Whitepaper

Fraud and Theft in Wireless Retail:
Key Risks and Their Solutions

Part 1: Employee Fraud and Theft

 

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In wireless retail, approximately 10% of employees are responsible for 95% of fraud and theft, according to iQmetrix data and qualitative research.

One company where the statistics bear this figure out is A Wireless, a Verizon authorized retailer that arrested and prosecuted 141 employees between 2016 and 2017. Those employees admitted to a total of about $500,000 worth of fraud and theft. That total of 141 employees—38 of whom were, disappointingly, managers—comprised about 10% of A Wireless’ workforce at the time.

Katrina Hull-Young, Loss Prevention Manager at Cellular Sales and formerly of Go Wireless, said this 10% figure was about right. “It depends on the store, its operator, and the employees, it could be 5% or it could be 15%, but that’s about in the ballpark from what we’ve seen.”

Talking to an audience of telecom retailers in an iQmetrix fraud seminar, Stacy Hamer, Vice President of Client Experiences, said, “All the research we’ve studied about retail fraud supports that 10% figure.”

It’s a startling proportion—especially if you’re new to wireless retail. That’s one in 10 of your employees who you can expect to exploit any gaps in the system that create an opportunity for them to steal either product, money, or time.

And those are the people that you’re supposed to be able to trust, the staff you hired, the people with your brand emblazoned on their name tags. Added to that, you need to factor in all the risks of external fraud and theft from customers, fake customers, organized criminals, and credit mules—all of which we will tackle in Part 2.

Jared Ellis, Sales Engineering Lead at iQmetrix and former Senior IT Leader at Spring Mobile, said, “People put so much effort and ingenuity into finding methods of theft and fraud. I often think that if they put all that effort into working hard and being entrepreneurial, they would be very successful. There are some very creative folks focusing on fraud, especially in the telecom retail sector.”

In Part 1 of this whitepaper, we will tackle the five biggest and most common methods of wireless store employee fraud and theft, and some of their possible solutions and preventive measures.


Contents

  1. Refund and trade-in fraud
  2. Physical inventory theft
  3. Fraudulent discounting
  4. Commission fraud
  5. Time clock fraud
  6. Part 2: External Fraud and Theft
Refund and trade-in fraud

Risks

• Easy pickings
• Easy for employee to time
• Non-stocked SKUs
• Trade-in fraud

Solutions

• Refund audits
• Patterns of refunds
• Refund percentages
• Call the customer
• Trade-in reports

 

Risks

Refund fraud is the number one area that employees will take advantage of. It is generally considered easy pickings—a low-hanging fruit that can be quickly and simply carried out by the store associate at the POS.

Katrina Hull-Young confirms this is a key concern of her loss prevention team at Cellular Sales. “This is one of the biggest areas that I have to get my team to look at, examining refund reports,” she told iQmetrix.

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This kind of fraud can and does span all product types, but there’s a particular risk when it comes to non-stocked SKUs, such as data transfer. An associate will simply process a refund for this kind of item and take the money, and it’s harder to detect as there’s no physical item to be returned. “There’s a lot of refund fraud that happens with non-stocked products, as there’s absolutely no inventory that will be affected,” said iQmetrix’s Stacy Hamer.

Trade-in fraud is another related method, where a real customer trades in their phone but the employee pockets the device instead of sending it back to the trade-in vendor. Kris Rogers, Client Experience Manager at iQmetrix, said, “Trade-in fraud is, across the board, a huge problem. You have to make sure that phones are actually making it back to the trade-in vendor. If it’s not, is it being activated on another account?”

Solutions

The only way to spot when an associate is faking refunds is to stay on top of your refund audits. A good Retail Management System (RMS) will give you a refund summary report, which will allow you to group refunds by the associate who tendered the refund. Look for high-value refunds, cash refunds, and those with no original invoice—this should be a red flag because it means the associate manually processed the refund and there are very few scenarios that should happen. Your RMS should allow you to require a manager override when there is no where there's no invoice. Also, look out for time stamps on the refunds—are any of them outside of store hours, when there would be no customers in the store?

Fraudsters are creatures of habit, said Hamer, and they’ll stick to choices they feel are safe. She said, “Look for the same dollar amounts being refunded over and over from the same associate—$49.99, $34.99, etc.” And look out for situations where one associate has multiple refunds under $50, while other store associates don’t.

For those who are overwhelmed by the task of examining that much data, try running a larger refund report first to look at bigger trends, such as the percentage of sales that result in refunds in one particular store. The industry average is about 6-8%, so if you’re seeing a lot more than that, it’s worth diving into the associate-specific data.

It’s also worth monitoring for a high percentage of refunds on typically low-refunded items, such as phone cases. Associates seeking easy wins for fraudulent refunds will often go for such items as it’s unlikely the customer will come in and get a refund for that item. And watch for a pattern of refunds coming in on the last day possible for that item—the associate may feel it’s now safe to fake a refund as the customer probably isn’t returning it. Conversely, the associate might have a pattern of doing the refund on the day of the sale of an item.

 

Employees investigated by iQmetrix clients have admitted to committing fraud fast, so they don’t forget
—Stacy Hamer, VP of Client Experiences, iQmetrix
 

Seek out locations where the average profit per box is dropping, as it suggests fraudulent refunds or discounts have occurred (see “Fraudulent discounting”).

When you discoveror suspectrefund fraud, a good first move is to take a sample of the refund transactions and simply call the customers to ask them if they genuinely returned their item. They may confirm that they did not, and then it’s time to confront the associate.

For trade-in fraud, run specific trade-in reports from your RMS, and look out for empty receipt dates that suggest the item wasn’t returned to the vendor. If that’s the case, check whether the phone was activated on another account.

If you find a red-flag store location or employee, it’s important to audit every employee at that location. “This kind of fraud spreads fast, and people like to share information,” said Hamer. Also, check the records going back several months, as the pattern of behavior almost certainly isn’t new.

Physical inventory theft

Risks

• High-value products
• Low profit margins
• Same person counting inventory
• Product stock transfers

Solutions

• Efficient inventory management
• Blind inventory counts
• Surprise audits
• Product serialization
• Inventory transfer reports

 

Risks

Employee theft of physical inventory is always a risk in any retail sector with high-value, desirable products. Store associates have easy access to that product, and there’s an obvious opportunity for theft. What’s more, these kinds of losses are a huge blow to the retailer, as the items are extremely valuable and it’s tough to recover the profits.

Jared Ellis of iQmetrix said, “Think about your margins on these devices. A smartphone can cost, say $1,000, and you might make a $200 profit margin, if that. You lose one, you have to sell five more to make up the loss. You can’t afford not to control that. It’s not like grocery retail where somebody steals an item, you’re only down a few bucks and you can recoup that.”

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The risk is especially high if the same person is responsible for counting inventory both in and out. Ellis added, “Let’s say six phones come in, but the employee only puts five in the inventory count and takes the sixth for themselves. Then they tell the vendor they only received five. Or, if there’s a mistake in the inventory count where there’s an extra phone, an opportunistic employee might spot that before anyone else and stick that phone in their pocket.”

Katrina Hull-Young at Cellular Sales said one sophisticated way store associates mask theft of physical inventory is by using transfers of product stock. She told iQmetrix, “If I’m an employee and I want to steal a phone or accessory, I can simply put it on a transfer to another store. It goes out of the inventory of the location I work for and transferred to the other location’s inventory. If the other location doesn’t receive it, they’ll transfer it back to my store’s inventory. I keep ‘transferring’ that product over and over, while in the meantime, I’ve taken that product for myself.”

Solutions

It’s essential to have an efficient inventory management system, including blind counts and surprise audits. Another tip is to open boxes during inventory counts to ensure the phone is in the boxit can often look like you have an item when you only have its packaging.

Ellis said, “You have to count all your phones and accessories however often, and scan them all in. But if there is a variance, have a manager come and check it. Plus it’s important to have random counts. If you’re always counting these high-end phones on a Thursday, then people start thinking about when they can commit fraud. Added to that, you should have external audits, for example by a district manager, who you don’t know when they’re going to show up.”

Fraud-Theft-P1-3

Serialization also gives retailers a powerful tool for combating theft and other forms of fraud. Retailers can maintain a record not only of where the item is at any given point (received, in a back room, on the sales floor or sold) but also who has handled the item at each stage. If a product goes missing, the unique identifier makes it easier to determine whether it was broken, misplaced, or stolen. And when employees are aware that each item is identified within a retailer’s inventory system, they may be deterred from even attempting a theft. In contrast, it’s much tougher to figure out what happened to a few undifferentiated items that may have been lifted from a bin.

Retailers can supplement the serialization provided by manufacturers with inventory solutions that assign unique identifiers to a wider range of products, including accessories. Assigning serial numbers to high-ticket items (i.e., those priced at $50 or more) also simplifies functions such as store-to-store transfers and re-integration of returned items.

Also, take a close look at inventory transfer reports from your RMS regularly, to ensure that the same products are not being transferred repeatedly.

 

Fraudulent discounting

Risks

• Overuse of employee discount
• “Sweethearting” products
• Heavy discounting to enable a sale
• Financing plans

Solutions

• Regular discount report audits
• Check for patterns among associates
• Use POS manager overrides
• Have a clear policy

 

Risks

Fraudulent discounting is an all-too-common practice of employees, ranging from seemingly benign use of an employee discount for a friend, to much higher levels of fraud.

Some associates, if not given a limit on the use of their employee discount, will buy large amounts of products at a discounted rate and then re-sell those items for a profit. Another risk with multiple locations is when an employee buys items at a discount at one location and has a friend return them to a different location for a full refund without a receipt.

Another practice, called “sweethearting,” also has a range of severity. Sometimes store associates entitled to their own discount on products can input that code when a friend is buying a product, and this is simply perceived by the associate as a harmless extension of their employee benefit. A more severe version of sweethearting is when an associate doesn’t process payment for items that friends or family want to take home. In some instances, an associate will process a few of the items their friend is purchasing but not others, allowing their friend to steal with a reduced risk of getting discovered. This is where fraudulent discounting veers into our previous chapter’s territory of inventory theft, as the employee may change the inventory count to suggest the item they gave away was never stocked. Alternatively, the associate can give away non-stocked SKUs, such as data packages, which doesn’t affect physical inventory.

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In a different spin on fraudulent discounting, some store associates will heavily discount a customer’s purchase to achieve the sale and earn the related commission (also see the next chapter on commission fraud). Hull-Young said, “Let’s say a customer is trying to finance a $1,400 device, but perhaps they are turned down by the carrier or can’t get the credit line. The only way the store associate can close the sale is by offering a much more discounted price—however low they need to go, to get the customer approved on that finance plan and make the sale. So now they’ve sold that device on the finance plan and made their commission. That is not what discounts are intended for.”

Solutions

Hull-Young believes that good, old-fashioned auditing is the best way to spot and stop discount fraud. An operator’s RMS should give them a full discount summary report on discounts applied, and it’s important to check for patterns of particular store associates offering discounts often, or at a deep rate.

 

Auditing is the best way to figure out whether discounting is being used nefariously.

 
—Katrina Hull-Young, Loss Prevention Manager, Cellular Sales

 

Some operators avoid fraudulent discounting by simply not permitting employees to process any discounts without an authorized override from their manager. If you want to take a less drastic approach, there are in-between measures. Hull-Young said, “You can apply stop-gaps within your POS where any discount over a certain percentage needs to be authorized by the manager, or if an employee has used more than a certain number of discounts in a month.”

It’s also crucial that employees fully understand what’s acceptable and what isn’t, by outlining the store policy during training. Some associates may consider using discounts for their own purchases or those of friends and family as a perk of the job, rather than stealing. Having a clear policy may be all it takes to prevent some of these discounts.

 

Commission fraud

Risks

• Employee prize contests
• Inflation of employee sales
• Handset protection programs

Solutions

• Audit commission reports
• Spot-check commission generating line items
• Monitor high commission earners
• Watch for spikes and anomalies

 

Risks

“There are two angles to commission fraud,” said Jared Ellis. “One, managers and associates will try to bump their numbers up to try to win the prize on offer for the employee with the highest commission—the President’s Club trip to Mexico or whatever it is. Or, because there are tiers to these contests, you might be the highest in your district and win the district-level award, such as a cash prize or a bonus. The other angle is simply that they are inflating their transactions each month to try to increase the actual commissions they earn.”

Non-stocked SKUs are the easiest way of doing this, as again, inventory is not affected. These include activation fees, data transfers, and so on—especially those that pay high commission.

For example, one clever way store associates can inflate their commissions is through handset protection programs. Let’s say a customer is, quite rightly, asked by the associate whether they want to protect their device, but they decline. Kris Rogers said, “What happens is that customer walks away, and the dishonest employee takes their information, adds it to a separate invoice, and simply ‘sells’ that handset protection to the customer without their knowledge. It’s such a relatively small amount that the customer may not ever notice it on their bill, but the associate has earned the commission.”

Fraud-Theft-P1-4

Another method is through fraudulent discounting, as explained in the previous chapter.

Solutions

As with other types of fraud, it comes back to auditing the commission reports generated by your RMS. Ellis said, “If you see somebody who, right at the end of the month, all of a sudden has a flurry of sales—on which they earn and log commission—but then a couple of weeks later those items all get returned, that’s suspicious. Even on returned items, the associate keeps the commission. So you need to track those kinds of sales patterns in your RMS’s reporting system.”

Kris Rogers added, “You should also spot-check any line items that are handset protection SKUs that you’re paying commission on.”

In terms of commission contest fraud, it’s important to be on the lookout for commission reporting that can boost an employee’s chances of winning that trip to Mexico – and check out the validity of the winners’ commissions. Rogers said, “One iQmetrix client who runs a big commission-based contest found that seven out of the 10 managers who won the major prize got there fraudulently, through cheating the system in various ways. So now, every time that client runs a contest, they have to audit the winners to ensure they got there honestly.”

A good retail management system will allow you to suspend or reverse commissions, and always watch the last 90 days for spikes and anomalies. Rogers added, “Have a consequence when anybody is found to be abusing your point of sale system.”

Fraud-Theft-P1-5

 

Time clock fraud

Risks

• Employees punching in colleagues
• Associate alone in busy store
• Lost payroll
• Lost sales due to store lines

Solutions

• Apply settings in your RMS
• Require fingerprint logins
• Set a clear policy

 

Risks

More colloquially known as “buddy punching,” this practice proves that employees will steal not only your products and money, but also time. Buddy punching is where an employee will punch an absent colleague into the time clock if that colleague is running late for their shift, for example, or has an appointment and can’t afford the time off.

According to Ellis, “So many people do this. The store rep will say to their friend, ‘Hey, you pick up donuts on the way and I’ll punch you in.’ It doesn’t seem like a big deal, but the more stores you have, all that time you’re paying for absent employees adds up.”

It can add up in a big way. According to iQmetrix client data, up to 5% of your payroll may be paying for hours not worked. And the math can get alarming. For example, if five employees in your store are each “buddy punching” just 10 minutes a day, that’s 250 minutes a week or approximately four hours a week not being worked. At $15 an hour, that’s $60 a week, and $3,120 over the course of a year. If you have 100 stores where this is happening, you’re looking at overall losses of $312,000 a year.

And that’s not all. Added to this tangible financial loss is the fact that you are paying for not only an absent employee, but also the knock-on effects of that employee’s absence.

Ellis explained, “Say there’s supposed to be two people in the store, but there’s only one. Maybe that person can’t handle the volume of customers, so now customers are sick of waiting in line, and they go to some other store to buy their phone. Now you’re out the sale as well as the pay. You have to add that to the math of lost payroll—lost sales, and the negative impact on the customer experience. You may lose that customer permanently.”

Solutions

It’s essential that store operators take this practice seriously, and use the tools at their disposal to prevent it. A good retail management system, such as iQmetrix’s RQ, won’t allow for buddy punching on certain settings. Some will even allow you to require fingerprint logins when employees clock in for the day.

The mindset around buddy punching also has to be changed. It’s important to ensure employees learn and understand during their continued training that this kind of theft—stealing time—will not be tolerated.

Hull-Young said, “It’s still all stealing. If an employee can’t make it in on time, they’ve got a doctor’s appointment or whatever it is, then it’s their responsibility to let their manager know, not to have somebody else clock them in or out. If you’re getting paid for the time you’re not working, it’s still theft. There’s no grey area.”

Part 2: External Fraud and Theft

Over the previous pages, we’ve tackled the key areas of fraud risk from employees within your wireless retail space. However, the outside world poses many further risks.

Look out for Part 2 of this whitepaper, in which we’ll take a look at four major areas of external fraud and theft and some of the ways they are being tackled.

  • Opportunistic “grab and go”
  • Armed robbery
  • Organized crime
  • Credit card and financing fraud

 

Read Part 2

 

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About iQmetrix

iQmetrix’s intelligent retail management software is designed to power the telecom industry. Our solutions are built around enabling telecom retailers to deliver a buy-anywhere strategy through multi-channel inventory management and digital retail solutions; make data-driven decisions using powerful reporting; and unify storefronts and digital channels for a consistent customer experience, in-store, online, and anywhere else. For more than 20 years, we’ve been passionate about helping the leading brands in telecom grow by providing excellent software, services, and industry expertise that enables them to adapt and thrive. Currently powering over 20,000 retail locations, iQmetrix is a privately held software as a service (SaaS) company with offices in Canada and the U.S.