Employee theft raises prices, contributes to organized retail crime

Retailers’ struggle with employee theft has been in the news a lot lately, leading some to speculate that crime is merely an internal problem that is not impacted by outsiders. Nothing could be further from the truth.

Is employee theft a problem? Of course. It always has been. Nobody wants to believe a new colleague or manager can violate their trust and commit a criminal act, but every good retailer understands employee dishonesty is a reality in stores, distribution centers and corporate offices. Retail losses from employee theft are staggering: preliminary results of the National Retail Security Survey found that merchandise theft by employees accounted for $15.9 billion, or 44 percent of theft losses, at stores in 2008.

Some of the most trusting store managers I know have been burned by someone they thought was the “perfect associate”. In reality, employees have the opportunity to take money, merchandise, commit fraud, improperly discount merchandise for family or friends, and go undetected for long periods of time before being apprehended. Only a small number of retail’s 24 million employees ever crosses the line, but this small percentage of incidents is usually high-profile, costly to the company and takes its toll on employee morale.

The key to most crime in retail, internal or external, is opportunity. Store associates and managers have access to cash registers, restricted areas, and know the store layout and loss prevention techniques better than customers. Because many associates and managers are responsible for on-site loss prevention, they can pinpoint camera locations, know the local security officers, and even become friendly with store management.

Over the years, employee theft has evolved. Historically we saw employees taking cash straight out of the register or wearing new merchandise out of the store. In a game of cat-and-mouse, many retailers have evolved their prevention-and-detection techniques, installing sophisticated exception reports, camera systems and employee tip lines.

One common scenario is what we call “Sweethearting”, where an employee adds extra merchandise into a shopping bag when friends or family members are standing at the register. Another example might be when a waiter or waitress collects customer credit card information for later use (this happened just a few months ago in Washington).

In some cases, the employees are involved in organized retail crime activity, fencing stolen merchandise and fraudulently-obtained goods for cash, drugs or other goods through a variety of methods. Similar to professional shoplifters, these fence locations include swap meets, flea markets, pawn shops and temporary stores.

They can also be online e-fencing operations, where stolen merchandise is sold through auction sites. In this regard, the retail industry is not alone. Whether it’s stolen computers in Seattle or music instruments in Columbus, schools and other groups have also been targets of “inside jobs”, where employees steal merchandise and anonymously resell the goods either in pawn shops or over the Internet.

In response to this illegal and unethical activity, retailers deploy scores of loss prevention techniques ranging from better pre-employment screening, sophisticated register tracking systems and even HD-quality smart-camera systems. The most effective programs include heightened employee awareness, laying out clear Standard Operating Procedures, Auditing programs and soliciting honest associates to report anything suspicious to management or loss prevention. Some companies even offer a financial incentive for such information.

Retailers work hard to develop comprehensive loss prevention programs and consider any type of theft a serious issue. While prevention is always ideal, theft does happen. And when these activities are identified, employees are terminated and most likely prosecuted for their crimes.

While companies continue to crack down on internal theft, we can’t solve the problem alone. Through continued cooperation with law enforcement, retailers will continue to track stolen merchandise through secondary markets, protecting our customers from purchasing stolen goods. If criminals–be it outsiders or “insiders”–are permitted to continue to profit from their crimes, retail losses will continue to rise and, unfortunately, so will prices.