On Santa’s Naughty List: 6 Common Forms of Fraudulent Holiday Returns

For the last several weeks, retailers have been hard at work planning for the upcoming holiday shopping season. From November through December, retailers face a huge opportunity to increase sales and profits, but this season also comes with challenges, including the need to prevent unnecessary loss. Unfortunately, post-holiday returns are a common source of fraud and abuse.  

Return fraud involves deliberately deceiving a retailer to obtain a refund or an undeserved benefit through the return process. Last year, the U.S. retail industry lost more than $84 billion to return fraud and abuse, including nearly $5 billion in lost sales taxes.  

Despite these startling statistics, most retail holiday returns are legitimate and caused by issues like incorrect clothing sizes or online purchases not matching product descriptions. However, fraudulent returns do increase around this time of the year.

An increased number of purchases, foot traffic, and seasonal workers can decrease a retailer’s ability to monitor return fraud during the holidays. For example, employees may overlook fraud-preventing practices to keep lines moving and maintain customer satisfaction. Recognizing suspicious activity can be nearly impossible with the high volume of consumers, purchases, and returns blurring together during the holidays.

That’s why preparation is crucial in preventing return fraud in-store and online.

Here are six common examples of return fraud to watch out for this holiday season.  

#1: Returning stolen merchandise

Heavier store traffic plus dishonest intentions equal a perfect opportunity for holiday shoplifting. There are two common ways that perpetrators pull this off. First, they may take an item off the shelf and make a non-receipted return. The fraudster will use an excuse, like, saying that it was a gift from someone without a receipt.

Alternatively, a fraudster may make an actual purchase, drop the item off in their car, go back inside the store with their receipt, and then steal the same item from the shelf, saying they changed their mind. In both cases, the store may face additional loss by refunding the product price plus any applicable sales tax. 

#2: False or stolen receipts

Many retailers are becoming more stringent in their non-receipted return policies, especially since ORC fraudsters have found success in selling the merchandise credit gift cards received online during these transactions. This can total up to 85-90% of the face value of their “return.” To earn higher profits, some individuals print their own gift cards or simply pull them out of the trash.  

Increased store traffic also means more customers dropping receipts on the floor or throwing away receipts in nearby trash bins. Staff should take a quick walk around the checkout area of the store, and the area immediately outside, to spot these receipts that could be picked up by fraudsters.

Once a fraudster has a stolen receipt in-hand they, can perform what is called “shoplisting.” In this scheme, the receipt is used as a shoplifting list. The items are then returned with a genuine receipt.

Finding stolen receipts for shoplisting may be hit or miss since consumers purchasing high-priced holiday items, such as watches or electronics, usually guard their receipts closely. Those looking to target expensive items specifically may turn to the dark web to print their own fake store receipts. They may even print off the fake receipts using the same paper stock as the retailer. 

#3: Wardrobing

The holidays bring plenty of opportunities for individuals to dress up, whether for parties, New Year’s Eve celebrations, or family photos. Due to this, the abusive practice of purchasing clothes intending to wear and return them, also known as “wardrobing,” often spikes during this time of year.

Wardrobing is not exclusive to apparel, either. Retailers who sell other expensive durable goods, such as TVs, cameras, home improvement tools, and jewelry, are at risk, too. Sophisticated criminals may prefer wardrobing since it keeps their credit card balances low and can mask other suspicious behavior.  

#4: Cross-retailer returns

Even before November begins, many retailers start promoting upcoming holiday sales. Whether in emails, online advertisements, or TV ads, a fraudster who does research can quickly discover where to buy expensive items at the lowest price. They can then take that item and make an unreceipted return to a store where it sells at a higher price. This type of return fraud, known as a cross-retailer return, can ramp up during the holiday season when fraudsters take advantage of busy stores and price fluctuations.    

Retailers should look out for cross-retailer return scenarios across items of all prices. Items such as batteries, for example, are typically on sale during the holidays. Additionally, the packaging is the same from store to store, making this item not only an easy target but also a profitable one if several packages are purchased at a time.

#5: Price switching and price arbitrage

Price switching occurs when an ill-intentioned customer switches UPC stickers, taking a lower-priced sticker from an item and sticking it to the higher-priced item before returning it. A clearance sticker may be moved to items that weren’t meant to be marked down, for example. However, price switching can go the other way, too, and become a form of return fraud commonly found during the holidays.

Consider the following: A fraudster purchases or steals a basic model Bluetooth speaker (a common holiday gift); they take the UPC sticker off a higher-end model and stick it on their arm. In the parking lot, they take the expensive price sticker, place it over the legitimate one, and head to another store to make an unreceipted return.

Price arbitrage is another form of holiday return fraud that, like price switching, involves returning a cheaper item as an expensive one. In this scenario, a fraudster purchases differently priced but similar-looking merchandise and returns the cheaper item as the expensive one. Associates should especially be aware of popular holiday gift items, such as earbuds, that may look similar but vary greatly in price. Since receipts are present in these types of fraudulent returns, it may not raise any red flags. 

#6: Employee assisted return fraud

As the holiday season approaches, retailers find themselves grappling with a unique challenge — a labor shortage that has left them scrambling to fill thousands of temporary positions to meet the surging demand. However, when considering the dynamics of these seasonal hires, a few concerning factors come to light. Many of these employees might undergo minimal background checks, and their commitment to the company may be fleeting at best.  

It’s not hard to assume that some of these seasonal workers may be there for the wrong reasons. They may use periods of high traffic as an opportunity to get away with processing fraudulent refunds for themselves, or family and friends, or making returns using discarded receipts, as happened at this major department store.

Some employees will also act as facilitators for further crimes, including providing receipt paper stock, sweethearting items for an accomplice to return, and even processing a fraudulent return transaction themselves. Regardless of which of these acts an employee engages in, one thing is sure: They can cause significant damage in a short period of time simply because they are working in the store every week. 

Mastering the art of preventing retail holiday loss  

During the festive holiday season, return fraud can be a real Grinch for retailers, impacting their bottom line and overall operations.

To promote stronger loss prevention this holiday season, it's essential to understand the various types of holiday return fraud and implement proactive strategies to mitigate them. Retailers should respond with clear policies, employee training, and cutting-edge technologies.  

By laying the groundwork and staying vigilant, retailers can conquer return fraud effectively and ensure that the holiday season remains bright and profitable.

This post has been updated from its original content in November 2019.