Return Exchange was co-founded by executives who previously worked at companies that tried to prevent credit-card and check fraud. Verify-1 first went on the market in March 1999, and its latest version is the result of a $20 million development project that culled the efforts of software engineers, statisticians and Arthur Andersen consultants. Since its inception, company executives say Return Exchange has grown to an estimated $10 million a year business — with its software used in at least one store in every mall in America.

"It's the last big hole retailers need to fill," says company senior vice president of sales and marketing Mark Hilinski.

The use of Verify-1 is just the latest move by retailers intent on curtailing return fraud, says University of Florida criminology professor Richard C. Hollinger. According to the 2003 National Retail Security Survey, compiled by Hollinger, the retail industry lost about $16 billion to fraudulent behavior.

Until now, retailers have focused on tracking fraud at the time of purchase. New technology monitors unusual activities like price overrides — the purchase costs $75 but the customer is charged $25, for example. Camera surveillance also pinpoints questionable behavior. Verify-1 tracks customers, however, only when they return or exchange items.

"Retailers have been either ignorant of the extent to which return systems have been abused or lacked the technology to be able to develop databases that were easily retrievable," Hollinger says.

According to retail consulting firm KingRogers International, in 2003, the return rate for specialty retailers was 10.6 percent of total sales, higher than the industry average of 8.58 percent. About 9 percent of all returns are estimated to be fraudulent.

There's a delicate balance, however, between aggressively catching crooks and alienating honest customers. "They want something that is customer-friendly," says Dan Butler, vice president of retail operations at the National Retail Federation, a trade association. "At the same time they want to isolate dishonest behavior."

The program has come under fire from consumers. Beth Givens, director of the nonprofit Privacy Rights Clearinghouse, says one initial concern was that Return Exchange might aggregate data, meaning that data about a customer's returns to one retailer could affect his returns at a second retailer that also uses the monitoring software. Return Exchange says it doesn't aggregate data.

Givens, who has met with company executives, says she thinks the company generally has a "robust" privacy policy. Still, she's encouraging the company to be more transparent about how it pinpoints fraudulent behavior. (No group or individual has seriously challenged the right to return purchases under this program.) "By not sharing the rules of the game, the companies are playing a game of gotcha, and I don't think that's fair," she says.