The Journal. - Fraudulent Online Returns Cost Retailers Billions

Episode Date: September 13, 2024

Scammers are exploiting retailers’ online return programs like never before, fueled by websites and messaging apps. WSJ’s Liz Young reports on the bind retailers now find themselves in, stuck between helping their customers and stopping the fraud.   Further Reading: - Online Returns Fraud Finds a Home on Telegram, Costing Retailers Billions  - Brick-Filled Boxes. Bogus Receipts. Retailers Battle Fraudulent Returns.  Further Listening: - How Cyber Thieves Are Disrupting U.S. Goods  - The Slaves Sending You Scam Texts  Learn more about your ad choices. Visit megaphone.fm/adchoices

Earlier this year, our colleague Liz Young heard about a big problem for online retailers. Fake returns on a massive scale. They try to put in systems into place. They try to use software. They try to use technology to try to sift through a lot of this, but it's not perfect. And people are trying to exploit that. All over social media, there are videos of people talking about it.

In some cases, people say they're posting these videos to alert the public. There were these online groups and just people online who are systematically taking advantage of the returns policies intentionally to get refunded while keeping the item. Tell them, hey rep, I have a problem with this order. I didn't receive it.

The rep will most likely refund it right away or send a replacement. So let's say I received this pink one right here, looks really, really nice, but I'm gonna claim that I did not get it, and I'm going to get a refund directly to my original payment method. It's like a real life Robin Hood story

happening right in front of you. There is this underbelly of people who are, not just like every now and then then saying they sent something back and they didn't and they want $10 back but instead ordering hundreds of items worth tens of thousands or more of dollars and getting that money back. How easy is it to do fraudulent returns like this? I think it's shockingly easy. What is so shocking about this fraud is that it's really quite simple at its core.

In some cases, people are just saying, I never got the package. And it's really hard for the retailer to prove that you did. And so they send a second one. And then maybe you say that one didn't come either. Maybe you say, I just want my money back. So now you have two and the retailer also gave you your money back. Retailers find themselves in a bind,

stuck between helping their customers and stopping the fraud. Welcome to The Journal, our show about money, business, and power. I'm Kate Leimbach. It's Friday, September 13th. Coming up on the show, the fraudulent return problem that's costing retailers billions. I'm going back to university for zero dollar delivery fee, up to five percent off orders and five percent Uber cash back on rides.

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I think so many of us have become that way over the past few years, or at least that's what I tell myself. And I definitely will order a few sizes to see what works at home. We want that option, just like you'd take something back to the store. Absolutely. If you don't give customers that option, retailers have found and analysts have found that customers shop elsewhere. They want the option that if they get a pair of pants and they don't fit, they can get

their money back instead of just having, you know, lost that money altogether on something that now they can't even wear or use. Liz, you, me, we all buy things online and then have to return some of them. Last year, Liz says that more than 17% of all online purchases were returned. That's $250 billion worth of goods. And for retailers, managing all of that stuff

is a lot of work. When something's coming back, it might be a wrinkled mess, it might be smelly, there may be stains on it, there's all kinds of problems. And retailers have to individually make decisions about whether they're going to fix those items up or throw them out or donate them, whatever they're going to do with them. Like have you heard specifics from these retailers about what they're actually seeing? So they're seeing people mail back boxes of bricks instead of a flat screen TV. And the point is supposed to be that the bricks are heavy enough that it seems like it's the

TV when it's in transit, but when it arrives, it's something else completely. And that's happening with other things too, like, you know, throwing your old lawn mowing shoes into a box and sending them back as if they're your brand new New Balances, um, just to get a refund. And it is everything from lipstick to a polo shirt, to a rug, to a Rolex watch. Can we talk about this thing where people send a box of bricks instead of a flat screen TV? Why are they getting their money back? Like, why aren't, why isn't the retailer

noticing the bricks before it sends the dollars back to the fraudster? It's a great question. When you return something, you want the money back. You don't want to be waiting, definitely not more than a week, to get that refund. But while the timing might vary, the point of it is that a customer gets their money back quickly, which retailers believe incentivizes those shoppers to come back and shop again because they've had what they feel is a positive experience. Liz says one brand that's dealing with a lot of these fraudulent returns is PacSun. PacSun is a very popular mall brand.

They've been around a long time. They are based in Southern California and they specialize in everything from beachwear, swimsuits, to casual clothing and t-shirts, to shoes. And how did they come onto your Raider? As a company? Yeah, like in this story. Oh, I was like, I used to shop there when I was... Oh, did you used to shop there? Oh, I'm sure. I'm sure. I mean, just like all of those mall brands, right? Like when you're 12 and wandering through the mall. Spending your tween dollars, yeah. That's exactly right.

My babysitting money. As Liz was reporting out this story, she spoke to PacSun's Chief Digital and Information Officer, Shirley Gao. She told me the retailer was seeing a huge uptick in online orders being returned. So she dove into individual transactions. And that's when she discovered patterns. So for example, one customer had ordered a pair of shoes, immediately returned them,

then ordered the same pair of shoes in two different sizes, then return those, and on and on, kind of scaling up. Gow got suspicious. Something didn't seem right. So she asked the PacSun Return Center to look into it. And that's when she and other PacSun executives realized the goods weren't actually being returned. So used shoes were showing up, different shoes were showing up, different shoes were showing up,

empty boxes were showing up. So Shirley went back, she looked in to this again, and she found for one shipping address, so for somebody's home address, one address, one quote person or people, had used about 20 different email addresses, ordered about 250 different orders in about two months, and they were refunded about $24,000.

Whoa. That's when she started to realize something else was going on. As a veteran of retail, Gao told Liz she'd seen return fraud before, but this was much more systematic and organized. She said it's really hard because these fraudsters are saying, maybe they're saying the order never arrived. That's hard to prove.

Maybe they're saying they did mail it back. Hard to prove. Maybe they're saying, oh, I accidentally put that in the box instead of what it's supposed to be. Hard to prove. So it can be really tricky to track down each individual item and then to prove that it was ill-intentioned.

How big is this problem for PacSun? Shirley wouldn't tell me a specific figure. She said they were still looking into this and tallying things up. But she did say it was having a significant operational and financial impact on the business. And she noted that part of that operational cost is that she's spending a lot of time on this is that she's spending a lot of time

on this and other people are spending a lot of time on this and trying to figure out how they can make this end. One way to make it end is to turn up the heat. That's next. so your business insurance should be too. Whether you're a shop owner, a pet groomer, a contractor, or a consultant, you can get customized coverage for your business. Contact a licensed TD Insurance advisor to learn more. The Rise of Returned Scams has caught the eye of prosecutors nationwide.

Liz told us about one case in particular. The U.S. Attorney's Office in Seattle last year arrested a man in his 20s. He was indicted for orchestrating a scheme to get fraudulent returns that resulted in more than $3.9 million of losses to retailers across the country. This man, Sajed Al-Ma'araj, ran a fraudulent refunding service on the encrypted app Telegram. He called it Simple Refunds. According to the indictment, his public Telegram channel had over a thousand subscribers. Simple Refunds used the channel to advertise its services and provide updates on which retailers could be defrauded.

And Simple Refunds charged a commission on those returns. He would share retailer return policies, and then he would boast in the group of his ability to get those returns and those refunds without sending anything back. So then he would do this a few ways. He would claim an item wasn't delivered or was damaged, or he would mail back garbage. Prosecutors gave one example where he sent a retailer an envelope filled with plastic toy frogs instead of the tools that he was supposed to be sending back. In 2023, law enforcement took action.

Ulma Oreg was arrested and was charged with defrauding over 50 companies on behalf of hundreds of people. He pleaded guilty in July. In August, prosecutors charged another man who worked with Ulma Araj. His operation resulted in $6 million in fraudulent refunds. He pleaded guilty to. Both men will be sentenced in November. How widespread is this? I think this is pretty widespread from what retailers told me that this is something they're seeing quite a bit of. I mean, I looked on Telegram and saw quite a lot of these groups. And the understanding I have from talking with Paxon, from talking with companies that specialize in trying to crack down on this, from talking with retail industry executives,

is that this is a little bit like whack-a-mole. So you shut one down, another pops up. So it's a problem that's hard to solve. The FBI has an ongoing investigation into these kind of refund fraud organizations. It's called Operation Chargeback. For the rest of us, shopping online and returning the pants that don't fit, it might start to become more complicated and more costly. Some retailers are getting more strict, and that could be as simple as reducing the time

window that you're eligible for returns. It could be getting more aggressive about the types of items they'll take back, you know, unwashed, unworn, tags on. It also could mean that they require you to return it in a specific way. Like if you bring it back in the store, it's free, but if you mail it back, we're going to charge you $7 for the shipping label. So definitely retailers are starting to change their policies. And consumers are paying the price.

Correct. There's a tension here. And the tension is you as a retailer want to give your customers a good experience. You want you and I to come back and shop again. You also have to try to prevent people from taking advantage of those benefits that you would give a loyal shopper. And that's really difficult. That's all for today, Friday, September 13th.

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