Consumers and Businesses Clipped by Coupon Fraud

TO most of us, coupons are things that lop some cents off the price of a box of cereal. To Larry Krasnick, coupons became the basis of an elaborate fraud operation in southern Florida that robbed companies of an estimated $44 million over a 10-year period. Krasnick and other ringleaders didn't even have to lift a pair of scissors. They bought bags of coupons from professional clippers, who purchased newspaper inserts at recycling centers. More bags of coupons came from church- or hospital-related charities, which sold coupons by the pound to raise money.

The operation started small, but grew to involve phony stores that sold no products but redeemed $50,000 a month in coupons, says Jim Layman, supervisor of the white collar crime squad for the Broward County Sheriffs Office.

Sargeant Layman was tipped off by the Coupon Information Center (CIC), a business-sponsored organization in Alexandria, Va., which gave him a list of questionable store accounts. Krasnick received a five-year prison sentence a year ago; more than 60 others either pleaded guilty or were convicted in adjudication that was finally completed this fall.

The CIC points to the Florida case as its biggest victory in a war that is far from over. David Vienna, CIC's director, says one unverified estimate puts the cost of coupon fraud to corporations at $500 million a year, mostly passed on to consumers. This estimate is ``either folklore or the source got lost,'' Mr. Vienna says. Coupon redemptions total about $3 billion to $3.5 billion a year, up from $2.8 billion five years ago, he says.

CIC is now trying to gather firm data. In one city, the CIC has found about $30 million in coupon fraud annually. The area accounts for less than 1 percent of total US coupon redemption, he says.

The CIC gives tips to police, based on evidence supplied by member companies. The association was founded in 1986 with eight member companies, and now includes 27 firms.

Vienna says companies use several methods to detect coupon fraud, including:

Technology. To prevent counterfeiting, some companies now issue light-sensitive coupons on which the word ``void'' appears if they are photographed or photocopied.

Financial analysis. Analysts consider whether a given store's sales are enough to justify the level of coupon redemption. The mix of products sold is also compared with the mix of products for which coupons are redeemed.

Physical review. When coupons come back to the originating companies, analysts look at the serial numbers many coupons bear, and the way they are cut, to find suspicious patterns. If coupons for a given product arrived for redemption with consecutive serial numbers, it would suggest that the coupons had been clipped from a stack of newspaper inserts that had never been distributed. Vienna says sometimes truck drivers are bribed for bundles that contain 1,000 inserts each - about $30,000 worth of coupons.

The problem is worst in the Great Lakes region, Vienna says, mentioning Chicago, Detroit, Buffalo, and Cleveland among other cities. He says activity appears to be high in Boston, New York, Philadelphia, Pittsburgh, and southern Florida. On the West Coast, southern California is the most active area.

Despite all the money lost to fraud, corporations still see coupons as a valuable marketing tool, Vienna says.