Return and Refund Fraud: A Growing Concern in the World of E-Commerce

Return and Refund Fraud is an emerging headache for all online vendors and traders, owing to the growth of e-commerce and consumers’ growing reliance on delivery services, in part due to the impact of the Covid-19 pandemic. Companies must strike a balance between a seamless delivery system with little resistance built into the process, whilst also building safeguards into their system to vet return and refund requests. In recent months, NetWatch Global Ltd have been approached by clients to provide intelligence into these types of fraud. Subsequently, we have accessed networks used by individuals who seek to defraud e-commerce vendors, to help companies find weaknesses within their return and refund systems.

Return and Refund Fraud can largely be grouped into three general categories, which we can call; Item Not Received Fraud (INR), Empty Box Fraud (EB) and False Tracking ID Fraud (FTID). To understand how best to protect your business from losses, it’s worth understanding what you’re up against.

Item Not Received Fraud (INR) Fraud

Item Not Received Fraud is potentially the easiest method for fraudsters to use, with no specialist knowledge needed to work. Put simply, an individual claims a parcel which has been delivered has not been received. Due to the phenomenon of ‘porch piracy’, there are legitimate reasons for why a parcel may be delivered properly by a courier, but not received by the intended customer. As such, without adding some resistance into the delivery process, INR fraud is a difficult weakness to eliminate.

Nevertheless, companies can require a signature on delivery, which significantly increases the chances of the parcel ending up in the intended recipient’s hands. A similar approach can be taken when the item is delivered to a ‘drop off point’, such as a corner shop or supermarket. Operators of collection points can be instructed to ask customers for ID when picking up packages, or indeed a QR code sent through email. Adding this safeguard allows a vendor to challenge a refund request more confidently, as they will have proof of the customer receiving the package, despite any protests from the would-be fraudster.
The value of this, however, must be weighed up against the time added to the delivery process and the potential for delivery to fail due to the customer not being available. Furthermore, whilst couriers and individuals operating a drop off point should ask for ID, a QR code or other verification, this was identified as a weak point in the chain, with our agents able to pick up packages without showing ID, or indeed without having a barcode available to scan.

Empty Box Fraud (EB) Fraud

EB Fraud can be similarly easy to pull off by a potential fraudster. Whilst a fraudster may confirm the package did arrive, they will state that it did not contain the item they were expecting, or may have contained an alternative item. Oftentimes this is done with a package containing both a large, low-value item, as well as a small, high-value item, with the latter being the item claimed to be missing. They may state that the item must have been stolen at the distribution centre or during transport.

Unfortunately, as the fraudster has confirmed receipt of package, the previously mentioned safeguards will not contradict their claims, and instead investigations must be placed on the courier service used. It is entirely possible that the customer putting in the refund request is honest, and there had been a mistake or thievery prior to the package reaching them.
In our recent investigations for our clients, we found this to be a common tactic used by fraudsters, because by its nature it is so hard for companies to differentiate between honest and fraudulent cases. If this is a type of refund request your company encounters to an abnormal degree, conducting an internal investigation, alongside an investigation with your chosen courier service, may be your best options for preventing further losses.

False Tracking ID Fraud (FTID) Fraud

FTID Fraud is an increasingly popular method of conducting fraud, but it is also potentially the easiest type to prevent. This scam usually involves an individual starting the returns process for an item, and putting the return label on an empty package or envelope. This takes advantage of the fact that vendors will often issue refunds as soon as the item is picked up by a courier, who may not vet the package fully.

Requiring a customer to send back the item in the original packaging, or waiting until the item has been safely received and inspected before issuing a refund can prevent this type of fraud. However, again, this adds to the complexity of the delivery and refund process, and can add friction into the system.

Refunds as a Service

During our recent investigations, we were somewhat taken aback by the size, openness, and professionalism of the cottage industry of individuals who offer to get individuals refunds on products for a fee. Largely, we found that many groups operated on the messaging application Telegram, which has a laissez faire attitude to what is permitted on their platform. Within minutes of creating an account on the service, you can view a number of groups offering refunds for popular online vendors such as Amazon, eBay, Nike and Adidas, to name only a few. The bottom line is if your company regularly utilises delivery services, you are at risk of return and refund fraud.

Whilst each individual facilitator of these types of fraud may have slightly different methods, the core approach appears to be largely uniform. These individuals regularly use social engineering to convince a customer service agent that the item did not arrive, or that a package was empty on delivery. In this approach, a single customer service agent becomes the weak link in the process. As they may lack the tools to verify the honesty of the individual they are speaking to, they may err on the side of customer service and process the refund. Alternatively, they may not be aware of the scale of these types of scams. Constant updating of training and monitoring of trends are the company’s best asset in preventing loss to fraud.

It must be noted that the murky world of Refund as a Service can be equally perilous for an individual attempting to play the system. It is often said there is not honour amongst thieves, and our agents have been reminded of this in several of our investigations. Oftentimes, individuals offering this service take either a flat fee amount or a percentage amount of a total order value as payment for their time. Without fail, this payment is taken in cryptocurrency, and oftentimes upfront, before they begin attempting to secure the fraudulent refund. This can leave the individual attempting to receive a refund by using a professional refund fraudster out of pocket, this often being a sizeable sum of money. As such, education of your legitimate customer base is also advisable, to deter them from attempting to try such fraud.

What We Can Do

Netwatch Global Ltd. has received increasing interest from both new and existing clients to use our expertise and insight to identify weaknesses in their delivery and refund systems. Our typical approach involves posing as a customer of these refund vendors and completing the process with them, whilst constantly keeping our client informed of all relevant transactions so they are able to track how the phony refund is completed on their end. This can highlight specific blind spots in your delivery method, tracking number system, or the training of customer service agents. We can also lend our expertise to singular investigations, or to conduct periodic investigations (to identify specific instances of fraud or ongoing concerns) should this be more appropriate to your business. If you would like to explore how our services can help your business avoid return and refund fraud, please get in touch.