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Source: Merchant Fraud Squad

Posted on April 30, 2001

Written By Julie Fergerson Co-Founder, ClearCommerce Corp.

      I have been working with merchants for several years now. One question they always ask me is, "What am I supposed to do when fraud occurs?" I began to research this question by flying around the country, talking to big merchants (both dot-coms and traditional brick-and-mortar companies) as well as small office and home office merchants. I found that while no one person had the answer, there are a number of best practices that merchants typically use if they are the victims of fraud.

Review the Fraudulent Order

      The number one message I heard from everyone I interviewed was this: When fraud occurs, don't just write it off and consider it a cost of doing business. You must review the fraudulent order internally and determine your plan of action.

      Why do you have to review the fraud? Because it will help you prevent future fraudulent transactions. Once a fraudster figures out that he can successfully commit fraud on your Web site, he will continue to do it until you stop him. And he will teach all his friends how to commit fraud against you as well.

      When I first heard this advice, it seemed counter-intuitive to me: Wouldn't repeat frauds on the same site just increase a fraudster's chance of getting caught? (I've watched enough murder mysteries to know that a criminal should never go back to the scene of the crime.) But what actually happens in this situation? The fraudster learns that you have limited resources to fight fraud. If one person commits fraud against you, you might be tempted to try to catch him. But if he and 100 of his closest Internet buddies commit fraud against you, you are spread so thin that you won't be able to keep up with the volume of fraud. When a merchant is targeted by groups of fraudsters, the outlook is grim. Large-scale fraud could actually force a merchant to shut down the business.

Document the Fraudulent Order

      It is imperative to document every fraudulent order. Documentation will allow you to build a criminal case, track fraud within your business, and find the root cause to determine how to prevent it from happening again. The critical elements of the order you should record are the shipping address, the shipping telephone number, and the IP address. Try to collect a signature at the time of delivery for an even stronger piece of evidence. When you ship via UPS or FedEx, you can require a signature upon delivery.

Create a Negative File

      The most effective thing a merchant can do is to create negative file-essentially a history of fraudsters. The negative file should contain credit card information, fraudsters' names, shipping addresses, and IP addresses.

      Used properly, this list will become one of the most powerful tools against fraud. Compare each incoming order against the negative file, and if there is a match or close match, mark the order for internal review.

      Never automatically reject an order based on your criteria because you may inadvertently reject a valid customer. These wrongful rejections are known as "insult orders" in the industry. Do not share negative files with other merchants. Another merchant's negative file may contain valid customers who had bad experiences at the store and simply charged back the order. If you rejected that customer, you would have an insult order on your hands.

Prepare Your Case

      Who should you call to report fraud? What steps are involved in reporting fraud? And when should or shouldn't you report fraud? These are extremely tough and complicated questions that only your organization can answer.

      First, establish in-house guidelines about fraud and how to handle fraud cases. For example, if the fraud is less than $1,000, you might want to simply document the case in your negative file and continue business as usual. But if the fraud is greater than $1,000, you might want to invest two hours of research time to try building a case against the fraudster. Of course, the cut-off dollar amount must be tailored to your business.

      When you prepare your case to report to the authorities, make it easy for the law enforcement officials to absorb. Place the most important details (especially the IP address and shipping address) near the top of the page. Include as much detail as you can about the case, but present the information in a way that is clear and easily understood.

How to Report a Crime

      Visit a yellow pages search engine, such as Yahoo! Yellow Pages. Click on "Change Location."Enter the ZIP code of the fraudulent shipping address. In the search box, type in "police."

      Call the police and ask to speak with a detective. Explain your case to the detective and send him or her the summary information. Remember, detectives are measured by the number of successful cases they can solve. The more detail you provide, the easier you make it for them, and the bigger your chance of catching the fraudster.

      Manage your own expectations. A detective in a New York City police department probably won't be chomping at the bit to go after a case where someone defrauded you for $100 on a couple of DVDs. On the other hand, do expect smaller towns to be more aggressive against smaller crimes. The key to success for you as a merchant is to provide enough detail so that all the detective has to do is capture the criminal. Do as much of the research as you can.

What Happens to Your Case When You Report It?

      First, the detective builds the case. Then he or she either captures the fraudster or involves the Secret Service or other appropriate federal agencies. After the fraudster is caught, the case is presented to the District Attorney. It is up to the law enforcement folks to "sell" the case and get the DA to actually bring the case to court.

Other Best Practices

      Make someone your in-house fraud expert: Do not allow customer service representatives to automatically contact customers about fraudulent or suspicious activities. It is best to have a single person (or group of people) handle these situations. After a while, your chosen fraud expert will develop an instinct for recognizing the patterns in fraud cases. This cultivated "gut feeling" will help in your fight against fraud.

      Go after attempted fraud too: One thing I was surprised to discover is that when the police are creating a case, they can convict on attempted fraud as well as actual fraud.

      Be helpful to the detective: Respond to all questions in a timely manner. Not only does this help catch the fraudster, but it also means you will be first on the detective's mind. Put the fraudster on a payment plan: Experts say you are more likely to get your money back if you work out some sort of payment plan with the fraudster. Most online fraud is committed by people who simply thought they could get away with it.

Getting Your Money Back

      Current restitution rates are quite disappointing. It is estimated that you may only see 10 percent of your money. In fact, you will probably spend more than that on investigating the fraud. If that's the case, is it even worth fighting fraud? Absolutely: the alternative is simply too risky. Once fraudsters figure out that you do nothing to report fraudulent orders, you become an easy target. Take action against fraud, and you can protect your business.

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