Help your business clients combat salvage fraud

When your client companies discuss their internal controls, they focus on cash, inventory, and high-value assets. They rarely mention things that are old, broken or returned.

For example, our firm once investigated a company that was rolling out new mobile phones to its 4,000 employees. The phone distribution was tightly managed — serial numbers tracked, signatures collected, everything above board. But the old phones? Completely ignored.

The employee managing the rollout realized what others had missed: a used iPhone still has value. He quietly sold the old devices to a local dealer for $40 each, pocketing $160,000 in total. No one in the company batted an eye, because the phones had been written off as worthless.

And that’s precisely how salvage fraud slips through the cracks — unnoticed, unchallenged, and surprisingly profitable.

Hide in plain sight

For insurers working with asset-heavy industries, typically all eyes are on big-ticket items — policy claims, premium collection, and operational risk. But salvage fraud, a low-profile, high-impact problem that’s lurking in the shadows is quietly draining value from balance sheets.

Salvage fraud isn’t as sensational as staged collisions or inflated invoices. It’s often systemic and undetected, especially in businesses dealing with high volumes of returns, damaged goods, or warranty claims.

Salvage fraud occurs when damaged, returned or written-off items that retain residual value are misappropriated by people entrusted with disposing of them. These items are supposed to be sold, auctioned, or destroyed, but instead they may be diverted, undervalued, or sold informally for personal gain.

Losses aren’t limited to the insurance industry. They affect other insured parties as well, such as:

• retailers dealing with high return volumes
• manufacturers handling warranty parts
• construction and auto companies that must write off equipment
• logistics firms managing damaged inventory.

Case studies

Our team was hired to perform investigative work by the head office of a major auto dealership chain. A customer had returned a vehicle twice, citing minor defects. But, instead of undergoing a proper evaluation or being repaired for resale, the car ended up in the customer service department, where it was quietly written off the books.

Despite being in almost perfect condition, the vehicle disappeared from inventory without a trace — no auction, no resale, no recovery. Since it was classified as ‘damaged,’ it was outside the core business focus. No one followed up. No value was reclaimed.

In many industries, it’s required that products and parts returned under warranty or recall be destroyed. This is often done to prevent damaged, outdated, or brand-sensitive items from entering the resale market at a discount — to protect brand integrity and pricing structures.

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But there’s a problem. When a company expects an item to be destroyed, not sold, and has already budgeted for disposal costs, it becomes easier for internal bad actors to write off items and quietly divert them.

If no one expects revenue from destroyed items, there’s no red flag when no revenue is received.

The steps are simple:

• an item is returned or deemed unfit for regular sale;
• a manager or staff member marks it for destruction or disposal;
• the item is sold privately, often to a friend or contact;
• since no proceeds were expected, no questions are asked.

Over time, this loophole creates low-risk, high-reward opportunities for fraud due to scant oversight.

Why this matters

These cases may seem minor, but cumulative losses can be substantial. Plus, salvage fraud creates a culture of dishonesty and entitlement. Organizations can face undocumented financial losses, inventory and audit discrepancies, reputation damage (if frauds are exposed), and legal risks if regulatory or tax reporting rules are breached.

Fortunately, salvage fraud can be tracked proactively, starting with the keeping of records for items marked for destruction. 

Companies must also implement clear chain-of-custody protocols and ensure no single person controls the disposal process or implements audit salvage and disposal activities, particularly for items showing zero revenue.

Other options include the use of third-party disposal or auction services, which should provide transparent records and verification, and making sure staff understands the terms ‘damaged’ or ‘returned’ do not mean ‘valueless’ or ‘free to take.’

Salvage fraud thrives in blind spots. Whether it’s a slightly damaged vehicle, a batch of electronics returned under warranty, or parts earmarked for destruction — if it has value, it carries risk.

Insurers and their clients need to rethink how they handle salvage. Items that are written off the books may be more valuable, and vulnerable, than people realize.

Dave Oswald is a Chartered Accountant at Forensic Restitution.