The Production Fraud Problem

minsk_gear_factory_by_deaddietrich-d58sesqNow that the buzz surrounding my video I would like to get back to dissecting the problems of Codentify. After meeting the industry insider, I also have a far deeper understanding of the system.

To remind everyone in my last post I discussed how easy it is for factory employees, especially in IT management positions to obtain a large batch of genuine Codentify codes. This is made possible by Codentify system’s design that does not demand any confirmation of the produced volume reported back by the local manufacturers.

Today I’m going to address this fundamental issue from another point of view: How could the government be certain the volume reported by the manufacturers is correct? How will it be able to identify tax avoiding factories? To make a long story short, with Codentify replacing the tax-stamps system – It simply can’t.

Each week, the factory reports back to the governmental central server the amount of produced packs via an automatic SQL query from Codentify’s software installed on the code generator. With a little help from a computer programmer, this query can send practically any number. So let’s say a factory reports 90% of its REAL produced volume – it just scored 10% tax-free. Easy money. In fact, it is even easier than that: as I mentioned in the previous post, the electronic key sent by central server to the local manufacturer, allows it to print a large batch of, let’s say 5 million packs. But every time a new key arrives, there is still an excess of codes left on the code generator, simply needed to be printed elsewhere. So in fact, this 10% discount I was talking about earlier, might happen even without “fixing” the reported production numbers.

But why the small thinking? If a factory has found a way to over-produce packs in an undeclared production line, it might as well just duplicate the signal going from a code generator to the production line printer onto another ILLEGAL production line. This case is probably a “perfect crime”: Each pack, with its genuine Codentify code is produced twice. Statistically speaking, there is almost no way a code would be checked more than once to raise any flags. But even if a miracle happens and the same code is checked twice, consumer reports on that matter would be totally random with no pattern to trace or investigate.

Actually, I’ve been describing in detail all of these complicated scenarios when the point is quite simple, almost a trivial one – you shouldn’t let a corporation, ANY COPRORATION, self-regulate its taxes. Definitely not a corporation who’s tax-regulation policy is in the middle of constant debate.

Every year, more states decide to raise taxes for industries whose products are considered harmful for public health (such as tobacco and alcohol). Moreover, more and more states earmark the taxes they collect from these industries to fund anti-smoking, anti-drinking, and anti-drugs education programs and rehab center. In all of these cases, the industry tries to fight back, through massive lobbying and campaigning against these reforms.

Hence, with Codentify replacing tax-stamps, the industry is pretending to help solve the problem of illicit trade (and I’ve already explained why their solution is far from being sufficient), in the meanwhile gaining ammunition against governmental reforms by practically taking charge of their own tax collection. I guess when you have the tobacco industry’s resources – even if the government raises your taxes, you can still make sure it will not have the necessary means to enforce any of these decisions.

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