COVID and Employee Fraud: What to Expect for the Remainder of 2020

2020 has brought about many changes to retail. From sneeze guards at the register to one-way aisles and floor stickers to promote distancing, stores are operating very differently than they have in the past. Employee fraud, however, is something that has been a growing concern for retailers long before phrases such as the “new normal” or “retail recovery” were even uttered.

Findings from the 2020 National Retail Security Survey, which uses data from FY2019, and was collected from retailers in 2020, indicate that dishonest employee terminations, apprehensions, civil demands, and prosecutions are up. 20.3% of retailers surveyed said that internal theft has become “much more of a priority,” with the average dollar loss per dishonest employee averaging $1,139.32.

Internal loss numbers have remained steady the past few years, but due to many factors brought on by COVID-19, all signs point toward an increase in employee fraud for the rest of the year. Here is what you can expect to see for the remainder of 2020.

Unemployment, Furloughs, and Mass Hiring

While the current unemployment rate for the United States has not surpassed the 14.7% peak hit in April, many individuals continue to be without jobs. The economic and social stress that has occurred due to the pandemic has left people concerned about how they will support their families, pay bills, and purchase necessities.

In May, we used information from US retailers in our global aggregate transactional database to determine if there was a correlation between unemployment and an increase in external and internal case counts. A positive relationship was found between changes in unemployment and changes in average case value for Asset Protection teams. The relationship was driven mostly through external cases, however, while internal shrink held steady. The 2019 and 2020 National Retail Security Surveys have shown similar steadiness in internal shrink.

Given the uncertain and tumultuous times, it can be assumed that internal theft may not be as steady as it was in years past. A correlation between unemployment and changes in average case values existed in a pre-COVID world. With the flu season approaching and the opportunity at any moment for coronavirus cases to spike again, unemployment rates will continue to be unstable and will have a greater chance to impact internal theft.

Cashier errors aside, Loss Prevention and Asset Protection teams may find it difficult to identify intentional internal fraud – the pandemic has left retailers in a data deficit due to the fluctuation in consumer behavior. This means that the data benchmarks previously used by a store to identify outliers may not be as reliable. Retail, and consumers, are changing so much that it’s hard to pin down what the real “normal” even is.

Without a vaccine, there is always a possibility that new cases may force retailers to temporarily shut down again and place employees on furlough. With this comes new opportunities for fraud; furloughed employees may collaborate with in-store staff to commit fraud or may use their employee privileges to access goods or information that could help them impact shrink without ever being inside the store.

With the 2020 holiday season coming up, mass hirings may also leave chances for internal fraud to occur. Retailers may quickly hire employees to assist in times of increased demand, and what may have once been thorough processes for background checks and employee screenings in the past may become cut short, or not done at all. This leaves the opportunity for bad actors or repeat offenders to be hired and go under the radar. Employees with a history of criminal activity may only work at a store for several weeks during the holidays to get what they need and move on. Even a few weeks, however, can be detrimental to a store’s shrink.

Cashier Training Takes a Back Seat

Preventing unintentional internal fraud starts with proper training at the register. New safety procedures, which may focus more on store cleanliness and the health of consumers and cashiers, may overshadow the importance of training new hires and formerly furloughed employees on how to adjust quantities, identify bad coupons, and enter in proper codes. A lack of consistent cashier training could also prevent employees from knowing how to identify popular scams, including quick-change scams and gift card phone scams in which a scammer calls a store’s phone to test out activating a gift card and ends up getting the cash.

Without thorough cashier training, new and returning employees are bound to make more cashier errors. These errors can make a store’s data stream murky enough to make it difficult to find fraudulent activity. Cashier errors aside, Loss Prevention and Asset Protection teams may find it difficult to identify intentional internal fraud – the pandemic has left retailers in a data deficit due to the fluctuation in consumer behavior. This means that the data benchmarks previously used by a store to identify outliers may not be as reliable. Retail, and consumers, are changing so much that it’s hard to pin down what the real “normal” even is.

In April of 2020, retail sales dropped 14.7%. While sales have improved since then, retailers will not be able to allocate the same amount of their budget toward loss prevention for the rest of the year.

While health and safety procedures should take priority for stores during this time, it’s important that cashier training isn’t ignored. Reducing opportunities for unintentional cashier errors can help to clear up data streams so that intentional internal fraud can be caught before it’s too late.

Budget Cuts

In 2019, LP departments were experiencing lower budgets than before to invest in technology and staff, with three in ten retailers reducing their investments in loss prevention – an increase compared to one in four retailers in 2018. However, any plans that retailers had last year to increase their budgets for addressing risk have likely been cut short. In April of 2020, retail sales dropped 14.7%. While sales have improved since then, retailers will not be able to allocate the same amount of their budget toward loss prevention for the rest of the year. The inability to upgrade to new software, such as an exception-based reporting solution with AI, or to install new surveillance systems, leaves plenty of opportunities for employee fraud to take place.

Budget cuts have also impacted the opportunity for Loss Prevention teams to have the quality and quantity of analysts they need to identify employee fraud. Whether analysts have been furloughed or fired, one thing is certain: Loss Prevention teams have not only lost a valuable asset to their team, they have also lost an employee who was very familiar with a store’s data and what outlier activity looks like.

This extends to the absence of seasoned Asset Protection and Loss Prevention employees as well. As stores adopt new procedures, and as consumers adopt new behaviors, smaller teams than before are being left to make sense of new data trends and benchmarks, making it easy for fraud to slip past. When retailers begin to fill these lost spots again, newly hired analysts and LP/AP employees will experience an adjustment period. This will further set retailers back in identifying employee fraud, leaving bad actors plenty of time between now and the final phase of retail recovery to negatively impact profits.

A good balance of technology and staff is important. As retail recovery continues, and budget planning resumes, retailers will benefit from assessing what that balance looks like, and whether what is being requested of LP and AP teams can be replaced by technology. Using renewed budgets to implement new solutions may relieve staff of more labor-intensive tasks and may uncover fraudulent activity that was not visible before.

Specific Kinds of Fraud Will Occur

Retailers have noted several types of employee fraud that have become popular during the pandemic, including:

  • Sweethearting/Robin Hood syndrome
  • Curbside delivery internal fraud
  • Loyalty points fraud
  • Self-checkout fraud

Low value cash theft or merchandise theft less than $500, which accounted for almost 40% of employee-related shrink in the 2020 National Retail Security Survey, will likely continue as well. Curbside delivery and self-checkout lanes in particular are experiencing more consumer traffic than before, which gives employees more opportunities to commit fraud. Stores hiring full-time and temporary employees to keep up with the demand in these areas should make background checks a priority as these new, contactless ways of shopping continue in popularity.

The COVID-19 pandemic has created a lot of uncertainty for retailers. Each month has brought new changes, and because of that retailers have found themselves being more reactive than proactive. Employee fraud has remained steady in recent years, and the pandemic has created new opportunities and avenues for it to occur. While retail recovery may not happen overnight, employee fraud can. By focusing on these key areas, retailers can make sure their profits are protected not only in 2020, but for years to come.

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Author

Leslie Nienaber, Digital Marketing Specialist, Appriss Retail 

Leslie researches business trends and distills the information for a retail audience. Her marketing experience has covered a wide variety of industries, including promotional products, microbiology, print, and mail. She spent five years in the retail industry before graduating with her Bachelors in Business Administration from John Carroll University.

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