Electronic Tax Fraud - Are There 'Sales Zappers' in Japan?

Abstract

Although there is no public acknowledgement - in the press, in a court case, though any announcement by the Japanese National Tax Administration, or in any academic studies or papers - that Zappers and Phantom-ware are a fraud problem in Japan, a number of factors suggest that Japan may be very fertile ground for technology-assisted cash skimming fraud. Those factors include: (1) a high concentration of small to medium sized businesses; (2) the fact that the retail economy is highly cash-based; and (3) the high level of technology acceptance in the Japanese retail sector - electronic cash registers (ECRs) and point of sale (POS) networks are commonly employed in the retail trade.

It is something of an anomaly that this kind of fraud appears to be a very serious and well documented in wide range of developed countries (Canada, the Netherlands, Germany, Brazil, Australia and Sweden) but it does not appear to be visible in the two largest developed economies Japan and the United States. The US has two cases; Japan has reported none.

Although it may be possible that Zappers and Phantom-ware are not in use in the US and Japan, it seems more likely that they are being used (perhaps widely) but that insufficient (or technologically limited) audit resources are committed to computer fraud detection in the small and medium sized business sector. Detecting Zapper and Phantom-ware fraud requires auditors to break down and analyze the programming of modern ECRs and POS systems.

There are three major sections to this paper. The first section outlines the historical development of Zappers and Phantom-ware. The second measures the significance of this fraud. Two measures are used direct and indirect. The direct uses the few (empirical) studies that governments have made public on this problem. The indirect measure considers the case law which shows that large amounts of cash have been diverted by these programs, and that once established in a marketplace large numbers of businesses follow one another in adopting this technology. The final section considers government responses.

The paper concludes, that if the Japanese National Tax Administration perceives Phantom-ware and Zappers to be a serious threat to revenue, and if Japan would like to consider a rules-based (fiscal memory) solution as opposed to a principles-based (comprehensive traditional audits supplemented with enhanced training in technology) solution, then the Greek, Quebec and German approaches to this problem need to be looked at carefully. This is an approach that fights technology with technology.

Keywords: zapper, phantom-ware, skimming, tax fraud, ECR, POS system, Japanese National Tax Administration

JEL Classification: H20, H26, H71, K34, K42, O23, O33