The Industry Strikes Back against Fraud

By Dale Buss

Paper-coupon fraud may seem like a concept from another time like Beta VCRs and dial telephones. But even in today’s digital era, the illegal use and counterfeiting of direct-mail, flyer and newspaper coupons offered by CPG manufacturers and retailers is a still-growing problem – and a challenge that impinges on industry profitability to the tune of millions of dollars a year.

In fact, instead of allowing digital stratagems to thwart paper-coupon fraudsters once and for all, the rise of electronic communications has spawned a threat that dwarfs all past methods of facilitating coupon fraud: spreading counterfeits via social media, especially Facebook and Instagram.

“The industry is having to come up with more-effective loss-prevention tools because of the proliferation of coupon fraud mainly through social media,” Bud Miller, executive director of the Coupon Information Corporation, a non-profit entity fighting coupon fraud, told CPGmatters.

A drumbeat of new cases of detected coupon fraud, involving both CPG companies and other brands, and retailers, document the persistence of the problem. Two Indiana women, for example, recently were charged with bootlegging Victoria’s Secret merchandise that they obtained by allegedly counterfeiting coupons, then resold through a Facebook group.

At the same time, some CPG brands have been signaling the seriousness of coupon fraud to the shopping public in alarming new ways. Kimberly-Clark, for example, owner of brands including Huggies diapers, Kleenex tissues and Cottonelle toilet paper, recently put bold red lettering on coupon inserts in Chicago newspapers threatening a $2-million fine and/or imprisonment if coupons are copied.

“CPG brands and retailers are more willing to prosecute coupon fraud than five years ago,” Miller said. “That’s because they have a better understanding of what fraud does. It hurts all participants in the industry, and they’re showing a greater willingness to deal with that. All industry participants have a responsibility to address this issue.”

Coupon fraud has been around as long as paper coupons have, but Miller said the onset of the internet a quarter-century ago created sort of a cycle in the seriousness of the problem and in the CPG industry’s response.

“People worried that the sky was falling after the start of the internet when people could print coupons at home,” Miller said. “But there wasn’t a lot of fraud because it was still so unusual, and retailers were very careful about stopping it. But later, counterfeiting took off and hit the industry hard, and the industry reacted through stronger policies and security reviews, to the point where some retailers wouldn’t accept paper coupons for a while.

“Then the industry started recovering, fraud grew again, and the cycle kept repeating itself.”

Individual efforts to copy or print fake coupons at home for their own use is one form of fraud, but it’s far from the most pernicious – or costly. Professional counterfeiters, even organized-crime rings, have turned paper-coupon counterfeiting into an art form that costs the industry millions of dollars a year. Multiply 20-cent and 50-cent-off deals by millions of fake coupons, and it’s easy to see how quickly the very real damages add up.

“People will create counterfeit coupons and sell the images through social media, either stealing legitimate bar codes or making up their own,” Miller explained. Bar codes can be ripped off, he said, “because they are not a security device. They are meant to convey information. So, there are a variety of ways for people who want to counterfeit or create their own.”

Professional fakes can wreak havoc with coupon fulfillment. “Today because it takes so much time to identify a fraudulent coupon, by the time it is identified in the clearinghouse process, it may have been used in stores across the country for weeks or even months, causing increased losses for both retailers and the manufacturers that issue the coupons,” Beth Buresh, president of the Intelligent Clearing Network (ICN), a software-as-a-service company that electronically validates and clears paper and digital coupons at the point of sale, told CPGmatters.

Of course, as Miller explained, big-time counterfeiters don’t want the products per se but “the value that they represent” in merchandise that can be collectively offered on social-media sites, at flea markets, in a basement or at a garage sale. Many of these are called “stockpile sales,” and consumers who frequent them clearly know the merchandise has been scored illegally in some way.

These sales are a main reason why shelf-stable products are favored for coupon fraud, especially home-cleaning products that don’t degrade.

In any event, CPG companies and retailers can detect and squash most problems by ensuring that their coupons are coded correctly and that POS systems can take full advantage of bar-code technology, said Miller, whose organization is funded by CPG companies.

Intelligent Clearing Network technology is meant to thwart counterfeiters. “Using a positive coupon file and real-time validation,” Buresh explained, “ICN identifies offers that would be denied in the clearinghouse process before they are accepted by the cashier,  and identifies and blocks the acceptance of counterfeit promotions within hours, further strengthening trust between trading partners and saving both parties time and money."

Added Jon Robertson, ICN’s executive vice president of marketing: “We stay ahead of the fraudsters. ICN has seen these criminals make changes and get newly-produced versions into stores quickly. With ICN’s real-time Positive File, we instantly reject any new fraudulent versions.”

Increasingly, too, manufacturers have been using new technology to make old-fashioned paper coupons increasingly difficult to counterfeit. For example, many high-value coupons – which Miller said could begin with as little as a few dollars in face value – now employ holograms that make replication on most printers almost impossible.

“It takes an organized crime ring to be able to steal the foil to make those types of holograms for coupons,” Miller said. “That makes it difficult for someone with just a passing interest [in fraud] to do this.”

It’s easy to assume that the use of digital technology eventually will vanquish paper coupons just as it has devastated, for instance, physical newspapers and magazines. But Miller warned that “you can’t make the assumption that digital is going to make fraud go away. Digital isn’t fraud-proof.”

For example, he said, “How many people really want to hand over their $1,000 cell phone to a cashier?” so that person can scan a barcode on the phone’s screen, Miller said. “And how many cashiers and retailers really want to take on that liability? What about where the WiFi connection doesn’t work or you have poor service?

“Paper coupons are very simple: You see them, you clip them, you take them and you use them,” he said. “The level of complexity involved in digital couponing is significantly higher.”

                                               Early March 2019
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