Zappers: Technology‐assisted Tax Fraud INDEX
Contents
1. Grand Caf Dudok Second paper pages 6 to 8 Dutch case LJN AX 6802 Jun 2 2006 LJN BC5500 Feb 29 2008 RS audit suspecting under reporting of wages On the second day of audit T P asks for help ECR supplier Straight Systems BV Software installed Finishing Touch based on 20 20 Manager of Straight Systems explains hidden function Employee sent to train in use of hidden functions Dudok begins use of hidden functions to disguise skimming that was used to pay unreported wages Problem with Phantom ware Self help phantom ware requires careful programming programming mistakes can be made fraud can be revealed Factory installed phantom ware makes the manufacturer liable easier to prove knowledge of fraud co conspirator with Installation of a dedicated fraud program Help desk support for the fraud program Zappers are the answer Zappers v Phantom ware Zapper Phantom ware Added on amp removed Embedded in the ECR Normally used with POS Normally used with stand system multiple ECRs alone ECRs No legitimate business May have a legitimate purpose other than fraud purpose other than fraud Hidden physically Hidden programmatically Help desk support needed Help desk support needed Provided by installers IT Either comes with the ECR free lancers ECR sales or can be requested personnel Two2. Zappers Technology assisted Tax Fraud 5 Papers Theme Market INDEX place Skimming traditional double till approach Phantom ware Self help Factory Installed Zappers 5 Papers 1 Zappers Tax Lawyer 2 Phantom ware Tax Notes International 3 Solutions Canadian Tax Journal German Canadian Greek Works in progress 4 SSUTA as a solution Final assessment Available on SSRN Theme Market place Skimming is an SME issue not LMSB issue Skimming has been an individual fraud issue not a market place issue Phantom ware applications show skimming entering the market place To purchase a particular ECR or POS system Government push back increase audits amp certify Zappers have developed in response Installers rogue developers smaller developers Development Time Line Entering the market place _ _ Skimming Factory installed Double Tills Phantom ware the idiot proof system Self help Zappers Phantom ware THE COMPETITIVE MARKET PLACE Greece 10m people 800 000 SMEs 300 000 to 350 000 ECRs and POS systems turnover of 30 000 to 40 000 systems per year 300 different machines all certified 50 importers and manufacturers Germany amp Italy EU USA Japan China non EU Skimming the Old Fashioned Way Still a popular fraud Double Tills Aleef
3. 2005 03 11 11 13 Gute enderdendee o e e Age e e e e e e e e RR Re e RR e R AOR RR RR RR RR RUHK RR RR RR e 23 LUNCH BUFFE L KONTANT MOMS 254 Electronic Journal before manipulation 1 Item number 21 is a Lunch B 2 It cost 65 00 kroner 3 The receipt is number 2 1 F rs per familj 2005 03 11 till 2005 03 11 Namn SUM Unknown family 693 00 kr AVHAMTNING 1701 01 kr 340 00 kr DRYCK 1026 00 kr MAT 19 981 00 kr SPRIT 669 00 kr STARK L 13 492 00 kx VIN 3 144 00 kx TOTAL 41 046 01 kr Out of SALES 0 00 kr Rabatt 209 70 kr Sales Report before manipulation We need this for comparison later TO0120050311 TIC Anteckningar Arkw Redigera Format Visa Hj lp C 21 1 Ces h zT HST x dq 38 1300P c 0 2 OG D eas HS be T 1103051113 0 0002 1 3 650007670006001H F A 23 1 6800G R 1 uH 6800D x 1 a 13606 Z 0 2 OG D DT DS a 1103051120000003 1 680007676006001N E Sales receipt before manipulation These are in the TIC files for tickets Notice 1 Item number 21 2 Sales price of 65 00 kroner 3 Ticket number receipt number 2 1 To manipulate the data you insert the zapper silver memory stick There is a new version of the CMDCAR DLL program on the zapper Utskrift av journal Restaurang Kvitto med Kvitto datum fr n Retur Mellan 2005 03 11 E amp amp 1 00 00 Hus bjuder T R
4. 68 00 kr 05 03 11 11 55 00001271 i 1 Direkt 130 00 kr OS 03 11 11 55 O00013 1 l l Direkt 35 00 kr 05 03 11 11 56 O00014 1 1 1 Direkt 68 00 kr 05 03 11 11 56 O00015 1 l l Direkt 65 00 kr 05 03 11 11 57 00001671 i 1 Direkt 73 00 kr 05 03 11 11 58 000017 1 d 1 Direkt 136 00 kr 05 03 11 11 59 000018 1 1 1 Direkt 65 00 kr OS 03 11 12 04 O00015 1 X 1 Direkt 65 00 kr w Select the tickets to replace in the list Manual selecting of replacement tickets TotalSales 4083631 kr Amount to remove Threshold amount 100 Total P Total MENOS 2 auto replace So assume we take the selection of a ticket approach 1 When we select the first item ticket number 2 1 we then get Elektronisk journal Restaurant POS Nb Waiters Change password Date 3 SERV 3 20090311 H au 20080311 Biz S SERV S Bill Total Recipt time m alll Unselect Uprerto o Entre 00 00 och 23 58 List of tickets paid in cash Y PoP hes Eee Fa ea Article List Tickets Total 45 00 kr Erase Ticket Ticket with z commission Price Level Normal v List of replacement tickets 384 FLASKOL SOCL 1 Save Total Sales r Threshold amount 100 Total P Total 0 Total Gross Notice the price r duction we could have gone lower Notice the tax reduction The Swedish VAT is at 2596 isk journal e Change password Change Restau
5. Garage Ltd Nov 13 2007 Family members newspaper stands Manchester UK Mustaq Hussain Patel Mubarakali Ahmed Patel Iqbal Ahmed Patel 3 brothers 3 5million fraud 92m turnover 60 shops 250 employees VAT CIT PIT of owners PIT of employees SS amp NHI of employees pay structure allows welfare qualification Funds are funneled through an off shore Muslim charity SME fraud not in publicly traded companies Problem with Traditional Skimming First paper pages 12 to 14 Perception of detection Employees unhappy ethical may turn you in Keeping a double set of books becomes too complex to keep up the fraud Australia Ronen 2005 NSWSC 991 1991 through 2001 skimmed 15AU to 17AU ncome tax evaded 8 125AU Clothing stores Manual skimming converted to digital when Australia adopts the GST in July 2000 fear of detection is heightened as GST audits are anticipated Phantom ware self help Modern ECRs can be re programmed to eliminate the audit trail critical records Z Reports daily periodic end of day report that records sales taxes media totals discounts voids etc X Reports same as Z Reports except they do not reset the system after being taken Electronic Journal records all transactions blow by blow entered in the machine Programming is secret not in user
6. s manual limit access bad employee issues Examples of Hidden Functions Sales Data Reset Resets all sales data on the terminal to zero Turn Off Journal Turn On Journal Electronic journal can be set to not function Master Reset Clears out the entire memory of the till and brings it back to a blank default program the till then determines which terminal it is by looking at others on the LAN and then prompts to import its program from one of the other terminals on the LAN Example CASIO TE 2000 Second paper pages 10 14 Cash Register Good Practice Guide EU Cash Register Study Group Part of the Fiscalis Committee Use of a refund to skim cash HMRC Re program Z Report not to record refunds Re program X Reports not to record refunds Eliminate refunds from the Electronic Journal Thus the ECR nets refund against a sale and records only a lower net sale amount without a trace in Z Report X Report or Electronic Journal Phantom ware factory installed Does not require re programming Secret hidden functionality built in to ECR Not discussed in user s manual Not visible in menu structure Commonly revealed only in oral communications with Installer Sales representative The idea is to remove the need to re program Problem is the manufacturer looses deniability These programs have only one function
7. 0 Manipulated 7 1 KONTANT anipulated 45 00 MOMS 254 9 00 TOTAL KVITTO Direkt POS number 1 Bord NR O G ST ANT 1 2005 03 11 11 13 Kvitto NR 0000027 REREAD EEE EEE EEE EEE Eee Cee eet eee eee eee Comparison Original amp ated Electronic Journal Notice the reduction in gross sales amp the reduction in tax If this record is tied into inventory control adjustments in related purchases will be necessary some zappers will do this for you because you may have just sold more beer than you ordered oun x 20 m T 2 3 I 1 Q De Ue 11030511130000 2 700120050311 TIC Anteckningar Arkiv Redigera Format i sa Hialp 0 1L 4 C 02 1 450007670006008H D 0111 6800G 1103051113000002 1 650007670006001H 68000 Manipulated Original 13608 0G 0 11 1 iL 1103051120000003 1 680007676006008N Comparison of the TIC files Manipulated amp Original Notice the in the Manipulated version in contrast with the letters H amp P in the original version This one of the tell tale signs of manipulation in this particular program It may indicate that the system has not been correctly updated since the manipulation procedure Solutions 1 Certification of ECRs Greece 2 Certification of receipts Canada Third 3 Encryption of ECR POS system ids functionality smart cards Germany 4 Third par
8. US Zapper Cases First paper pages 1 to 3 Stew Leonard s Dairy Norwalk CT 1994 Custom made zapper former NCR IT expert Zapper is kept in a hollowed out book in office e 17m IRS income tax audit Customs uncovered LaShish restaurants Detroit MI 2007 Zapper kept at owner s residence connected to ECRs at 13 restaurants Skim 20m 4 years sent to Hezbollah Lebanon CIA mole sister in law wife in prison Husband is fugitive from US in Lebanon Meet the Zapper TT PI Electronique cash register Manufactured in Paris since 1983 Popular in Italy Belgium Portugal Spain Germany Denmark Australia USA and North Africa Uses Restodata back office program Cash register is connected to a PC in the back office like the one on the following slide Back Office PC Notice the dongle grey memory stick protecting proprietary program Notice the silver memory stick this is the zapper Restodata is programmed to automatically download all information about all transactions from all cash registers every morning at for example 5 00 am So before manipulation here is the electronic journal the sales report the sales receipt Eil Andra A rae AB TEL 2006 10 05 15 02 41 ELECTRONIC JOURNAL UTSKRIFT 2005 03 11 23 59 2005 03 11 00 00 up com MOMS 25 TOTAL KVITTO Direkt Bord NR 0
9. abatt och 2005 03 11 H 1 23 58 Korrigering av kvitto Kvitto Tid fran Kvitto korrigerat I korrigering artikel Mellan 00 00 och 23 59 POS nr Criteria number Fitter p Kvi G st Konton Password E All d Id anv ndar ID Bill Total Password Mellan O oc Unselect Avbryt 5 SPS YAKINIKU Unselect Double Click on the secret module It is not all that apparent what you need to do here but by double clicking in the box in the lower left entering an ID and a password you will get to the next screen the Electronic Journal which can be adjusted S Elektronisk journal Change password E POS Nb Waiters 2CAFE2 po S SERV 3 2005 0311 J au 20058033131 Ted 4SERV 4 F E S SERV 5 p Bil Total Recipt time fv all VIRREISEE Upper to Entre 00 00 och 23 59 List of tickets paid in cash Replacement tickets ii Articles exclure 0 Date Time Nb ticket POS Wait Type Amount Replaced by Total removed O05 OS3 11 11 13 00000271 X l Direkt 65 00 kr 05 03 11 11 20 o00003 1 Fi 1 Direkt 68 00 kr 05 03 11 11 30 00000471 1 1 Direkt 60 00 kr OS 03 11 11 35 00000571 X 1 Direkt 136 00 kr 05 03 11 11 44 O00006 1 1 1 Direkt 76 00 kr 05 03 11 11 46 O00007 1 1 1 Direkt 136 00 kr 05 03 11 11 48 O10001 2 1 l Bord 45 00 kr 05 03 11 11 49 00000871 1 1 Direkt 68 00 kr 05 03 11 11 54 o00010 1 1 1 Direkt 68 00 kr OS O3 11 11 55 00001171 4 1 Direkt
10. rant POS Nb Waiters D ate SERV 3 S pn STS su 20050331 TSI SEE sr Bill Tota Recipt time jv AN NICHE Upper to o Entre 00 00 och 23 58 List of tickets paid in cash Y Replacement tickets at Articles exclure 0 Date Time Nb ticket POS Wait Type Amount Replaced by Total removed OS 03 11 1 a 0 00 1 l Direkt 1 1 Direkt a 1 Direkt 05 03 11 11 44 O000de 1 1 1 Direkt OS O03 11 11 46 O00097 1 3 1 Direkt OS 03 11 11 48 Ol100pi1 2 a 1 Bora OS 03 11 11 49 oo00bs 1i al 1 Direkt Os OS 11 11 54 000Q10 1 1 1 Direkt Os OS 11 11 55 OO0g11 1 l Direkt 05 03 11 11 55 00012 1 1 1 Direkt OS 03 11 11 55 oo0bis 1i a 1 Direkt 05 03 11 11 56 oogo14 1 1 1 Direkt OS 03 11 11 56 O0g015 1 1 1 Direkt 05 03 11 11 57 O09016 1 as 1 Direkt OS 03 11 11 58 Ooo0po1i7 1 1 1 Direkt OS 03 11 11 59 00001871 1 1 Direkt 05 03 11 12 04 Odgo019 1 1 1 Direkt Manual selecting of repl cement tickets Total Sales Amount to remove Threshold amount Total P Total 20 00 k Total Gross Ticket 2 1 has been changed from 65 00 to 45 00 with a reduction of 20 00 on this ticket There is a running total kept in case you want to remove more Nr Nann Ant SUM ir eom B i 65 00 l KONTANT Original 1 65 00 MOMS 254 i 13 00 TOTAL KVITTO Direkt POS number l Bord NR O GAST ANT 1 Nyk mr il 200S 03 11 11 13 EKwvitto NR OO000027 1 Servit NR 1 Nr Nann SUM 334 FLASK L SOCL 45 0
11. ty certification regimes PE Extension of SSUTA Thanks Richard T Ainsworth Director Government Affairs International at ADPTaxware Richard Ainsworth adp com Adjunct Professor Boston University School of Law Graduate Tax Program Vatprof bu edu
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