Liberal return policies are great for business. After all, they encourage customers to take a chance on merchandise that might otherwise languish on the shelves.

Unfortunately, easy returns carry a downside: They allow thieves to exploit loopholes in your refund procedures. And return fraud can have a costly impact on your bottom line.

Return fraud is a growing crime in these difficult economic times. How big of a problem is it? Some nine percent of returns are fraudulent, concludes a study from King Rogers Group, a security consulting firm in Eden Prairie, Minnesota. Nearly 70 percent of retailers state that return fraud is an important issue to their stores, according to a survey completed by the Loss Prevention Research Council (LPRC), Gainesville, Florida. And there’s apparently much room for improvement when it comes to preventing this crime: The LPRC survey found that two out of three retailers consider their current return procedures “ineffective” or only “somewhat effective” in deterring return fraud.

Return fraud occurs in more than one way. Sometimes shoplifters will leave your store with concealed goods, then return with the merchandise in clear sight to establish the appearance of a legitimate purchase. These thieves commonly claim they lost their receipts and often request waivers of your usual documentation requirement.

Other thieves will buy merchandise on sale and later return the item for a full-price refund. Still other thieves are more straightforward: They’ll cart merchandise from the back of your store directly to the returns counter. They might present receipts obtained from previous purchases or found in a trash can outside your store.

Stop the Crime

Although return fraud may always be with us, that doesn’t mean you can’t take steps to protect yourself. “A lot of times retailers haven’t put methods in place to make illegitimate returns more difficult,” says Howard Levinson, president of Expertsecurity.com , a Norton, Massachusetts, consulting firm.

Some of those procedures are simple to put in place; others require a higher level of security. Here are some ways to reduce return fraud:

1. Position your return counter near the store entrance.
“People walking in should have the ability to return items right away,” says Levinson. From a security standpoint, shoplifters will hesitate to be observed hauling items from the back of your store to the front to seek a refund. They will hesitate even more if your return area is separated physically from the main store floor by walkway barriers.

2. Require receipts for refunds.
In this tough economy many retailers are anxious to avoid upsetting customers. As a result they often drop the requirement for a receipt when something comes back to the store. Unfortunately, that can be an open invitation to return fraud.

“In recent years some stores were starting to get very lenient about the receipt requirement, racking up any losses from fraud as part of the cost of doing business,” says Doug Rector, president of Northwest Loss Prevention Consultants in Renton, Washington (www.nwlpc.com ). Increasing crime, though, is having its effect: “Today retailers are becoming less lenient.”

Requiring a receipt is a good idea. For a variety of reasons, though, it’s not a panacea. As we have already seen, some thieves will return stolen goods using receipts obtained from legitimate purchases. Other thieves can reproduce receipts using modern technology. And then there is the individual who has received a gift without a receipt, and the honest customer who has lost one. In both cases you want to avoid unnecessary inconvenience and may want to bend the rules. “You need to maintain some balance between being careful of your profits and being customer friendly,” says Levinson.

3. Train your staff to process returns correctly.
Your staff needs to know what your policies are, how to follow them, and ways to communicate them to shoppers. “Good policies and procedures will keep return fraud at a reasonable level,” says Los Angeles-based security consultant Chris McGoey (www.crimedoctor.com ). Post your policies in the store and print them on receipts. You can state simply: “A valid receipt must accompany all returns.” And encourage employees to be proactive. “If a customer buys a high-end item, the employee at the terminal should say ‘be sure to keep your receipt because we will not take a return without it,’” says Rector.

Employees should follow policies consistently when individuals bring items to the return counter. Exceptions should be subject to approval by a manager. Also keep in mind that everyone needs to be prepared for the habitual thief who has learned that creating a commotion can bully the return desk into granting a refund. “When denied refunds, thieves will almost always act in a belligerent way,” says Levinson.

4. Require managerial approval.
Require a supervisor to sign off on any return over a certain dollar amount. This additional step may keep some thieves from plying their trade at your store.

5. Keep high-ticket items off the sales floor.
If you don’t have locking display cabinets, showcase instead empty boxes or quality photos of costly merchandise and stock the actual items in the back room where they are protected from theft. Electronic stores do this consistently.

6. Slap a sticker on it.
Be aware of legitimate returns as soon as they enter your store. Have employees post stickers on any merchandise coming in through the front door. The stickers must then be present when the item is returned.

7. Insist on identification.
Making identification mandatory is enough to deter many habitual thieves from attempting return fraud. And there is a bonus here: If your state laws permit, you may be able to match names against a database of proven criminals. Check with your attorney to see what you are allowed to do.

Communicate Your Rules

There may not be a magic solution to return fraud, but well designed procedures can be a big help. Your challenge is to strike a balance between security and customer service. Before employing some of the higher-level security measures mentioned above, consider their impact on legitimate customers. “If one out of every 10 returns is fraudulent, that can really kill you,” says Levinson. “Does that mean you inconvenience the other nine customers so that they get angry and you lose them as customers?” Keep in mind, though, that as long as consumers know what your rules are, the incidents of inconvenienced legitimate customers should be few.

Consistent policies will also help reduce crime by raising the security profile of your store among repeat offenders. “Eventually word gets around about which stores offer easy refunds and which do not,” notes Rector. Don’t let your store be one of those easy targets.

Phillip M. Perry is a freelance writer based in New York who has published widely in the fields of business management and law.