 1-6-14
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