The Underground Economy - Part 2 - A Growing Problem


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.

Growing Acceptance

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:

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.



About Author

Carl Hammersburg

Manager, Government and Healthcare Risk and Fraud

Carl Hammersburg manages the SAS Government and Healthcare Risk and Fraud team, and has been with SAS since 2012. Prior to that, he spent 20 years in anti-fraud activities for Washington State’s exclusive workers’ comp insurer, the Department of Labor and Industries. In 2004, Carl formed that agency’s comprehensive fraud program, covering tax and premium audit, claim investigation, provider fraud and collections. Data sharing and investigative partnerships with other State and Federal agencies, as well as driving public availability of information and awareness served as cornerstones to the anti-fraud activities of the program. During his stewardship, audit and investigative activities doubled and outcomes tripled, based on a focus on data mining and predictive analytics that improved efficiency and case selection. Program success under Carl’s leadership resulted in awards from two successive Governors of Washington State.


  1. Agreed on the importance of compliance, Carl -- certainly there's an increasing attitude of "who cares if I cheat? The big guys do it, and with the huge Federal deficit, taxes don't have to equal spending anyway."

    But for the love of God, something had to be done to break the cab companies' stranglehold on that market -- when it costs six figures for a taxi medallion, and a 5-minute ride home from the train station is $10, that's ridiculous! Deval Patrick (outgoing MA governor) may have the right idea -- having Uber/Lyft regulated, but by the Department of Public Utilities, not by the cab regulators, who are tightly controlled by the cab companies to protect their profits. If ever an industry cried out for disruption, it's the taxicab industry!

    • Carl Hammersburg
      Carl Hammersburg on


      Thanks for taking the time to read and comment. Jurisdictions where the cost of a taxi medallion have spiraled out of control are definitely a huge issue, and one that should have been addressed well before Uber/Lyft/SideCar showed up - clearly a supply/demand issue that should have grown the size of the pool of vehicles. Regulators need to be at arms' length from those they regulate, so your points are very well taken there, as otherwise they can manipulate supply and demand.

      Coming from a compliance viewpoint, it's simply about following the laws. The vast majority of the drivers aren't actually licensed as a business, which they are when they provide a product or service for sale. Beyond that, they typically don't pay any taxes on the income. Third, they don't carry commercial insurance, and true accidents/injuries aren't covered. Uber is well aware of all these problems, and the multiple forms of fraud and tax cheating involved, but pushing it all to arms length.

      Disruption is good. But everyone should be on a level playing field - either deregulate the taxi industry and apply base laws to everyone that wants to provide transport services, or Uber and government agencies need to work together in a common way across multiple jurisdictions. FedEx and others have been clashing over issues like this for years, with many cases litigated, and most lost by the industry players.

      Again, I appreciate that you took the time to both read and add to the conversation John.



    • Carl Hammersburg
      Carl Hammersburg on


      Thanks for reading and weighing in. Some of the other members of my team have been working with the regulators and insurance industry on fraud issues and data-sharing across insurers in South Africa. I know there are a lot of growing concerns, and saw some of the issues when I was recently in Johannesburg. Interesting to hear that the specific use of zappers are climbing there as well.

      Cheers and Happy New Year,


  2. Pingback: Not in My Backyard! North Carolina is Tackling Government Fraud

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