Digital Transformation Conversations

Digital Transformation Conversations

One step ahead of the digital fraudsters: how the tax and welfare authorities can fight a seventy-billion dollar digital fraud battle

Digital Talent GapDo you know that feeling when you receive an email that immediately makes you suspicious or wary? One of those emails that asks you to log-in to your bank account via a website that is not familiar to you. Or the officially-worded request that politely (but firmly!) asks you to submit your personal data to an online form. While many of us are becoming savvy to this type of activity, digital fraud is a massive international problem, particularly for the tax and welfare authorities. For instance, identity theft was the number one US tax scam in 2013 - a result of the growth in e-filing of tax returns. And identity theft is not the only problem. Let me give you an example of a new type of digital tax fraud:  zapping. Software programs called ‘zappers’ automatically and remotely skim cash from electronic cash registers or point of sales systems and are used to under-report income and evade taxes. Businesses such as restaurants, convenience stores and gas stations that record significant cash sales are more susceptible to zappers. Recently, Canada’s Globe and Mail newspaper, in a story called “Taxman finds rampant restaurant fraud”, reported estimates that a third of Canada’s restaurants may be evading taxes by using programs such as zappers to hide their sales[1].

We built a forecasting model to check the growth rates and impact of these frauds and the results should sound a warning bell for tax authorities globally. We believe that, if left unchecked, digital fraud will double in size to around $35 billion each in the US and the EU by 2020[2]. Potential revenue losses of this magnitude are a significant concern for all countries, particularly at a time when many are struggling to rein in their fiscal deficit. The positive news is that digital technology is not only a weapon for the would-be fraudster – it can also be employed by governments to fight the anti-fraud fight. Digital technologies are already securing significant victories in the tax authorities’ campaign against traditional fraud. For instance, the VAT gap in the UK fell from 15.7% in 2002 to 9.5% in 2012. Similarly, the percentage of fraudulent income support over-payments decreased from 9.2% during 1997-98 to 4.4% during 2011-12. While these are notable successes, the problem is that the ever-increasing possibilities of digital technologies are continually creating new types of fraud – a sort of ever-expanding universe of possibilities. This is why we have forecasted digital fraud to rise, despite authorities turning their digital weapons on the fraudsters.

To a certain extent, the answer to digital fraud’s ever-growing possibilities is a familiar one: stay one step ahead of the fraudsters! New digital fraud tactics require innovative and multi-pronged solutions from tax and welfare authorities. The first step in combating new types of frauds is to identify them, and assess their spread and financial impact. It is then important to evaluate how effective existing anti-fraud systems are in identifying and preventing digital fraud. This can be done through regular audits, which will reveal loopholes and missing capabilities.

As a further step, authorities need to clearly define their vision and target operating model for combating digital fraud. For instance, in the US, the IRS defined a vision of implementing a “Real Time Tax System” that would allow matching of data on tax returns with data in IRS’s records at the time the tax return is submitted for filing[3].  Developing an integrated solution that encompasses policy, processes, people and technology is the only way that we can fight this digital fraud battle effectively.

As businesses use the ever-growing possibilities of digital technologies to innovate and transform, it is ironic that there is – inevitably – a murkier flipside to the digital revolution. As digital technologies keep growing in complexity and capability, fraudsters will continue to get bolder. They will try new and increasingly sophisticated ways of circumventing established protocols. It’s a straight battle between fraudsters and the authorities as to who will have the deeper and more advanced understanding of emerging digital technologies. For more on this critical area, read our paper: "Digital – Blue Skies or a Perfect Storm for the Taxman?"







[1] The Globe and Mail, “Taxman finds rampant restaurant fraud”, September 2012
[2] We evaluated a wide range of parameters in order to identify the quantum of digital fraud that can hit the US and the EU by 2020. Specifically, we looked at identity theft, zapping, third-party payroll processing and VAT carousel
[3] US House of Representatives, Statement of National Taxpayer Advocate on Identity Theft Related Tax Fraud before the Committee on Oversight and Government Reform, August 2013
blog/digital-transformation-conversations/2014/02/one-step-ahead-of-the-digital-fraudsters-how-the-tax-and-welfare-authorities-can-fight-a-seventy-billion-dollar-digital-fraud-battle

About the author

Subrahmanyam KVJ
Subrahmanyam KVJ
Subrahmanyam KVJ is Manager of Capgemini Consulting’s Digital Transformation Research Institute.

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