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 Return Fraud May not Cause
Shrink
Submitted by Mark McClain, CFI
Director, Investigations AP - Walmart
Store
returns where the merchandise was obtained fraudulently is an issue
and even a crime in most states that we should all be concerned
about. However, there is some clarity that should be made before we
jump off the deep end regarding the issue. Don’t confuse the two.
Let's start by stating that fraud is generally defined as some form
of deceptive practice. A return occurs when a customer brings in an
item to a retailer that for some reason or the other they are not
satisfied with. Put the two together and we are essentially saying
that the merchandise that is being returned is happening with some
form of deception occurring. The challenge is really determining if
a loss is occurring as a result of the return of another prior act.
Consider the following scenarios:
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1. |
Subject steals a $1000
TV from store A and returns it to store B and receives $1000
in cash or on a gift card. |
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2. |
Subject purchases a
$1000 TV from store A with a stolen or fraudulently obtained
credit card and returns the TV to store B and receives $1000
in cash or on a gift card. |
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3. |
Subject purchases a
$1000 TV from store A with a stolen or fraudulently obtained
check and returns the TV to store B and receives $1000 in
cash or on a gift card. |
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4. |
Subject creates a
counterfeit receipt listing a $1000 TV, selects the TV and
then exits store A showing the receipt upon exit and then
brings the receipt to store B with the TV and returns it and
receives $1000 in cash or on a gift card. |
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5. |
Cashier/Employee at
store A conducts a refund transaction on a $1000 TV that was
never purchased while no other employees are around.
Employee then takes either cash or gift card. |
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6. |
Subject returns
merchandise to store A that was never stolen, but may
contain a different product or object like a brick or other
misc. objects other than the real product. |
Now there may be more examples, but as you read through the above,
consider the following questions:
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Is there a loss at store A? |
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Is there a loss at store B? |
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What is the total loss? |
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Is the loss a shrink issue or a profit
issue? Or Both? |
Scenario explanations and answers:
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1. |
Theft and thus the
loss took place at store A. When the merchandise was
returned to store B an exchange took place of the
merchandise for cash at retail, thus, no loss. Yes, there is
a potential loss of sales tax and margin that could be
realized since store B just paid retail plus tax for the new
inventory. Additionally, if the merchandise cannot be
returned to the shelf then you may have a second loss of
$1000, but not for many cases. |
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2. |
& 3. These two
scenarios really depend on if store A receives a chargeback
or return of the checks. If so, then the loss occurs at
store A. If no, then no loss at store A. or at store B,
except as previously stated for scenario 1 with regard to
sales tax, margin, or potential markdowns. |
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4. |
Same as scenario 1. |
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5. |
Since only store A is
involved in this scenario, clearly the loss occurs there,
but only for the amount of the return. Inventory will show
one more TV than the store actually has on-hand and thus
shrinkage at inventory time of $1000. |
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6. |
Same as scenario 5. |
Many retailers that I have spoken with do not always see my
interpretations in the same light. They fear conducting the return
indicating they do not wish to lose twice the amount of money. With
the above explanations, hopefully one would agree that this is not
always the case. Additionally, when surveys or discussions are held
about the causes of shrink, many may report inaccurately what these
causes are. Return Fraud is not a cause of shrink. Not a major
cause, anyway. Again, in scenario 5 & 6, these could be classified
as return fraud that would cause shrink. However, the others may be
better classified as;
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1. |
Theft |
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2. |
Credit Card Fraud
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3. |
Check Fraud
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4. |
Theft
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Return fraud can cause shrink, but does it contribute significantly
and are we all classifying it correctly to begin with? A number of
reports or case management systems seem to try and capture the
refund as the reason or cause of the loss. In a lot of cases,
wouldn't it be better to say that the refund is the actual "fencing"
of the product that was already stolen or fraudulently obtained? In
essence, we are the fence that converted the merchandise to cash. As
for conducting the return or refusing it, consider that at times,
providing a gift card can be instrumental in obtaining additional
evidence as the investigation unfolds.
The intention of this article is really to cause us all to consider
just how we report what we report and if we really understand the
numbers and what makes them. Are we looking at crimes or causes of
loss?
Have a happy holiday!
Mark |
