OTTAWA–A two-year probe of the restaurant industry in Canada has uncovered at least $40 million in "phantom" cash sales so far, says the Canada Revenue Agency.
The amount of hidden cash income – with no taxes paid – is likely to be much higher once the pilot project concludes in March, officials say. Agency auditors are swooping in on restaurants across the country to determine whether their electronic cash registers contain illegal software that selectively deletes sales from official accounting records.
So-called zappers and phantom-ware have been around since at least the mid-1990s, but few were prosecuted.
The agency launched a two-year pilot project in 2008 to improve its investigations into so-called "electronic suppression of sales" by sending teams to selected establishments to ferret out hidden software in cash-register systems.
Before the project began, the agency had identified 11 such cases. It since has found others, although a spokeswoman would not provide details. The new cases have been referred to enforcement officers.
"Preliminary work indicates that (practice) is prevalent across Canada," Caitlin Workman said by email. "These are ongoing investigations, and the CRA has identified additional businesses using electronic sales suppression."
The agency's new enforcement phase will start this spring, she said.
Workman declined to indicate how agency auditors determine whether cash sales have been hidden or deleted on computer systems, saying it could jeopardize investigations.
The Quebec government, Canada's leader in hunting down cash-register fraud, estimates cheats in that province cost its treasury $425 million in 2007-2008. It passed legislation prohibiting the design, manufacture, installation and use of zapper-type programs.
Federally, it is a criminal offence to alter accounting books and records to dodge taxes, with penalties of up to five years in prison and fines up to twice the evaded sums. The fraud works on cash sales only; credit and debit cards create separate readily traceable audit trails.
Phantom-ware is factory-installed software within electronic cash registers that can selectively delete sales records, leaving no audit trail. Not disclosed in the user manual, it is often passed "verbally" to the business owner. Zappers are temporary installations, such as a memory stick that can be removed to hide the fraud.
Workman said no businesses have come forward so far to confess to fraud, under the agency's Voluntary Disclosures Program, which can allow cheats to avoid prosecution.
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