Fraud is common in restaurants. Why? Large staffs with multiple people who have access to systems/register runs a risk. Combine this with multiple shifts and high employee turnover, the owner can’t be there every second of the day to prevent restaurant fraud.
External Restaurant Fraud vs. Internal Restaurant Fraud
External fraud is committed by customers or vendors/suppliers. These people have less of a connection with the restaurant itself. Internal fraud is committed by employees. Statistically, internal fraud accounts for the vast majority of fraud in business, all industries included. The National Restaurant Association estimates that employee theft accounts for 75% of restaurant loss.
Types of External Fraud in Restaurants
What are chargebacks?
- There are 3 types of chargebacks: merchant error, criminal fraud, and friendly fraud.
- Merchant errors are a grey area of chargebacks. Neither the customer nor the merchant are at fault for this chargeback, one believes that the other has made an error. For example, a customer may request a chargeback when they believe they didn’t authorize a transaction or have a disagreement on a dish’s price.
- Criminal fraud is just as it sounds – criminal. This occurs when fraudulent credit cards are used, or when wait staff applies a larger tip to a bill that has already been signed off on by the customer.
- Accidental friendly fraud occurs on the customer end of the chargeback. Accidental friendly fraud is when a consumer authorized a purchase but files a chargeback without realizing the are responsible for the purchase. For example, a child may be verbally authorized to use their parent’s credit card. When the bill arrives, the parent may dispute the charge, assuming it’s fraud.
- Intentional friendly fraud is much more malicious, a customer may have buyer’s remorse and dispute the charge with the hopes of a refund.
How to stop chargeback fraud
- Process According to Processor Protocol
- For card-present purchases, check that the card has not expired and enter the security code on the card if applicable.
- Use updated systems, like EMV technology, to avoid holding the liability for a chargeback.
- Train Employees to Pay Attention to the Warning Signs of Fraud
- Obtain and verify signatures, be aware of customers using several credit cards to pay in the same order. If many of these transactions are declined, the activity may be fraudulent.
- Clearer Payment Descriptor
- If your restaurant’s name is “Holly’s Cafe”, use a descriptor with familiar terms in it, such as “Hollys-Cafe-Restaurant”, rather than a parent company.
- Address Customer Service Issues Swiftly
- If a customer expresses displeasure, reach out to them quickly to try and solve the issue at hand.
What is vendor fraud?
Billing schemes, check tampering, and bribery/extortion schemes fall under the vendor fraud umbrella. Billing schemes occur when an employee uses false documentation to generate false payment for their benefit.
Check tampering is when checks are manipulated to be deposited into an unintended bank account. This can include forgery or altering payee information.
Bribery and extortion schemes happen when an employee either receives or demands inappropriate personal payments from a vendor.
How to stop vendor fraud
- Segregation of Duties
- There should be clear divisions between the employees receiving the goods and those processing invoices and payments.
- Manage Third Party Access
Break-ins and Robberies
A robbery is when a victim is present and robbed of something valuable by way of force or intimidation. Break ins and burglaries are done without a victim present, such as a restaurant being robbed before or after hours.
How to stop break-ins and robberies
- Use a Monitored Alarm System & Surveillance Camera
- Silent alarm systems contact the police without alarming the robbers, providing you the potential recovery of stolen goods and/or money.
- Empty Cash Drawers Nightly
- The less unattended money left in the restaurant, the less someone could get away with.
- Change Up Routines
- Do not do the same thing every morning or every night. Someone may be canvassing your restaurant for a future burglary and learning your most vulnerable times. Use the “buddy system” – open and close with two employees together to provide more security than a solo open.
What makes the best restaurant staff successful? Download our complete guide to staff management.
Types of Internal Fraud in Restaurants
What are auto-gratuity scams?
Auto-gratuity is when a restaurant automatically adds a gratuity service charge to a bill. Typically, the auto-gratuity is 18% of the bill and is only applied to parties of six or more. This policy is usually printed on the restaurant’s menu.
Auto-gratuity scams occur when an employee take advantage of customers who may not have noticed that the gratuity was already added, and allows them to add an additional tip.
How to stop auto-gratuity scams
Look for Employees with Higher Than Average Tips
- If there is a bill with a large tip in addition to a standard service fee, it is possible the customer wasn’t made aware of automatic gratuity and left an additional cash tip.
[ For more clarity on auto-gratuity and what restaurants in every state need to know about automatic gratuity laws, visit here. ]
Wrongly Voided Transactions
What are wrongly voided transactions?
A void is a transaction which cancels, or entirely deletes, a completed transaction.
Wrongly voided transactions happen when a server charges a customer for their full order, but later voids certain items and pockets the money for said items. Menu insights from your POS can compare the amount of voids/comps of each server and help you keep tabs on these expenses.
How to stop wrongly voided transactions
- Compare Average Voids Over A Period Of Time
- Compare the average amount of employee voids to the employee causing suspicion. This can pinpoint the problem employee and hold them accountable.
- Check Time Stamps On Void
- Employees make take advantage of fewer employees being on shift in the early mornings and late nights to fraudulently void transactions. Time stamps will distinguish what voids take place during open restaurant hours, and which do not.
What is undercharging?
Undercharging occurs when an employee charges for a more expensive item and rings it into the POS as a cheaper item. For example, a bartender may take a customer’s order for a $15 glass of wine. The bartender then rings it into the restaurant’s POS as an $8 glass of wine, pocketing the $7 difference.
How to stop undercharging scams
- Check Inventory Often
- This scam is popular because it can’t be detected on most restaurant POS systems and flies under the radar unless inventory is consistently checked.
- Automize inventory using automatic inventory software which ensures that what is being rung into the POS is what’s being served to customers.
What is time theft?
Time theft comes in numerous forms: employees taking extra breaks, clocking in too early, or clocking out too late. Paper time sheets, poor employee engagement, and poor scheduling can all be factors in encouraging employee time theft in your restaurant.
How to stop time theft
- Effective Scheduling
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What is food theft?
Food theft is when employees eat food aside from the allotted shift meals, give free meals out to friends and family, or take food home without permission.
How to stop food theft
- Track All Sales And Inventory
- Whether it’s as simple as sneaking an additional snack without permission, or a more serious issue such as stealing a crate of food right off a delivery truck, these thefts are costly in the long run.
- Limit Access To Alcohol
- Alcohol can represent some of the more expensive items on a restaurant’s menu, such as a fine wine or aged liquor. Reduce the risk of theft by keeping a running inventory and limiting access to alcohol to certain employees, such as bartenders and general managers.
Intellectual Property Theft
What is intellectual property theft?
Recipes, customer and vendor lists, and certain kitchen operations are all types of potential trade secrets. This includes formulas, patterns, programs, devices, methods and techniques of executing menu items. Although often overlooked, intellectual property theft is a large contributor to restaurant fraud.
How to stop intellectual property theft
- Patentable materials include manufactured articles, machines, industrial processes, and chemical compositions. An Italian restaurant may have the owner’s grandmother come in and cook the pasta sauce from scratch, alone, without a recipe written down. This makes the sauce a valuable trade secret – it is something you’ve gone out of your way to protect.
- A restaurant’s menu design, website, and promotional marketing materials all fall under protected copyright law. These can be a restaurant’s long-term, secret competitive advantage over the competition, so copyright law is important to consider.
Opening a restaurant is costly enough without the added risk of various types of restaurant fraud. Keep tabs on possible areas that restaurant fraud may take place and take advantage of the numerous softwares available to help restaurant owners. This will help ensure you make money rather than lose it.