Software known as a "zapper" or phantomware allows businesses to erase or modify sales transaction records in electronic cash registers, which often run on commonly used operating systems like Microsoft Windows.
Zappers are usually housed on a USB key that can be plugged into the register while phantomware tends to be installed directly on sales terminal software.
Small enterprises, particularly restaurants, in Canada and many other countries have been known to use both types of technology to help skim cash from the register, robbing the government of tax revenue by making it appear they sold less than was actually the case.
The federal government is trying to crack down on the use of such software, saying that it "undermines the competitiveness of businesses that abide by the rules" and "offers an unfair advantage to those who fail to comply with Canada's tax laws."
New federal rules that came into force this January mean businesses or individuals caught using, developing or selling zappers can face a fine of between $5,000 and $1 million. A criminal conviction could result in a prison sentence of up to five years.
Electronic sales suppression has been a growing problem for more than a decade, according to a 2013 report by the Organization for Economic Co-operation and Development (OECD). Investigations are underway in a number of countries to determine whether sales-suppression software has become sophisticated enough to manipulate credit card and debit transactions as well as cash sales, the OECD says.
But it's hard to say just how prevalent the problem is or how much it's costing governments.
"Countries find it difficult to put a precise figure on what the risk is, because potentially, it is a very, very significant number," said Mark Johnson, a policy adviser with the OECD's centre for tax policy. "Every country the OECD knows of, where governments have thought, 'OK, we're going to look at whether or not this risk is present,' have ultimately found out that it is."
One of the largest legal cases in the United States involving electronic sales suppression centred on Talal Chahine, a restaurateur in Dearborn, Mich. In the mid-2000s, the U.S. Department of Justice accused Chahine of skimming more than $20 million US from his restaurant business using sales-suppression software. The money was allegedly transferred via cashier’s cheques to Lebanon, where Chahine is believed to still be on the lam.
Legal cases have cropped up north of the border as well. One of the earliest court cases took place in Quebec in 2000, when a judge granted an absolute discharge to Stephane Mercier, who had admitted to devising zapper software in the mid-1990s.
Mercier testified that he was employed at a restaurant at the time and that his bosses had asked him if it would be possible to create such a program. He said it took him less than two days to devise one and that he was paid $700 and given a dozen free meals for his trouble.
One of the most recent Canadian cases came to a close last year, when two restaurants pleaded guilty in a Manitoba court to hiding more than $150,000 in sales by using zappers.
Search for solutions
Governments have tried a range of approaches in recent years to get a handle on the problem. In Portugal, software is now installed on sales terminals to encrypt data on transactions that helps to verify their authenticity. In Sweden, the government has passed strict rules governing which functions a sales terminal must have and which functions are forbidden.
In Quebec, the government made it mandatory in 2011 for most restaurants to outfit cash registers with so-called sales-recording modules, or "black boxes," which record data on sales transactions that businesses are then required to relay regularly to the provincial tax agency. The Quebec government says the black boxes helped generate $160 million in additional tax revenue in the first year.
Businesses have to pay for the devices, but the province has offered subsidies to help them cover the cost.
The Canadian Restaurant and Foodservices Association has criticized Quebec's approach, saying that it creates "ongoing costs and red tape for the province's restaurant owners, including the vast majority who are already complying with the law."
However, the province says the project has been so successful that it's being expanded. By 2015, Quebec bars will be required to install the devices, which the province says will help generate tens of millions of dollars more in tax revenue each year.Suggest a correction