Internal Fraud in a Retail Environment

By Marisa Broughton, CPO
February 2001
Reprint Protection Officer News - Summer 2001

The circumstances of internal fraud in a retail environment differ from the corporate environment. Though both share similar motives of greed and both also involve theft of money or assets by trusted employees, the methods and basis of theft differ and likewise, so do the preventative measures.

Internal Retail Fraud [IRF] usually involves a cash register transaction. Store merchandise and cash are most often targeted through fraudulent transactions involving refunds, gift certificates, under-rings [sweet-hearting], false voids, paid outs, false transfers & vendor collusion. Of course, there are as many schemes as there are creative criminal minds; however, these are the most popular vehicles of internal crime. In a retail environment, all staff members have access to the cash register and stock, therefore the opportunity for crime is increased and more difficult to investigate and control.

Corporate Retail Fraud involves crime at the office level. The number of people who could be involved in the crime is limited through access to certain information and if set up properly, it can be difficult for one act alone in a theft. The departments and personnel that have the most access and opportunity for fraud are typically A/P, A/R, Payroll & Sales Audit. The determination for criminal opportunity does depend upon the size of the company, corporate culture & the centralization or decentralization of management & executive.

Types of Internal Retail Fraud

Refund Fraud in thrives in a system that allows refunds to be processed without complete customer information and/or a receipt. The most common method is for the employee to take merchandise from the store floor and "return" it, using fictitious customer information. Most fraudulent returns are either missing information and/or do not have receipts.

A company policy that allows "no receipt refunds" needs to be monitored closely because this is where the most criminal opportunity exists. If a customer does not have a receipt, he or she should be required to provide full information such as name, address, phone number and reason for return, including picture identification before a refund is given. A follow-up phone call should be conducted, especially on returns involving higher priced items. This "customer service" call is necessary in detecting suspicious refunds. It serves to verify whether or not the customer purchased the merchandise in the first place and whether he or she actually returned the merchandise for a refund. This action also provides management with an opportunity to find out why the customer returned the goods and whether the service received was adequate.

Management often allows a slack refund policy because they are afraid of inconveniencing the customer. To counter, the rationale for enforcing a stricter no-refund policy is that legitimate customers usually have receipts and on the odd occasion where they do not, they feel that the store is doing them a favor by processing the refund in the first place.

At the same time, it should be noted that not all refunds with receipts are necessarily legitimate either. Nor are you immune from refund fraud if your store has a "no receipt, no return policy". Though it may be a little more difficult, it is not impossible for an employee to keep or find a legitimate customer receipt from an earlier transaction – especially in a store that sells consumable items such as a grocery or liquor store.

In stores where it is logistically feasible, having refunds issued by a customer service department and not the cashier practically eliminates the problem of refund fraud caused by the cashier acting alone. Collusion with an outside party or coworker at the Service Desk certainly still remains a possibility.

Some other suggestions for curtailing refund fraud involve keeping track of refund totals each month and investigating any fluctuations in amounts of refunds and returned expensive merchandise. Next, do not allow a single person to process a refund, always have a second signature on the refund slip – preferably a senior employee or manager. Granted that this doesn’t prevent an employee from forging a second signature out of laziness, convenience or theft; however, with some awareness training, it does serve as a good deterrent. Educating the employees about accountability, theft and consequences also goes a long way in prevention. It does cause them to think twice about faking a signature when they are aware that forgery is a crime regardless of the circumstances and they will be held accountable for their actions.

The red-flags of Retail Fraud are:

• Obvious fictitious names such as I.P. Nightly, U. Sucker etc.
• Questionable or missing addresses – [2 Forgery Road].
• Incomplete customer information filled out.
• Scribbled, ineligible writing.
• Out of town customer returns.
• High priced items – no receipts.
• Refunds first thing in the morning, just before closing and/or when there is only one person on the sales floor.
• No receipt returns.
• Higher number of returns every time a particular employee works.

Discount Abuse is the result of an inadequate employee purchase system that doesn’t properly monitor employee purchases. To avoid abuse of the system, spending limits should be put in place. All employee purchases should be kept track of at head office on a centralized system. This is especially important in a multi-store environment where employees can make purchases at a variety of locations.

Discount abuse can manifest in a variety of ways. For example, an item can be purchased at one store, via staff discount, and be returned [no receipt] at another store for a full price refund by a friend or the employee acting as a customer. Another method is to purchase goods at the discounted price and sell them to friends etc. at a lower price than retail. Though this abuse can happen even with spending limits in place, it at least puts a limit on how much can be stolen via this method. Without employee spending limitations put into place, a lucrative business opportunity exists for dishonest employees.

Sweethearting occurs when an employee rings in a sale at a lower amount than the item is priced. The best prevention is to not allow employees to process discounts from their cash register without a Manager or Cash Supervisor’s overriding the system using a confidential code.

Another problem that exists in this area is the cashier ringing in a code for one item and bagging another. For example, an apple is rung-in and a steak is bagged. The only way that this will ever be caught is through surveillance. A time-lapse video camera above the cashier will serve as a deterrent to criminal activity by the cashier, not to mention it also is a useful investigative tool which could be used to match the time of transactions to what was rung in on the register. The camera will pick up the customer purchasing a television, for example, at 2:00 p.m. and when the cash register tape is checked, the only transaction at this time was for a pillow – thus a case is established.

Vendor theft typically accounts for 6% of shrink and will involve always involve an employee somewhere. What most employees don’t realize is how theft can be disguised as an innocent act. What appears to be a simple gesture of goodwill or kindness, rapidly escalates into either a partnership of equal opportunity or blackmail where they feel powerless to do anything but continue to comply with the vendor’s wishes.

The following six questions provide us with telltale signs regarding whether or not a particular employee is a risk candidate for Vendor advantage. It’s not that any of these acts themselves are crimes, or even wrong, though each of these things do allow the opportunity for manipulation.

1. Will the employee accept a sample, for personal use, that is not on the manifest?
2. Will the employee allow the vendor to place a sample in his or her car?
3. Will the employee accept deals without permission from management?
4. Is the employee satisfied with his job and working conditions?
5. Is the employee under any financial stress?
6. Will the employee sign or allow an altered bill of lading?

Another method Vendors use to con an employee is to ask for a favor, which will appear like a harmless enough gesture to comply with. For example, the Vendor may ask the employee to break a rule by letting the delivery occur after hours, with some lame excuse attached. In another circumstance, the Vendor may ask the employee to store a package for him at home or ask the Employee to pick up something for him, not sign the bill of lading or sign an incorrect bill. Often the Vendor will set up little tests for the prospective employee to see whether or not he/she can be lured, such as telling them that they can have a certain damaged item, that the company doesn’t want damaged merchandise back and it would just go into the garbage anyway. The thing to remember is that it’s just a ploy to get the employee to compromise ethical standards.

Awareness training for employees and managers, along with a "receiving" policy would curtail this activity. The Awareness Training should include what to do when a Vendor approaches you with an out-of-the-norm request, along with information explaining motives and methods used by corrupt Vendors. The key is to get employees to step back and consider the logic or reasoning behind questionable requests. Why wouldn’t a company want damaged merchandise back? They need to keep track of their inventory and could sell the damaged merchandise at a discount or send it back to the manufacturer. Second, the employee needs to understand the consequences of his actions. There really is no such thing as bending the law, you either commit a crime or you don’t. Even if a crime is disguised, it is still a crime and you can be held accountable, lose your job and be charged.

Cash Register Tampering covers a wide area of fraud. Some of the most common methods of tampering include altering the transaction tape [by cutting out transactions and either rejoining the register tape or starting a "new" roll], false voids, paid outs, and overages and shortages.

Prevention involves both loss prevention personnel and management keeping track of, and investigating any irregularities that occur. When looking at cash shortages, inspect transactions from the previous year or two and determine the number and amount of average shortages that have occurred in each particular store. Scrutinize large variances and compare them with store sales. If the variances occurred during a period when the store was extremely busy, the "human error" excuse could be legitimate. Furthermore, these averages can be used as a benchmark for determining the "normal" amount of shortages for each store and time of year. Always look for patterns.

Do not fool yourself into thinking it’s a waste of time following up on a $2.00 shortage. You can check back a few days later and see if it turned up or make a note of who worked that day, time and cash register. Keeping up with shortages on a daily or weekly basis not only helps you remain informed as to what is going on in the store, it also saves you a lot of background work later if an investigation is initiated.

The Biggest Challenge of All is Changing Management’s Attitude Towards Loss Prevention Strategies…

Changing management attitudes presents the biggest challenge and problem to Loss Prevention Managers. Retail managers and business owners are not loss prevention specialists, nor do issues concerning loss prevention gain any consideration until an incident occurs that directly affects them. Our job, as loss prevention professions, is to educate and advise management on risks and sometimes that entails changing attitudes.

Difference of perspective is the obstacle to overcome. A retail manager’s job is centralized around cutting costs and increasing sales. His/her focus is on team building and motivation, not issues of trust concerning loss prevention. In order to elicit change, you need to change the morality of their thinking. The mindset of coach needs to be transcended to that of a law enforcement officer, and only then may reality been truly understood from a loss prevention perspective.

The most common hurdle to overcome concerns management’s idealized conception that their employees are honest, hardworking team players who would never steal. Yet, the truth of the matter remains that though most employees are honest, given the right circumstance and opportunity – internal crime will occur. To convey this message to management with impact, you need to speak the language of management, which is profit and loss.

Statistics always catch attention. Provide management with statistics and facts on the growing amount of internal crime. Present facts such as the following: In a Pinkerton Survey of 86,000 retail applicants, 40% consider petty theft from the workplace acceptable. In another survey, the National Retail Security Survey, sponsored by Sensormatic, employee theft accounted for 41% of shrinkage. Brandweek Magazine [Feb.98] published the results of another survey citing that employees stole 1.1 million dollars more than shoplifters last year. In the U.S. Annual Retail Theft Survey [1997], it was found that employees steal up to 10 times as much as shoplifters, and that on a per company basis, one in every twenty eight employees was arrested for theft. Statistics such as these are available on the Internet and through various security publications, which you can also access through your library, if not on-line or through subscription.

Provide management with comparison information on what other retailers are doing about their internal problems. Through established relationships with other loss prevention specialists or enforcement agencies, information regarding LP products and effectiveness can be shared. Present this information to management in the form of a statistic. For example, Store X initiated a reward program three months ago, and since its implementation, they have recovered $5,000 in stolen merchandise and made 4 arrests. This information may take some time and effort to collect; however, it is effective in putting your point across and demonstrating your point.

Management should know that employees that steal find ways to rationalize their crimes. Point out how, that in their mind, the employee does not see his or herself as a criminal, just someone who has made a mistake. Emphasize that it is often rationalizations such as this, which enable the employee to justify and continue stealing.

Three of the most common rationalizations used are:

1. The company doesn’t care about me, so why should I care about them.
2. It’s a big company, they won’t miss a few bucks.
3. The company expects a certain amount of shrink, they’ll just write it off or claim the insurance for it anyway.

Communication is a strategy that works to change employees inaccurate view of how the company feels about internal theft. Employees need to be shown how a few lost dollars does affect the company and ultimately their jobs or lost bonuses. Though management is in the habit of keeping this information away from employees, they need to understand that if the employees themselves understood more about how the bottom line affects everything in the company, the theft rationalizations would not occur.

Another obstacle to overcome is management’s desire to take an "inoffensive" sanitized approach to loss prevention issues. There is a misconception that employees will be offended if the problem of internal crime is discussed with them. It needs to be pointed out that the only people who will be offended by this kind of discussion are the criminals because they want management to turn a blind eye to crime. Awareness sends a clear message to employees that the company does not tolerate internal crime. A proactive stance tells employees that the company takes crime matters seriously and that the consequences for indiscretion far outweigh the harvest of criminal effort.

The key element to Internal Retail Fraud is criminal opportunity through lack of internal control and/or weak policies regarding cash and merchandise transaction. When looking to detect fraud, look for a weakness in the system [opportunity] and how the crime may be concealed. From there you will likely either find a hole to fill or a lead to follow.

Regardless of how good your investigation team is, the battle against internal crime cannot be won without management support. In fact, the biggest battle may not be against crime itself, but to direct management thinking more towards a loss prevention directive.