The perfect tax stamp

Current security labels cause governments to lose tax revenue, writes Avi Chaudhuri of Systech.

Introduction

The taxation of human vices represents a substantial source of revenue to many governments and therefore the excise tax on alcohol and tobacco is highly coveted, monitored, and protected. The worrying growth of counterfeit products in these sectors represents a major source of revenue loss because criminals do not pay tax on their fake products. Another problem faced by governments is the thriving trade in black market diversion from lower to higher taxed markets.

The ability to succeed in such criminal activity relies upon one simple objective — to replicate genuine tax stamps to near perfection so that bogus or diverted products remain undetected by excise inspectors and even consumers. Just as the science and artistry behind genuine tax stamps continue to evolve, so has the power of counterfeit traders to source and apply fake ones that are astonishing in their ability to fool the market until they are detected either by chance or through a fervid inspection program.

Here, I argue that the continued success of the criminal sector is neither surprising nor unexpected because their craft relies on exploiting a fundamental psychological property of all humans, whether they are trained inspectors or lay consumers. I will describe this phenomenon and then propose a transformational solution that is based on two critical reforms — mitigating the psychosocial factors that allow criminals to succeed and applying the right stamp design to assure total success of any program that should choose to adopt it.

The fundamental problem with current security labels

Most modern tax stamps incorporate many security features, often referred to as layers. The current thinking is that no single security feature can provide full protection against copying and therefore having multiple such elements will provide maximum benefit. Unfortunately, this is a grossly misguided view.

The first problem — passive solutions are easy to copy

A fundamental problem with the multi-layer approach is that most of the features belong to the first generation of security technologies — the so-called passive solutions. These offerings require mere visual inspection of the label to ensure the feature is present. A number of security products belong to this category and broadly include different types of holograms, watermarks, color-shifting or fluorescent inks, intaglio printing, microtext, etc., as exemplified by the figure.

It is an unfortunate fact that these features are now easy to copy and place on fake stamps. Holograms in particular have become notorious due to the ease with which they can be successfully replicated by counterfeiters worldwide. And even if the fake versions are not exact copies of the original, their sizeable presence testifies to a large degree of success.

The second problem — human factors and the familiarity effect

It is however the second problem that represents the real dilemma, and one to which little attention has been paid. A fundamental principle in the field of sensory psychology is that repeated exposure to a stimulus creates a positive relational connection, and thereafter we take for granted that we already know it well. This so-called familiarity effect is what makes us easily recognize something we have encountered in the past and therefore need to spend less time to process that signal.

So, what does this have to do with counterfeiting of tax stamps? Everything. The presence of passive stimuli such as holograms, watermarks, and similar things on a tax stamp quickly become known and recognizable features to inspectors and consumers. The familiarity effect then takes over so that all future exposures to such elements by virtue of prior knowledge are now more easily processed and therefore quickly recognized.

It is this innate bias that allows counterfeiters to so easily dupe us. By creating near-perfect replicas, our familiarity with the various passive features makes it more likely to judge them as original. Once that familiarity has become embedded, we do not bother to take time out to scrutinize something that we are already acquainted with. And while professional inspectors are expected to be diligent, it cannot be argued that they are fully immune to human mental properties that have evolved over eons

Creating the perfect tax stamp

The design of an invincible tax stamp is rooted in the premise that all passive security features are to be considered redundant because they provide limited security value, require forensic investigation, and add unnecessary cost to the tax stamp program. This fact is starting to already become recognized by various excise agencies.

The second assertion follows from the first — a secure a tax stamp program must deploy an interactive authentication regime. The principle here is simple. The inspector must interact with the tax stamp through a technology that will provide an actual binary response — YES it is genuine or NO it is counterfeit. There cannot be a middle ground here, and there cannot be a qualitative best guess or estimation on the outcome.

The foregoing two assertions provide a pathway to creating a durable and robust tax stamp, one that eliminates all passive features, and which must provide a simple binary outcome. The revised design requires a mere three functional layers, each with its own dedicated purpose.

Layer 1 — Tamper-evidence

A critical property of the tax stamp is that it must not be permissible to simply peel off a genuine one and then have it applied to a counterfeit product. Any effort to remove a tax stamp will either make it crumble into pieces, due to the presence of security cuts throughout the label, or alternatively leave a discernible mark upon the product when peeled.

A further criterion in the stamp design is that of simplicity. It is entirely unnecessary to incorporate any more visual elements than absolutely necessary, and in fact the removal of all passive security features will itself produce an uncluttered tax stamp. It will however be necessary to include the excise program logo for attribution, so as long as it is not itself used as a security feature in any way.

Layer 2 — Traceability

Recognition of the failure of passive solutions has recently led to the emergence of product traceability as a new deployable feature to fortify excise protection. The idea is to place a unique number on the label and then use that to track the product. The second functional layer of the stamp is therefore a serialized barcode with either QR or DataMatrix symbology, which then creates the foundation for a Track & Trace system to be implemented at program launch or some later phase.

An issue of concern is that some solution providers use this feature to authenticate the serial number itself as a means of validating the tax stamp. The logic is simple — if the serial number is successfully authenticated, then the product (tax stamp) must also be genuine. This is unfortunate because serial numbers are highly flawed for use as an authentication tool due to the ease with which they can be copied or hijacked. Serialized barcodes should never be used to validate the authenticity of a tax stamp.

Layer 3 — Authentication

Let's begin with a fundamental question — what makes for a perfect tax stamp? Simply put, any security label must provide perfect (100%) performance. To be precise, each and every test of a genuine stamp must return a positive (verified) response and similarly each and every test of a counterfeit stamp must return a negative (suspect) response – no exceptions.

There are two other key requirements — unlimited authentications on any given stamp and empowerment of consumers. Various excise authorities are seeking the latter as either an immediate or future requirement to provide greater marketplace confidence. The inclusion of consumers along with multiple stakeholders in the supply chain necessitates a solution that has no limits on how many authentications are permitted.

It is absolutely mandatory that the technology used in the third layer be hidden and must provide a binary outcome as to whether the stamp is genuine or not. The implementation of forced authentication is therefore an obligatory requirement if a program is to be fully protected from attack. The tax stamp must actually be interrogated via the third layer, and not just looked at by an inspector.

A disruptive new approach

Counterfeiters will make every effort to copy any new stamp design, including the technology used in the third layer. For this reason, the tax stamp must be fully immune to cloning — i.e., even if the label is copied, the authentication layer must be invincible and never deliver a false result. A strong argument has been made in this paper against the use of any overt features as part of the third layer, and in fact to discard them altogether to avoid the familiarity effect. Implicit in this argument is that the third layer must be covert.

A number of new technologies have been introduced as part of the next generation of security solutions that are truly robust offerings and provide all of the needed requirements — unlimited authentication, consumer empowerment, covert placement, and most importantly, non-clonability. One such technology is fingerprinting — the idea that a component of the tax stamp contains a unique noise pattern that is not discernible to the human visual system. No two stamps can have the same fingerprint. It is this unseen noise that is authenticated and cannot be successfully replicated by a counterfeiter.

An ideal outcome would be one where the serialized barcode in the tax stamp itself provides the platform for the covert noise. The figure shows an example configuration that incorporates all three layers and includes fixed artwork representing the excise department's logo. This new design eliminates all passive components to make for a clean and uncluttered appearance. Most importantly, it would contain an authentication layer that is verifiably non-clonable to create an entirely new construct that is elegantly simple — the perfect security label to stamp out counterfeiting and black-market diversion.

The author serves as Chief Scientist at Systech.

To learn more about anti-counterfeiting technologies—how they have evolved as well as where and why they failed—download the Evolution of Brand Protection white paper.

©Systech 2019