Ah so scammers are ordering real products, paying full price, and returning counterfeit products that cost them less than the real product, getting a refund on the full real product price then selling or keeping the real product - got it!

If the scammers keep the real item, they effectively get a real product at counterfeit prices. If they sell it, they make the difference between real and counterfeit in profit less shipping.

Yep. And counterfeits are good enough that you need dedicated personnel to be able to confirm high-value returns are legitimate and not knock-offs.

Does a good counterfeit Apple Watch actually do everything a real watch does, e.g., respond like a genuine watch after you install an arbitrary app on it and start using the app?

(If so, I'm guessing they made the cheapest genuine Apple Watch look on the outside like a more expensive one.)

It won’t, but a random person off the street might not immediately notice the difference, particularly if they’d never used one before.

Even booting it to software, it might be enough for a completely-untrained person to assume it was real. Actually pairing it with a test phone might be the easiest/fastest to be certain.

That seems to be the idea from what I see. I really have no idea how this all works in practice though.