Zapper Fraud Case Results in Mandatory Real-Time Monitoring

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By Michael J. Bologna and Paul Shukovsky

The most noteworthy feature of Washington state’s recent criminal prosecution of a restaurant using zapper technology was a first-in-the-nation settlement requiring continuous monitoring by the state for five years.

Washington Attorney General Bob Ferguson (D) made headlines last month for scoring a plea agreement with Yu-Ling Wong, owner of the Facing East Restaurant in Bellevue, Wash. Wong pleaded guilty to first-degree theft and unlawful use of a zapper, or sales suppression software. But Wong avoided a prison sentence under a landmark agreement that permits Washington’s Department of Revenue to continuously monitor Facing East Restaurant’s electronic cash registers, or point of sale systems (POS) ( Washington v. Wong , Wash. Super. Ct., No. 16-1-00179-0, guilty plea 8/30/17 ).

Richard Ainsworth, a professor of tax law at the Boston University School of Law and one of Wong’s attorneys, said no state has previously required continuous monitoring to resolve charges of tax fraud involving sales suppress software. And while POS monitoring by revenue agencies is common in some parts of Europe and Canada, it’s virtually nonexistent in the U.S.

“Every piece of information that Wong has, the department already has a right to it. Now the department of revenue has the right to it immediately,” Ainsworth said. “We’re not really changing anything but the time and the accuracy.”

One-of-a-Kind Statute

Michael Chertude, computer assisted audit program manager for Washington’s revenue department, said monitoring is required under his state’s one-of-a-kind statute criminalizing the use, possession and sale of tax zapping software and devices. While 27 states have such anti-zapper statutes, only Washington’s 2013 law requires five years of monitoring by the department as a penalty (see related story, this issue).

“That was really important because you can find someone, you can convict them, and they can just go back to what they were doing,” Chertude told Bloomberg BNA. “But if you have a recording module—that gives you a sense of security that if someone wants to stay in business, they have to report correctly.”

Ferguson said the Wong plea deal would serve as a “model” in future enforcement actions.

Under Wong’s monitoring agreement, all of Facing East Restaurant’s POS systems must be equipped with eTaxMan software developed by Allagma Technologies Inc., a Montreal, Quebec, Canada-based information technology company.

No Tampering, No Hacking

Steve Adessky, Allagma’s director of government affairs, told Bloomberg BNA the proprietary eTaxMan technology generates in real time a separate encrypted database showing all transactions and cash flows moving through POS devices. The encrypted database is then stored in a cloud-based storage system or a government server for monitoring and evaluation. Internal mechanisms prevent tampering and hacking as a prophylactic against potential tax zapping.

Adessky said eTaxMan was initially developed to support restaurants in Quebec, which are subject to a 2011 rule requiring the use of sales-recording modules, or “black boxes,” which provide sales transaction data to provincial revenue authorities. With security gaps emerging in the black box systems, eTaxMan was developed as a tamper-proof solution. Allagma hopes to distribute eTaxMan to restaurants subject to monitoring in Quebec. Adessky noted the company is discussing the product with provincial revenue officials.

Vartkes Melkonian, president of Allagma, told Bloomberg BNA Washington’s use of eTaxMan signals a major step by U.S. law enforcement, which has little previous experience with real-time monitoring. He said Washington would be using cutting-edge technology to curtail a challenging tax fraud that infects a large portion of the retail industry.

“Tax fraud in the underground economy is a major global problem that is siphoning billions of dollars from governments around the world, reducing their ability to deliver cost-effective services to citizens,” Melkonian said in a news release.

To contact the reporters on this story: Michael J. Bologna in Chicago at mbologna@bna.com and Paul Shukovsky in Seattle at PShukovsky@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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