Refund and exchange fraud in retail

Refund and exchange fraud is a growing threat to retail companies, quietly eroding profits and undermining trust between businesses and their customers. While most shoppers use return policies responsibly, a small but increasingly sophisticated group exploits these systems, costing retailers billions each year.

The Saks stylist scam involving Shail Kwatra, which was recently reported by the Wall Street Journal, offers a vivid example of how such frauds operate and the devastating impact they can have on even the most established brands.

Understanding refund and exchange fraud

Refund and exchange fraud occurs when individuals manipulate a retailer’s return policy for personal gain. Common tactics include returning stolen merchandise, using counterfeit receipts, or swapping out genuine products for fakes before requesting a refund. In some cases, fraudsters may even return empty boxes or bricks, as highlighted in industry reports.

The Saks stylist scam is a textbook case. Shail Kwatra, a well-known stylist for Boston’s elite, allegedly processed fake returns at Saks Fifth Avenue, resulting in losses estimated at $400,000. Kwatra’s scheme involved issuing refunds for items that were never actually returned, exploiting his position of trust and insider knowledge of Saks’ systems.

Common types of refund and exchange fraud

• Wardrobing: Consumers buy an item, use it, then return it for a full refund. This is especially common in clothing, electronics, and home improvement sectors. In 2024, 60% of retailers reported incidents of wardrobing.
• Receipt Fraud: Creating fake or altered proof of purchase to claim refunds on products never legitimately bought.
• Returning Stolen Merchandise: Organized retail crime groups steal items and attempt to return them for cash or store credit, often without a receipt.
  Price Switching: Fraudsters swap price tags or packaging to deceive retailers, returning a lower-priced item as a higher-priced one for a larger refund.
• Employee Collusion: Dishonest employees collaborate with outsiders to manipulate the return process or facilitate fraudulent returns.

The scale of the problem: data points and industry impact

The financial toll of refund and exchange fraud is staggering. According to U.S. retail industry estimates, more than $100 billion in merchandise was returned fraudulently in 2023 alone—a sharp increase from previous years. This surge is attributed to several factors:

• Growth of Online Shopping: The rise of e-commerce has made it easier for scammers to exploit return policies, often using fake accounts or stolen identities.
• Lenient Return Policies: Retailers, eager to attract and retain customers, have adopted more flexible return policies. Unfortunately, these policies can be abused by fraudsters.
• Technological Loopholes: Automated systems designed to streamline returns can sometimes be manipulated, especially by insiders with knowledge of company protocols.
• Retailers are now caught in a bind: they must balance customer satisfaction with the need to prevent losses. As one Wall Street Journal report notes, some companies have responded by tightening return policies and raising fees, but these measures risk alienating honest customers.

Anatomy of the Saks stylist scam

The Saks case illustrates how refund fraud can be both sophisticated and deeply damaging. Kwatra, known as the “Fashion Whisperer,” had access to high-value merchandise and the trust of wealthy clients. Over several years, he allegedly processed hundreds of fake returns, crediting accounts for items that were never brought back to the store. Some clients noticed mysterious charges on their credit cards, but the scam continued until Saks’ internal controls flagged the suspicious activity.

This type of insider fraud is particularly dangerous because it can go undetected for long periods. Employees with access to inventory and refund systems are uniquely positioned to exploit weaknesses, and the financial losses can quickly escalate.

Industry trends and responses

Retailers across the U.S. are grappling with the fallout from refund and exchange fraud. In addition to direct financial losses, companies need to deal with:

• Legal expenses for pursuing civil or criminal cases against perpetrators.
• Reputational damage due to losing customer trust when fraud becomes public.

Some retailers have begun to fight back by implementing stricter return policies, requiring proof of purchase, and using advanced analytics to detect suspicious patterns. However, these efforts are often reactive, and fraudsters continue to adapt their tactics.

Protecting retailers and customers

Refund and exchange fraud is not just a minor inconvenience—it’s a major financial threat that demands attention from retailers of all sizes. The Saks stylist scam is a cautionary tale, showing how even trusted employees can exploit systemic vulnerabilities for personal gain. As fraudulent returns continue to rise, retailers must invest in robust controls, educate staff, and strike a careful balance between customer service and security.

By understanding the risks, learning from high-profile cases, and leveraging technology, retailers can better protect themselves—and their customers—from the hidden costs of fraud.

If you are facing such challenges on your infrastructure, come and speak to us. We can share with you our experience and help you combat such challenges.

About SAI

As a leader in computer vision technology, SAI Group delivers cutting-edge, multi-modal AI solutions into retail environments. Using a unique platform approach, its technology uses existing camera systems to target losses, increase store safety, and underpin operational efficiencies.

All solutions are built from the ground up to ensure the highest levels of security and data protection, respecting the privacy expectations of the public and operating to stringent ethical standards while delivering substantial value to our clients. Globally, SAI monitors millions of transactions per day, protecting the revenues from tens of millions of product sales and hundreds of millions of customer interactions. Its models also accurately identify anti-social behaviour, aggression and violence, helping to de-escalate situations with real-time interfaces to security officers and operations centres.