5 steps to protect your company against warranty fraud

Elements of a successful fraud-combatting program

This is the second installment in a series on warranty fraud. Read part one here.

If your company is successful, chances are you have terrific products and an equally good warranty support program. Potential customers look at your warranty program and have confidence to buy your products. Criminals, though, look at your warranty program as an opportunity to steal millions of dollars of new product from you.

How do successful companies balance the need to be customer friendly with being sensible about fraud?

One company, networking equipment giant Cisco Systems, headquartered in San Jose, California, has instituted a program to address the problem of fraudulent warranty claims, with significant success. “Several years ago, we proactively addressed potential problems around warranty abuse and took aggressive measures to plug any holes we came across,” says William Friedman, director of litigation at Cisco. “We developed a program, supported it and saw cases through to conclusion.”

Cisco was in danger of becoming an attractive target, because of its SMARTnet technical support services program and products that were readily sold in the secondary market. “As the popularity of our warranty program expanded, we did not want to be seen as an easy target. With all of the work we have done, potential criminals would have a hard time viewing us that way,” says Friedman.

The proactive work has paid off . In the last few years, there have been significant prosecutions of those who defrauded Cisco, which have sent a clear warning signal to other criminals. Examples are:

  • Nicholas Stoupis (Boston, MA): Stole $3.7 million through warranty fraud scheme. Pleaded guilty, sentenced to 51 months in prison and ordered to pay all $3.7 million back to Cisco.
  • Kent Scott Andrews (Cleveland, Ohio): Stole $1.9 millionin products through warranty fraud scheme. Pleaded guilty, sentenced to 33 months in prison and ordered to pay everything back to Cisco.
  • Scott and Julie Rasmussen (Las Vegas, NV): Stole more than $3 million in warranty fraud scheme. Pleaded guilty, sentenced to 48 months (Scott) and 30 months (Julie) in prison and ordered to pay over $3 million back to Cisco.

The lessons learned from Cisco’s success show that companies need a sustained commitment to combat the problem, combined with a comprehensive program with five key elements.

1. Identify the problem. Before you can come up with a solution, you need to understand how you are being defrauded. Are there holes in your warranty program? What products are the criminals getting?

2. Identify the path to market. A criminal generally does not hold on to the stolen product. He needs to off-load it to a reseller. What companies are buying stolen products and how should you engage with them (if at all)?

3. Identify the metrics. In order to get executive buy-off for making changes to your warranty program, you need to gauge the risk and potential losses related to not making a change. Do your homework and get your executive team behind you.

4. Plug the holes. As you identify areas of improvement in your internal controls, fix them so that fraud becomes more difficult. A fraud averted due to internal controls will save you from having to chase the stolen property.

5. Give your program teeth. If criminals can easily defraud you, they will. And word that there is money to be made off your warranty program will spread. But, if there is a serious risk of being caught, and a commitment by the company to refer the cases for prosecution or to civilly sue the major bad actors, that message spreads too.

Although there is no one-size-fits-all solution, building a commitment and a team to confront warranty fraud is necessary and a money-saving measure. As summed up by Friedman, “the cost of doing nothing is just too high.” 

Contributing Author

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Richard Nelson

Richard J. Nelson is a partner at Sideman & Bancroft LLP in San Francisco, where he specializes in litigation and government investigations. Mr. Nelson often...

Additional Contributors: Erica Brand Portnoy

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