In Part 1 of this blog series, I touched on the problems created by the underground economy, and framed the size and scope. But important questions remain about the types of businesses that are part of the underground economy, how they do it, and what the driving forces behind this wave of fraud are.
Studies from various sources show that some amount of tax evasion and fraud to be growing in acceptance amongst the general population. At an example, 1 in 5 surveyed in the U.S. now find some form of insurance fraud acceptable. With that trend, it becomes much easier for a business owner to rationalize their actions in the underground economy as part of “the new norm” and completely acceptable, even if not lawful.
Where’s the Problem
While the exact nature of the underground economy ebbs and flows, and will vary from location to location, there are a number of industries that have already shown to be rather susceptible. They tend to fall into a number of categories:
- Service Industries – Janitorial/housekeeping, restaurants, car washes
- Construction – Commercial and residential, with higher rates in areas like drywall
- Transportation – Package delivery, trucking, human transport, courier services
- Temporary Help and Employee Leasing
- Adult Entertainment Clubs
Other industries vary by geography and presence of natural resources. Agriculture is extremely prone to under-reporting and misclassification, and logging and related work is a significant issue in some provinces in Canada and states in the U.S.
Technology and Mobile Economy
There are a wide range of forces driving the move towards the twin issues of the underground economy and employee misclassification. Amongst those are the growth of the mobile economy and technology. As transactions with businesses increasingly shift from actual physical locations and land line phones to mobile, Internet and e-mail, there is less ability for transactions to be tracked and it is more difficult to identify the true size and nature of a business and its employment.
Methods such as using “zappers”, which erase a portion of completed transactions from sales logs, allow them to keep false books and records that more easily appear legitimate in an audit.
While decades ago, many workers could expect to stay with the same company for most or all of their lives, the concept of “employment”, especially for Millennials has increasingly become mobile and in rapid flux. It makes it very easy to designate an employee illegally as an “independent contractor", exempt from many tax payments and coverage for unemployment and workers’ comp.
Disruptive and Informal Economy
Craigslist has long been a great facilitator of the underground economy. While eBay makes some efforts to police things, the line between an individual selling off some of their used clothes and a full business is a tough one for them to address. The uproar is growing louder in many countries around websites and apps like Uber, Airbnb, VRBO and many others, as they represent easy person-to-person and business-to-business transactions that typically avoid much government scrutiny. At times, the hammer is falling hard, driving them out of business in some localities or countries altogether.
In Part 3 of this series, I will discuss some of the best ways to address the growing underground economy. In the meantime, please add your comments, or follow me and join the conversation on Twitter @CarlHammersburg.