Exclusive: A shopper has been caught trying to defraud an Australian small business by using generative AI to make it look like her order was destroyed in the mail.The worst part is that it almost worked.Gabbie Foord, founder and creative director of Victorian candle brand MILKWICK, told nine.com.au there were no red flags when the new customer initially placed an order.READ MORE: Is Australia headed for a recession? The latest job data paints a grim pictureGabbie Foord is founder and creative director of Victorian candle brand MILKWICK, which she operates with husband Kane. (Supplied)Then she got an email from the customer claiming the order had been damaged in transit, including a photo of two ruined candles.The customer wanted a free replacement, which Foord would usually have no issue with.But something in the photo the customer supplied seemed off."Initially when I saw it I was like, 'Oh my gosh, that's been severely broken, something really bad has happened during transit,'" Foord told nine.com.au."Then, within a few seconds, I realised that the shape of the [candle] jar doesn't match the shape of our jars."I noticed that the writing on the label had kind of been jumbled up [and] the more I looked at it, the more I discovered red flags."Foord said the "proof" the customer sent was obviously an AI-generated image.READ MORE: How to Choose 9News as your preferred source in Google's Top StoriesThis is the image the customer sent as 'proof' of the damage. Foord is certain it's AI generated. (Supplied)The fact that the customer asked MILKWICK to replace the two damaged candles with different scents only made her more suspicious.Fortunately, she shared her concerns with husband Kane before he sent out replacement candles."Initially he wasn't thinking it was AI and he was definitely going to proceed with it," Foord said."That's what was quite shocking, that this customer almost got away with it."She asked the customer to send a video of the damaged order, at which point Foord claims the customer became defensive and threatened to report the business.When Foord told the customer she would report any fraudulent claims to Victoria Police, the customer cut contact.Professor Jeannie Paterson is co-director at the Centre for AI and Digital Ethics. (Supplied)And that's exactly what this was, according to Jeannie Paterson, Professor of Law at The University of Melbourne – attempted fraud."It's actually a criminal offence, because you're fraudulently trying to obtain an advantage," she told nine.com.au."Fraud means intentionally deceive someone and you cannot argue it's not intentional. You're trying to operate a fraud on a business."READ MORE: How can Aussie travellers get to Europe now major Middle East airports are shut?Paterson has also heard of consumers using AI to generate fake receipts to try and access refunds they may not be entitled to.She described it as a kind of "reverse scam" where shoppers target sellers."We're in this spiral of fakes and frauds. I just feel awful about it," she added.Foord never imagined fraud by way of AI-generated images would be part of her journey as a small business owner.The experience has forced her to reconsider how she processes replacements for orders damaged in transit.Currently, MILKWICK doesn't require customers to ship damaged products back to their Victoria warehouse because it's an extra cost for the business.That may change as AI becomes more ubiquitous."Maybe we will have to move to paying for those to be shipped back to us, even though they're broken and that will be an extra expense for our business," Foord said."You can't risk people just stealing from you."READ MORE: The 39km-wide stretch of water threatening to throw the global economy into turmoilPaterson predicts AI fraud cases like this could push small businesses to raise prices to cover the cost of additional shipping insurance or losses due to fraud.MILKWICK sell up to 500 candles in glass jars each day and every now and then one is damaged in transit. (Instagram/@milkwick)Businesses may also start requiring video proof of faulty or damaged goods before issuing replacements, exchanges or refunds."It's very hard to see our way around this problem of AI fraud by the customer, because at the end of the day if the customer says the product broke or the product didn't arrive, what does the business do?" Paterson said."If they refuse to refund, they may be said to be in breach of the law, and they may also get bad reviews online which can be a killer for a business."She urged small business owners to educate themselves on AI and the red flags to look out for.READ MORE: How are planes still flying through the Middle East? Are there safe routes for Australians to use?Foord echoed that message in a social media video she posted, warning other Aussies to watch out for this new type of fraud.It has already received nearly 300,000 combined views across Instagram and TikTok."I just wanted to raise awareness that there's people out there that are unfortunately doing this," Foord said."There's people out there that have probably gotten away with it as well, and think they can get away with it again."NEVER MISS A STORY: Get your breaking news and exclusive stories first by following us across all platforms.Download the 9NEWS App here via Apple and Google PlayMake 9News your preferred source on Google by ticking this box hereSign up to our breaking newsletter here