Case Study: Organized Refund Fraud

When the news broke in March 2006 that Claude Allen, a White House advisor, was arrested on numerous counts of refund fraud, this crime was briefly placed in the national spotlight. Then, like all sensational events, it quickly faded to black.

Unfortunately, the crime itself has not vaporized with the cessation of the news coverage. Organized refund fraud has been going on for many years, and it is likely to continue, especially if stores make it easy for thieves to get away with it.

Following is the description of a very lucrative organized refund fraud scheme, the steps the retailer followed to put a stop to it, as well as tips for other stores to build cases that can be successfully prosecuted.

MARSHALLS AND T.J. MAXX

In 2001, a married New Jersey couple began targeting Marshalls and T.J. Maxx stores up and down the East Coast, committing fraudulent returns.

Both stores are off-price apparel retailers that belong to the MarMaxx division of the TJX Companies, Inc. There are approximately 715 Marshalls stores and 800 T.J. Maxx stores in the United States, with combined annual profits of approximately $10 billion. The couple hit branches of these stores in nine states, committing 758 fraudulent returns and taking the stores for over $160,000 in a four-year period.

The two, who were living the American dream in an upper-middle class suburb in New Jersey -- a very nice home complete with two cars and two kids -- suffered a financial setback in 2001. They began committing fraudulent returns in order to generate revenue to pay their living expenses. This money-making activity quickly escalated into a full-time job for both of them.

THE SCAM

The division of labor worked like this: The wife was responsible for acquiring the merchandise, and the husband committed the fraudulent returns. The female half of the couple purchased items at clearance or super-discounted prices from both Marshalls and T.J. Maxx stores. She would remove the discount stickers from the price tags to reveal the original, full-price cost.

The couple also kept a cache of merchandise tags. They would put the appropriate bar codes and the original prices on the tags, then retag the merchandise.

Using a laptop computer and home printer, the wife generated a counterfeit receipt that reflected the purchase of several items, including those they planned to return for cash refunds.

The receipts were printed on thermal register tape of the kind used at the stores. In fact, it was exactly the same as the tape used at the registers; the male half of the couple stole a roll of it that had been left out at a customer service desk in one of the stores. Any store employee who handled the receipt would be easily fooled by its texture.

The printouts were almost perfect. There was, however, a slight difference in ink color between the fraudulent and the genuine receipts. The cashiers did not seem to notice this discrepancy, but store loss prevention did eventually pick up on it. That piece of the puzzle was difficult for LP to get a handle on because the man was scrupulous about getting the receipts back. After receiving cash back, he would ask for the receipt back “just in case [he] wanted to return another item” that appeared on the same receipt.

Out of all the evidence that was collected in this case, only three fraudulent receipts were recovered by the stores.

MAKING THE ROUNDS

The wife constantly made purchases at Marshalls and T.J. Maxx stores, amassing merchandise that the husband would return for cash. He went on his appointed rounds daily, blanketing the East Coast. He traveled as far north as Massachusetts, New Hampshire and Rhode Island, and as far south as Virginia. The states he hit the most frequently were New Jersey, with 479 returns totaling over $100,000; and Pennsylvania, with 128 returns in the amount of almost $27,000.

On these field trips, he would make between 10 and 12 returns at different stores each day, receiving about $2,000 in cash daily. He parceled out the returns so that each refund was for an amount slightly under $200. This amount was important to make sure the refund would fall under the store’s radar.

One of the factors that made T.J. Maxx and Marshalls attractive targets for refund fraud is that the stores did not require identification for cash refunds. The male would sign the return slips with a fictitious name and address. When the signatures on the slips were compared later, they were all found to have been written by the same person.

The couple also found these stores to be juicy targets because they were aware that the stores were affiliated. They also knew that there was no computer connectivity among different stores. So when the male made a return in, say, New Hampshire, he would present a slip showing that the items had been purchased in, for example, Pennsylvania. The local New Hampshire store’s computer would have no way to verify the information and would have to go by what was on the receipt and the merchandise tag.

MAKING A CASE

MarMaxx loss prevention became aware of the deception perpetrated by this couple and began gathering evidence against them. The evidence included in-store video surveillance footage, photos, documents and more. This mountain of data was collected in three six-inch wide binders.

A company investigator brought the neatly packaged evidence to a federal law enforcement agency to pursue prosecution of the couple. Despite the heap of documentation, the F.B.I. refused to take the case. According to an anonymous F.B.I. source, the agency will not touch retail cases under half a million dollars.

Because the majority of the fraudulent transactions were committed in New Jersey, the investigator then spoke with the New Jersey Office of the Attorney General, but got the same result. The New Jersey State Police was likewise uninterested in pursuing a criminal case against the couple.

The investigator eventually worked his way to the police department in Holmdel, N.J., a town in Monmouth County. Holmdel is bisected by the Garden State Parkway, a main New Jersey thoroughfare. It is also home to the PNC Bank Arts Center, which hosts many concerts featuring big-name stars. In addition, it has a number of strip malls containing many national stores, including Marshalls and T.J. Maxx branches.

Det. Eric Hernando was presented with the evidence. On first glance, it appeared to be a wealth of information that could be used to build a strong case against the couple. But when he asked his sergeant for the go-ahead to pursue the case, he was shot down.

However, once his supervisor realized that the case had basically already been made and that the detective had only to verify information, he gave it a nod.

On May 10, 2005, arrest warrants were issued for the couple. They were charged with theft by deception; conspiracy; criminal simulation; and forgery. The wife turned state’s evidence in order to be allowed to remain at home with her children, while the husband was sentenced to incarceration for his part in the scam.

THE LESSON

Unfortunately, the MarMaxx investigator’s experience is not unique. Many retail loss prevention personnel suffer similar frustrations when trying to get a law enforcement agency to bring charges against criminals who have ripped off their stores.

Right now, federal agencies are unlikely to take such cases unless they are in on them from the beginning. And getting their cooperation to make a case can be next to impossible.

Large state agencies are often similarly unwilling to go forward on a retail case. Their reasons for failing to do so vary, but they often believe that the cases are too small in the scheme of things to bother with -- after all, they don’t involve violence, and they’re not sexy enough to make headlines. Remember, even Claude Allen’s case fizzled out of the media spotlight within mere days.

The agencies may also lack knowledge and experience with retail crime, which makes them even more hesitant to proceed.

So what’s the answer? First of all, conduct a thorough investigation. Getting law enforcement cooperation is difficult enough; it will be impossible if you don’t hand over an air-tight case.

Secondly, develop a relationship with someone in a position to assist your cause. Ask around among other loss prevention personnel. Who has championed their cases? Once a prosecutor or officer has become familiar with retail crime, he or she is more likely to take on more crimes of a similar nature.

If you can’t find anyone who fits this description, cultivate a relationship with someone from a local law enforcement agency. Invite the agency to give a presentation to your store, mall or association. Then let the presenter know that you’re interested in sending some good cases his or her way. Anyone would be delighted with the opportunity to look good without doing any actual work.

A third option is to educate prosecutors and law enforcement in your area about the consequences to all of us for letting organized retail crime go unpunished. Many people in law enforcement are still unaware that a lot of terrorist organizations utilize retail crime as a money-making scheme that carries a low risk of apprehension or incarceration. If you make law enforcement understand that every dollar ORC gangs steal from you may be sent home to Osama, they may look at your case in a different light.

Finally, if you find it impossible to get off the hamster wheel, work with the media. Reporters love a good story, and once they put the failure of a LE agency to go after ORC into headlines or on the 11 o’clock news, you’ll find police cooperation much easier to come by.

For more information about successful strategies for working with police and prosecutors on retail crime, see the article “Enlisting Police and Prosecutors to Help Fight ORC” from Security Technology & Design Magazine online at http://www.securityinfowatch.com/print/Security-Technology-and-Design/Features/Enlisting-Police-and-Prosecutors-to-Help-Fight-ORC/3840SIW2.

Liz Martinez is a leading security expert and the author of “The Retail Manager’s Guide to Crime and Loss Prevention: Protecting Your Business from Theft, Fraud and Violence” (2004, Looseleaf Law Publications). She is a member of the Retail Loss Prevention Council of ASIS International. Her appearance on “Inside Edition” explaining refund fraud can be viewed on her Web site at www.RetailManagersGuide.com.