Evan Schuman's StorefrontBacktalk

Nordstrom found itself paying nearly $1.5 million last year in a scam that was ironically made possible because the chain had banned two brothers, and then compounded the problem with what Nordstrom described as “a lapse in communication” with an affiliate.

The retailer’s system for blacklisting lost-package fraudsters worked fine. So did its system for sending commissions to affiliates. But no one ever realized that the two systems might someday interact. After all, why would a blacklisted fraudster keep trying to order online, knowing the order would always be blocked? How likely was that? And the thing that made the systems interact was something that Nordstrom’s software developers had no control over: the homegrown system that the affiliate site used to handle Nordstrom orders. That’s what couldn’t be tested until a problem actually showed up.

On March 14, the U.S. Attorney’s Office in Seattle charged Allen J. and Andrew S. Chiu with wire fraud after the two ordered $23 million in merchandise from Nordstrom through its affiliate FatWallet. The brothers knew the orders wouldn’t go through, because the retailer had already blackballed them. But they also knew they would collect half of FatWallet’s 7 percent commission on the orders, due to a communication glitch between Nordstrom and FatWallet.

According to the indictment, the Chius (Allen from Dallas, Andrew from Anaheim) first showed up on Nordstrom’s fraud radar in 2008, when the retailer notified both brothers that they could no longer shop online at Nordstrom.com “because of their excessive claims for refunds purportedly due to lost or undelivered merchandise.”

Ironically, it was because Nordstrom blacklisted the brothers that they became eligible for their much bigger fraud.

The pair discovered that their orders were refused whether they tried ordering directly or through FatWallet, an affiliate site that splits its commission with shoppers who buy through the site. But due to what a Nordstrom spokesperson called “a lapse in communication” with FatWallet, when an order was blocked, Nordstrom still paid the commission.

“As a result, no merchandise was ever shipped to Allen Chiu or Andrew Chiu, and none of the credit cards they submitted for the attempted purchases were ever charged,” the indictment said.

But “Nordstrom continued to make commission payments to FatWallet, based on those blocked purchases, and FatWallet, in turn, continued to credit Allen Chiu and Andrew Chiu with the cash-back awards based on those blocked purchases,” the indictment continued. “Between January 2010 and December 2011, Allen Chiu and Andrew Chiu fraudulently submitted approximately $23 million in purchase orders on Nordstrom.com, and successfully obtained more than $650,000 in undeserved cash-back payments before their scheme was discovered.”