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Pack for meeting with James Arbuthnot and other MPs Meeting scheduled for 18" June 2012, 6pm, Portcullis House.
This pack contains:
1. Agenda 2
2. Key Messages 3
3. Potential Questions 5
4, Network Background 8
5. Horizon 9
6. Post Office Recruitment and Training Process for Sub Postmasters 1
7. Example Case 1 13
8. Example Case 2 17
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1. Agenda
Attendees: James Arbuthnot Member of Parliament for North East Hampshire
MPs Final list to be confirmed
Alice Perkins Chairman, Post Office Ltd
Paula Vennells Chief Executive, Post Office Ltd
Alwen Lyons Company Secretary, Post Office Ltd
Angela Van-Den- Head of Network Services, Post Office Ltd
Bogerd
Agenda Item Lead by: Duration (minutes)
1 I Overall Introduction James Arbuthnot 10
2__I Post Office Introduction Alice Perkins 10
3__I Background Paula Vennells 10
4 I Two anonymous case examples Angela Van-Den-Bogerd 10
5 I Discussion and Recommendations James Arbuthnot / Alice 15
Perkins
6 I Conclusion and next steps Alice Perkins 5
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2. Key Messages
Agenda Item Who Key Messages
1 I Overall Introduction James Arbuthnot 10 0 Introduce those round the table
oO Purpose of the meeting
2 I Post Office Introduction Alice Perkins 10 o Appreciate taking the time to meet us today
o We take this issue very seriously. This impacts the lives of
individuals, public money is at stake, and so is our
reputation
o Weare open to feedback and we will provide you the
information we have available, we want to work with you to
address all your concerns
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Background
Paula Vennells
10
Confirm above
Sub Postmasters are key to our business and it is important
to me that we support them in every way we can
To support our branches we have a helpdesk that provides
telephone support 7 days a week, field support teams, and
class room training for new agents. We are constantly
looking to improve, so any feedback you may have from
your constituents is welcome
The Horizon is the system used in branches to manage the
branch accounting. If a sub postmaster has any questions or
concerns about their transactions in Horizon the help desk
is there to support them
Occasionally we do get incidents of fraud. This is
unfortunate, but as it is public money at stake it is
important that we protect it
Even in cases of fraud we do try to treat the agent with care
and respect throughout the process
Two anonymous case
examples
Angela Van-Den-
Bogerd
10
Describe high level process when fraud it suspected: Eg,
P&BA phone call, audit, investigation, interview
Case 1 Key points
Case 2 Key points
Discussion and
Recommendations
James
Arbuthnot/ Alice
Perkins
15
oo o0Il0 0
Opportunity for the MPs to express their thoughts.
JA to propose his idea of a “Forensic Audit”
AP to offer a review of the individual cases relevant to each
the MP and get view on the best way of doing this.
Conclusion and next steps
Alice Perkins
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Gain consensus of views
Agree next steps
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3. Potential Questions
Question
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1 I Whyare crown staff and sub-post
masters treated differently if
found committing fraud
Response
Post Office staff are expected to balance in the same way as sub postmasters. If a clerk misbalances
resulting in a loss of more than £30:
©. Three times in a three month period (or less) they receive an informal warning
0. Six times in a six month period (or less) they are interviewed
o Nine times in a nine month period (or less) they are re-interviewed an put on an improvement
plan which could lead to dismissal if no improvement is forthcoming.
Criminal Investigation and Prosecution Process
Post Office applies consistent investigation and prosecution processes across our Sub office and our
Crown estate.
Once any branch comes to our adverse attention we would raise an active investigation and proceed
in a formalised manner. Suspect offenders would be interviewed under the auspices of PACE (Police
and Criminal Evidence Act) and cases passed for advice to lawyers. The lawyers would apply the
“prosecutors’ guidelines” (in reality CPS checks and balances) to the matters in hand and advise
prosecution, or not, accordingly dependant on evidence and not branch type.
In terms of investigation and prosecution it is factually incorrect to state or infer that we treat the
branch office staff differently.
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What is our view of Computer
Weekly
Computer Weekly is well respected within the IT industry and widely read in Government.
Computer Weekly does not have in-house experts; it relies on using expert consultants from the
industry at large.
As we have external and internal experts available we don’t believe Computer Weekly can assist us in
this specific case. Although there is no evidence of problems with Horizon, as an assurance exercise
we are considering a forensic audit of the Post Office Horizon IT system. If we do proceed with this
audit, it is likely that we will use an experienced audit organisation.
We will, however, will be engaging Computer Weekly as part of our IT Transformation
communication plan, and will pick up any Horizon related matters through that forum.
If when suspected of fraud we bar
sub-postmasters from the system,
how can they be expected to
prove their case?
Sub-Postmasters should be balancing their accounts at the end of every day. If there are any
discrepancies they should be investigated by the sub-postmaster with assistance from the help desk
and P&BA. There should be no surprises at the time of an audit.
In cases where an auditor has found evidence of fraud, the previous trial balance (which the sub-
postmaster has approved) will be the baseline record. If there are found to be any discrepancies with
that Trial Balance the sub-post master should have followed the standard process to resolve.
If discrepancies are found during the audit, the sub-postmaster will have the opportunity to explain
any anomalies.
Does the system allow sub-
postmasters to understand why
errors occurred, eg can they
interrogate past transactions?
Yes, they can go back and look at past transactions
The help desk and P&BA can also provide assistance
Sub-postmaster should do a cash balance every day so, so should not be necessary for them to
integrate vast quantities of transactions.
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Why are we considering Deloittes I KPMG are excluded as they are Fujitsus’ auditor
to perform the audit? E&Y are excluded as they Post Office’s auditor
PWC are not recommended because not on Post Office’s supplier short list, although this could be
bypassed if required.
Deloittes are on Post Office’s supplier short list and have proven experience in this area
The audit could cost in the region I The audit envisioned is a thorough end-to-end review of processes, systems and data which not only
of £250-£500k, why so expensive? I could reveal potential improvements but could be used as an assurance for court future cases. The
cost is a result and thoroughness of the audit and the expertise required. An alternative, reduced
scope audit could also be considered.
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4. Network Background
The Post Office has a unique and valued place at the heart of communities across the UK.
A third of the UK population and half of all small businesses visit a Post Office each week which helps to make it one of the nation’s most valued
and treasured organisations.
It is seen as a vital public service but it faces a challenging commercial environment.
Over the last ten years footfall has dropped from 28 million customers a week to just under 20 million. This is largely driven by the reduction in
government services and a shrinking consumer mails market in an increasingly digital world.
Following the enactment of the reforms contained within the Postal Services Act 2011, Post Office Ltd is now (as of 1 April 2012) an
independent company. It has its own Chairman and full Board including non-executive directors. The Postal Services Act has made clear that
the company will remain in the public sector — with the possibility of mutualisation at a later date.
The company provides services to just under 20 million customers (and to half of all small businesses in the UK) per week
We have a network of over 11500 Post Office branches. 373 of these branches are operated directly by Post Office Ltd. All the others are
agency branches operated by independent business people or multiple retailers - typically as part of retail premises. There are over 10,000
agency branches.
The network carries out over 150 million transactions a month.
Post Office Ltd provides full infrastructure support to all branches with a UK-wide cash and stock distribution system, product and marketing
support, a helpdesk who provide telephone support for sub-postmasters, and field support teams who provide on site support.
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5. Horizon
Summary:
o Horizon designed with integrity in mind from day one
o Horizon has undergone external scrutiny
o Each transaction is audited and protected with a digital signature to prevent change or tampering
o Reconciliation processes automatically detects any problems
Background
© The Horizon computer system is used in all Post Office branches to process counter transactions and process all in-branch accounting
processes. Horizon enables sub postmasters to account accurately for each transaction they undertake in their branch.
co The system has been operating for over ten years. In that time around twenty thousand sub postmasters have used it in performing
many millions of successful weekly and monthly financial reconciliations between the cash they have in the office and the transactions
they have handled.
©. The National Federation of Sub Postmasters (NFSP), which represents sub postmasters throughout the country, has expressed its full
confidence in the accuracy and robustness of the Horizon system.
© In 2010 Horizon underwent an upgrade. The upgraded system was tested and has the full support of the NFSP.
External Scrutiny
© Horizon and Post Office Ltd systems environment have always been subject to external scrutiny for both assurance and accreditation
purposes. Ernst & Young carry out an annual financial systems audit; an independent auditor also carries out a yearly audit to maintain
the system’s Payment Card Industry (PCI) accreditation.
oO The system and its Data Centre are ISO 27001 accredited which requires an annual audit from an independent agency. Horizon is also
accredited by HSBC Payment Services and WorldPay (Post Office’s Merchant Acquirers) and must comply with the VocaLink standard for
card payment transactions. In addition to these regular audits, ad hoc independent audits of the system are initiated by Royal Mail
Group and supported by Post Office Ltd.
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Designed for Security and Integrity
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Reco!
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Horizon was originally built to support benefit payments against requirements from Post Office Limited and the Benefits Agency. The
need for security, integrity and a strong audit trail has been emphasised since day one.
Horizon system keeps full audit records of all transactions undertaken by all log ins — so that it is always possible to track back anything
that has occurred within the system — or at an individual sub post office
The system is designed such that all data is sequentially numbered at the point of its creation and is separately stored in a secure
tamper proof facility for 7 years — so that recreation of situations and track back is always feasible
Horizon requires clerks to log on, using their own username and password before any transactions can be carried out.
Horizon captures ‘baskets’ consisting of items sold and payments in or out at the counter. When the clerk settles a basket this is clearly
shown on the counter screen. Software at the counter digitally ‘signs’ each basket.
Each basket is written to the audit trail where it is kept for 7 years. Data in the audit trail is cryptographically protected to ensure that its
integrity can be asserted.
nciliation and Validation
Each basket is checked to balance to zero at the data centre; if it did not (eg because of a bug in the software) it would be rejected. The
signature applied by the counter is checked before the data is written to the database.
The data centre also checks that each basket is the one expected (i.e. the count has gone up by exactly one). If it is not, then, if
appropriate, the clerk is notified of the need to recover.
Transactions are reconciled with all the banks and clients, any discrepancies are investigated and resolved.
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6. Post Office Recruitment and Training Process for Sub Postmasters
Prior to appointment
The key extracts of the contract are covered at the interview stage by the Contracts Advisor. One part of which is:-
Post Office cash & stock
¢ Balancing/branch trading.
All discrepancies to be made good immediately.
Fraud.
Cash for PO use only.
Robbery/burglary,
Error, theft by assistants, cashing personal cheques.
Following Appointment
A copy of the contract is sent to the agent.
An appointment pack is also issued to agents when they take over a branch and is explained by the trainer to the agent whilst on site.
The following is an extract from the document:-
The Subpostmaster is responsible for all losses caused through his own negligence, carelessness or error, and also for losses of all kinds
caused by his Assistants. Deficiencies due to such losses must be made good without delay. Section 19:
Once the offer of appointment is accepted, training dates are then confirmed.
Training
Training processes are under constant review and can be modified to accommodate a variety of circumstances. Training commences within
classroom for larger branches and is delivered in advance of the site transfer, or delivered at the time of the on site transfer in smaller
branches. The Ops Manual is used as reference document during training and all subpostmasters have a copy, although most of the Ops
Manuals are now on-line in ‘Horizon on-line Help’ which is available at every branch.
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Both the classroom and on-site training includes how to complete the office balance and the trainer is on site with the agent for the completion
of the first office balance, which is always a Branch Trading Statement.
Follow up support is provided to assist with balancing or any other training needs. This takes the form of:
e Helpline support at NBSC. If unable to resolve the issue the agent is referred to the POLtd Branch Support team.
e The Branch Support Team is able to provide telephone support to the agent. If this support doesn’t fully resolve any issues (and in the
majority of cases this does) then this is escalated to the Field Support Team.
e Amember (trainer/auditor) of the Field Team will also telephone the branch to assist and if necessary then visit the branch to provide
face to face support.
e Remedial training would be arranged following the face to face support if the Field Support Advisor felt this was necessary.
Is the training adequate?
Customer satisfaction with training is tested through independent research questionnaires collated by an independent research company. The
field team leader receives a copy of each branch feedback form and if any comments cause concern or if any Agent raises an issue regarding
the quality of the training or lack of confidence this is followed up by the team leader. There is currently a 95% satisfaction from a response
rate of 69%.
Initial training
All new entrants to the business receive classroom training the length of which depends on the model of the branch, plus 6 days training on
site. All new Agents also have further follow-up contact to embed training, which includes:-
At one month from appointment a follow up telephone call to check all is okay and they are confident;
At three months from appointment a face to face visit to check all is okay and observe the branch operationally, provide a refresh and
support as necessary;
e Atsix to nine months after appointment a face to face unannounced follow up which is unannounced and includes a procedural and
compliance audit, an audit of cash and stock
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7. Example Case 1
Date Action
24/12/2001 I « Sub Postmaster begins working at the Banch X SPSO.
21/10/2003 I ¢ SUB POSTMASTER appointed as subpostmaster (SPM).
* SPM assisted by Mrs Partridge. Mrs Partridge denies (in her statement dated 31/07/2006) having ever assisted with balancing or completed any
cash declarations.
1/12/2004 I — Cash held increases from £15,000 to £35,000 (See Graph at 7.2)
to 1/4/2006
03/02/2004 I « Unidentified loss of £3,191.00. SUB POSTMASTER requested hardship payments to be set up to clear this loss. (Payment deducted from salary over
a 12 month period)
24/02/2005 I « Unidentified loss of £750.00. SUB POSTMASTER requested hardship payments to be set up to clear this loss.
01/05/2005 Ie Warning letter sent to SUB POSTMASTER for rolling balance not made good (£724)
01/09/2005 I Second warning letter sent to SUB POSTMASTER for rolling balance not made good (£188)
05/10/2005 I PO migrated to branch trading. (Formal balancing every month instead of every week). No onsite visit provided, but would have been provided
with an interactive training CD ROM, a Transition Guide, a Quick Reference Guide, a branch trading calendar and the relevant manuals. The SPM
would also have been invited to attend a number of face-to-face events explaining migration.
. Records indicate that no requests were made for replacement materials or that the CD-ROM be exchanged for a video.
08/02/2006 I — Branch Trading Statement for trading period 10 (13/01/06 to 08/02/2006) completed.
Statement shows a shortage of £6.74 and cash on hand stated as being £35,515.83.
06/03/2006 I Rebecca Portch (Retail Cash Management Support) contacted the branch regarding high levels of cash holdings. Branch paying out approximately
£2,500 on average per week, but declared cash holdings in excess of £20,000.
© SPM requested by Ms Portch to return £25,000 by 08/03/2006.
© SPM alleged to have advised a NFSP representative, Kam Matharu, that there were problems at this branch. The nature of the problems was not
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specified.
07/03/2006 ‘SPM signed off on sick leave.
08/03/2006 Excess cash holding not returned by SPM as per request.
09/03/2006 Audit undertaken. Deficiency (including cash and stock) of £36,644.89 identified by the audit team.
Cash figure on Horizon stated to be £37,360.06. The cash physically verified as being n hand only £1,933.48 (a difference of £35,426.58).
SPM precautionary suspended as a result of shortfall. SPM requested to attend an interview under caution.
15/03/2006 Izzy Hogg, solicitor acting for the SPM, contacts POL and offers to provide a written statement. Ms Hogg informed that an interview under caution
will still need to be conducted.
12/04/2006 Second letter sent to SPM regarding interview.
21/04/2006 Agreed interview will take place on 05/05/2006.
05/05/2006 Interview conducted by POL under caution at offices of the SPM’s solicitors.
POL provided disclosure of documents to be put to the SPM in the course of the interview. Includes cash declarations and branch trading
statements.
SPM provides a pre-prepared written statement. The statement states that the SPM did not receive adequate training and that the operation
manuals provided were out of date. Statement also makes reference to an error for £1,500 which is alleged to have doubled to £3,000 when
attempts were made to correct it. The SPM was invited to confirm when that error is alleged to have occurred, but the SPM declined to comment.
Statement also contains a denial that the SPM has ever stolen monies.
Taped interview commenced at 12:13pm. The prepared statement was read and the SPM then gave “no comment” responses to all the questions
raised by the interviewing officers.
Interview concluded at 13.32pm.
11/10/2006 Decision taken to prosecute for theft.
30/10/2006 Summons issued requiring the SPM to attend before the Aldershot Magistrates Court.
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09/10/2007 Defence offers pleas to false accounting by way of mitigation.
19/11/2007 Hearing before Winchester Crown Court.
SPM pleads guilty to 14 separate counts of false accounting. This is accepted by POL on the basis that the losses are repaid in full by 25/01/2008.
Count of theft to remain on file until payment made in full.
04/02/2008 SPM sentenced to 12 month Community and Supervision Order.
18/02/2008 Cheque for £37,644.89 received from the SPM.
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Cash Declarations
Ean I
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8. Example Case 2
The defendant Sub Postmaster X (D.0.B! “} had been employed as a Post Mistress for over four years. Sub Postmaster X worked at the
Branch Y Post Office, but also operated an outreach Post Office at Branch Z .
An audit was conducted at the Branch Y Post Office on the 29" September 2011 following concerns raised by a former holiday relief worker at
the Branch Y branch in August 2011 over alleged cash shortages.
Mr Constant and Mr Gilding arrived at Branch Y Post Office at 8:30am and introduced themselves to Miss Lisa Porter, the daughter of Sub
Postmaster X who was sitting behind the counter having already logged on to the Horizon system and accepted the Transaction
Acknowledgements.
Mr Constant asked Miss Porter when she expected her mother to arrive, Miss Porter informed the auditors that she would be in later on as she
had gone to the cash and carry. Mr Constant asked Miss Porter if she would allow him access to the secure area, which she did, and also to
inform her mother that the auditors were at the Post Office. Sub Postmaster X allegedly told her daughter to ask the auditors to wait until she
arrived at the branch before they continued, Miss Porter remained quiet until her mother arrived.
Whilst waiting for Sub Postmaster X to arrive, Mr Constant logged onto the Horizon system for the Branch Y branch using the Global User name
and password as Miss Porter did not have Manager Access to the system. Mr Constant then created user ID BCO003 and logged on to the
Horizon system, using that ID to produce audit reports.
Mr Constant also logged on the Outreach Horizon system for the Branch Z, using the user ID BCO001. No other action was taken until Sub
Postmaster X was presents in the branch.
Sub Postmaster X arrived at 09:15am and Mr Constant advised her that they were there to perform an audit.
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Before t he audit commenced Sub Postmaster X advised Mr Constant of a cheque for £9500 and explained that she had removed cash to that
value the previous evening after she had declared her cash onto the Horizon system. The cheque appeared to be with her outstanding daily
documents, when questioned about this, Sub Postmaster X stated that she meant to put the cheque through the system the evening before
but hadn’t done so, and was intending to process it that morning. Sub Postmaster X explained that the cheque was to pay for ‘something
personal’ that had nothing to do with the shop. She explained that she had needed the cash urgently but was unable to get to the bank(s). Sub
Postmaster X explained that she thought she was allowed to use Post Office cash as a cheque had already been put in to cover it. She
expressed that she did not intend to steal the money and that the cheque, if banked would be honoured.
Sub Postmaster X confirmed that this was t he first time that anything like this had happened. However the audit team noted that the date on
the cheque had appeared to have been altered from what appeared to be ‘5’ (May) to a ‘9’ (September). When asked, Sub Postmaster X said
that it was due to a writing error. There were no details recorded on the reverse of the cheque and it had not been date stamped.
Mr Constant confirmed with Sub Postmaster X that he should expect to find the cash at least £9500 short when it was counted, she confirmed
that was correct.
Branch Y Audit findings:
£8546.17 (-) Difference in cash figures
£404.74 (-) Difference in stock figures
£518.24 (+) Difference in postage figures
£17.40 (-) Difference in foreign currency figures
£ 8415.27 Total Shortage
Branch Z Outreach Branch Audit findings:
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£3517.96 (-) Difference in cash figures
£46.71 (-) Difference in stock figures
£933.17 (+) Difference in postage figures
£17.40 (+) Difference in foreign currency figures
£ 3471.55 Total Shortage
The total audit revealed a shortage of £11,886.77 at the two branches under the control of Sub Postmaster X._ The event log balancing printout
showed shortages were apparent during August 2011.
Sub Postmaster X was issued with a without prejudice receipt for the £9500 cheque and a further without prejudice receipt for a second
Santander cheque for £2386.77 that together made up the discovered shortages on the day. Both cheques later returned not honoured.
Mr Adderley, Contracts Manager precautionary suspended Sub Postmaster X’s contract for services on the 29" September 2011. Sub
Postmaster X admitted to Mr Adderley on the day of t he audit that she had taken the money from the Post Office on the evening of the 28"
September 2011 for a personal matter, confirming what she had advised the auditors at the office that day.
On Monday 3% October 2011 Sub Postmaster X was contacted by Mr Thomas to informing her that he needed to interview her and explained
her legal rights and the Post Office Friend rule. Sub Postmaster X confirmed that she was receiving legal advice and that she would contact him
once she had done this.
On the 5" October 2011 Mr Thomas requested and received a personal printout from HR for Sub Postmaster X.
Whilst awaiting to hear from Sub Postmaster X, Mr Thomas continued to progress aspects of the case such as PNC results etc. Following a
further telephone conversation, Mr Thomas wrote to Sub Postmaster X again confirming that e still needed to conduct an interview with her
under caution. Mr Thomas was eventually contacted by Mr Mike Robinson of Morton Law Solicitors in Yeovil and an interview was arranged at
their offices on Wednesday 9'" November 2011. Mr Thomas and Lisa Allen attended the offices at 12:30hrs where disclosure was given from
Mr Robinson.
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Interview
The caution was explained to Sub Postmaster X and the interview commenced at 13.18 hrs in accordance with PACE. During the interview Sub
Postmaster X said the following:
1. That she denied having taken the money the night before the audit as she had previously advised the auditors, and now produced a
large document regarding on-going litigation by Shoosmith Solicitors over the reliability of the Horizon system.
2. She only admitted taking the money during the audit because she was upset and would have said anything at the time, when shut in
a room with two men that she did not know. She went on to say that she felt intimidated and would have done anything to get
herself out of that situation. Mr Thomas confirmed that at no point was she locked in a room, but was in fact in a secure area in full
view of customers who were being advised that the Post Office was closed whilst the audit was being undertaken. She was only
present to monitor the audit taking place. Her daughter was also present.
3. Mr Thomas referred to an ‘Event Log Balancing’ printout which identifies an entry made by TMEO01 (Sub Postmaster X) on the 17”
September 2011 at 12:36 hrs that identifies a substantial discrepancy that was immediately followed by a re-entry increasing the
cash on hand by some £14,400 and resulting now in a surplus of £245.45. (This was not posed to Sub Postmaster X at the time of the
interview).
4. When asked, Sub Postmaster X denied taking any money but blamed the Horizon system. Mr Thomas then advised her that it was
her responsibility to arrange an audit following information received from the holiday relief Catherine Early which appeared to be
true. Sub Postmaster X denied that she had asked Catherine to inflate the cash on hand by £12,000. She stated that there had been
occasions where she needed to take money to Branch Z from Branch Y and had not been able to officially transfer the money as she
had no barcodes to do it. Sub Postmaster X conceded that even if that was the case, the two branches would not balance and t he
amount still would have been short. Mr Thomas asked why would Catherin Early advised POL about the shortages if they were not
true? And was she, therefore suggesting that Ms Early was lying? To which Sub Postmaster X could not say if she was lying, but only
that she had not asked her inflate the cash declaration.
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At the end of the interview, Sub Postmaster X stated she would be willing to allow searches of her home to be conducted. A search
was conducted at 16:27hrs and concluded at 16:41hrs. Three items were seized that related to various bank statements, copies of
which were forwarded to Dave Posnett.
The loss to POL was £11,886.77and Sub Postmaster X gave a signed undertaking to repay £9,500 within 14 days of her interview on
the 9" November 2011.
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