Appearing before the U.S. District Court for the Western District of North Carolina, Amazon shopper Hudson Hamrick has pleaded guilty to wire fraud for defrauding Amazon of at least $290,000.
According to a Department of Justice report released on October 5, the 31-year-old man made at least 300 fraudulent transactions over four years. Amazon eventually caught on and referred the case to the FBI. From 2016 to 2020, the North Carolina man engaged in a scheme where he ordered expensive items off the popular website and then claimed they arrived damaged or were faulty, ultimately receiving a refund.
In technical terms, what the North Carolina man did is known as price arbitrage. Price arbitrage is when someone returns cheaper, similar-looking merchandise in the place of a more expensive model. Due to its size as well as logistics processes, Amazon is a common target for criminals attempting return fraud of various types, including arbitrage as well as empty box fraud, where buyers will claim they received an empty box instead of the product, and bricking, where the criminal strips an electronics device of its valuable parts for resale before returning it and getting their money back. This problem is especially pronounced when it comes to FBA, the Fulfillment by Amazon model, where Amazon take care of the storing and logistics of products sold on its marketplace on behalf of the merchant, as well as any returns. This point to make the products more attractive to consumers, as they are guaranteed the convenience they get from buying directly from Amazon, including free delivery, which shoppers appreciate. According to a 2019 survey, free shipping increases order volume by 97 percent, while 68 percent of online shoppers will step back from a purchase if there is no free shipping offered.
Targeting Amazon, Hamrick’s modus operandi was, much of the time, textbook online return fraud — an umbrella term for all wire fraud that involves abusing a merchant’s return policy. He would buy top-dollar items, start the automatic return process, and return different yet similar items that were cheaper and/or older models. He would then sell the more valuable item he fraudulently held onto for profit. Most of the time, the discrepancies would only be noticed by the seller’s staff if they compared the item’s serial numbers. Wire fraud is a Class C felony punishable by up to 20 years of incarceration and up to $250k in fines, as well as restitution.
Online Return Fraud Is on the Rise
In the U.S., ecommerce grew by 32.4 percent in 2020 compared to 2019, according to the Department of Commerce. While the unprecedented conditions certainly contributed to this, industry insiders estimate it was always expected to rise, as one third of all retail sales in the country are expected to be conducted online by 2030.
In response to the public announcement of Hudson Hamrick’s guilty plea, Amazon stated, “There is no place for fraud at Amazon, and we will continue to hold bad actors accountable.” Although the digital retail giant’s intentions are undisputed, it is equally undeniable that return fraud is on the rise both within its ranks and at large.
Per Statista, recent reports place retail ecommerce sales at a whopping $4.28 trillion worldwide — 21.8 percent of all global retail sales. The rate of returns for goods purchased online is estimated to be around 25 percent, according to a Paazl white paper. An estimate from Deloitte places the number closer to 10 percent. Any of those figures, once considered in conjunction with the fact that 5.9 percent of retail returns are believed to be attempts at fraud, and retailers lose $5.90 to fraud for every $100 in returned merchandise, gives us a clearer picture of just how widespread the phenomenon is, and how important it is for ecommerce brands to protect themselves against return fraud.
Recent months have seen more fraudsters convicted of similar crimes. A Rhode Island man found guilty of “theft of inventory through falsely represented returns” and other crimes was sentenced to 30 months in federal prison in March of 2021. His scheme was very similar to Hamrick’s; he returned items of lesser value and pocketed the refund for the original item, which he kept. In October 2020, a 32-year-old Florida woman plead guilty to a shipping and return reimbursement scam involving 31 Amazon accounts. LPRC research has signposted return fraud as a growing concern, too, both online and offline.
A Game of Cat and Mouse
Amazon sellers as well as other online retailers are clearly being targeted by both professional and amateur scammers looking to defraud them. The fraud landscape is looking increasingly like the old cybersecurity adage: it’s a game of cat and mouse between criminals and businesses.
To face this, the fraud detection and prevention industry has increasingly shifted its focus on proactive, holistic solutions that learn from past incidents to flag and block not only similar attempts but also new attempts that follow analogous patterns or are deemed suspicious. Machine learning, AI, and heuristics are valuable tools in this battle. There are also niche solutions created for certain industries and particular types of return fraud, such as disposable anti-wardrobing tags for clothing.
At the same time, retailers can take some fairly simple immediate steps to better protect themselves. These include updating return policies to only offer credit or gift receipts rather than cash. Some have started to weigh every returned item to identify attempts at empty box fraud, bricking, and associated schemes. In addition, we have also seen the appearance of a new type of returns-as-a-service B2B company, which hopes to give peace of mind to SMEs who might have felt overwhelmed by the returns process but did not want to subscribe to Amazon’s FBA model.
In terms of fraud prevention technology, depending on the size, product volume, and concerns, we have processes like digital footprint analysis on one end of the spectrum as well as web-powered data enrichment tools on the other.
In essence, the latter provides the option to enter someone’s email address to see all the public information they have shared about themselves on the web. Because this provides data on when they created their email account, whether there are professional profiles associated with it, whether their location matches the delivery location, and other similar pointers, one can get a general feel for a customer and whether they seem trustworthy or might be a fake identity conjured up by a scammer. Digital footprint analysis analyzes the trail of data a person and/or device leaves behind.
Have they shopped before using different cards or accounts? Are they using suspicious add-ons and tools on their browser? Where are they located and where was the return shipped from? Combined, the answers to such questions can assign a risk score to each attempt at a purchase or return. This type of technology is more frequently used by the bigger stakeholders in the industry, yet it is becoming increasingly more accessible.
As is often the case, it is easier to prevent return fraud by taking several steps at the same time, utilizing technology to one’s advantage. There is no one-size-fits-all solution. Each merchant ought to assess their situation independently, based on their needs, industry, and risk appetite.