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It is not illegal and does occasionally happen when you cannot get a refund processed to a credit card. The key is to document that there is a legitimate reason for the cash payment to prove it is not fraud.
Oh, the additional risk that your company faces is that the wrong party can get the money, which is why it’s best practice that the refund method match the form of payment (and goes to the same credit card). Nothing illegal to not do this, just additional fraud risk your company exposes itself to.
Who is the “they” in “they paid with a credit card”?
If it’s a customer, no, you refund to the card. Otherwise you pay the customer in cash and the customer disputes the charge and is refunded and has doubled their money while you’re out twice.
I find it hard to believe that you can’t simply refund the customers credit card. I don’t see any illegal activity per se, but there is risk of your company being out if they dispute the credit card charge and also get cash.
Like the director above me said, document the transaction.
Unfortunately, the CC merchant in order to cut down on fraud, no longer issues credits unless it is directly to the original card used in the purchase. My company encountered this problem and now issues credits in cash (check).
Why
The why is critical and should be noted