smiling woman making purchase at retail store

July 11, 2016

3 types of retail fraud – and how to avoid them

2 min read


In most retail environments, all staff members can access the cash register and handle merchandise, which certainly increases the opportunity for crime and makes it more challenging to control. Being aware of the potential ways internal retail fraud can occur is the first step in finding preventive measures to avoid theft in your retail operation.

3 main types of internal retail fraud

While there will always be some new way of defrauding retailers, here are the most common methods of internal retail fraud to expect and prevent using the tips mentioned below.

1. Employee discount abuse

This can occur when employees are entitled to an employee discount and can buy merchandise without limits or any type of monitoring of their purchases. They can then re-sell it to their friends at lower-than-retail prices while still profiting themselves. If you have two or more stores, discount abuse can also happen when an employee buys discounted items at one location and has a friend return them for a full refund without a receipt at the other location. Keeping track of employee purchases for every employee will highlight who is making above-average purchases, which you can bring to their attention and discuss with them. Although putting limits in place doesn’t prevent discount abuse, it will at least cap the amount of possible abuse going on.

2. Under-ringing

Also known as sweet-hearting, this happens when an employee rings in a purchase for a lower than actual price, which they might do for their friends. It is easy to do by scanning the tag of a pair of socks for their friend who is buying a shirt or jacket. This is hard to detect without using some form of observation or surveillance. To prevent employees from ringing in sales at lower prices, simply do not allow employees to process any discounts without an authorized override from their manager.

3. Refund fraud

Opportunities for refund fraud multiply when refunds do not require a receipt or incomplete customer information is collected. A simple technique is taking an item off the shelf and ‘returning it’ on behalf of a fictitious customer. While you want to be flexible and provide good customer service, requiring a receipt for refunds or exchanges is a commonly accepted practice. You or a store manager – not a sales clerk – can always choose to make exceptions as deemed necessary.

If no receipt is provided, collecting full customer information including their phone number should be mandatory. This allows you to make a ‘customer service‘ follow-up call, especially for pricey items to find out why they were unhappy with it. You will also learn if the info collected is for a legitimate refund.

Fraudulent refunds are harder to do if a second employee, ideally a manager, is required to sign off on the transaction. Be sure to keep detailed records of refunds and review them regularly to look for patterns, such as a higher number of refunds during certain shifts or for certain employees.

Educate your employees to prevent internal retail fraud

Don’t keep your focus on preventing internal retail fraud a secret! Explaining how everyone will be held accountable for theft and what the consequences are to your employees will certainly make them think twice about committing such a crime. In addition to tracking data on refunds, employee purchasing, and disallowing employee-authorized discounting, communication is one of the easiest ways to prevent or reduce internal retail fraud in your store now. Speak with a Mitch retail insurance specialist to learn more ways to minimize your risks.

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