Initial Complaint Review and Mediation Scheme
Provisional and draft
Not approved by POL and not discussed by the
Working Group
MEDIATION BRIEFING REPORT
PART TWO
Draft V2
Second Sight - 30 July 2014
This report and accompanying documents are confidential and are not to be disclosed
to any person other than a person involved in the processing of Applicant's claims
through the Scheme ,
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1. Introduction
1.1, This report has been prepared by Second Sight, which is the trading name of Second Sight
Support Services Limited, the company appointed to conduct an independent investigatlon
into a number of matters raised by Subpostmasters, or former Subpostmasters.
4.2. Part One of the Mediation Briefing Report (‘Part One’), issued on 22 May 2014, describes some
aspects of Post Office branch operating procedures and related functions of the Horizon
system.
1,3. The purpose of this report is to expand on the main common ‘Thematic Issues’ that have been
raised hy many Subpostmasters in their applications to the Mediation scheme. This has been I
done in the interests of efficiency and in order to avoid duplication of facts and conclusions i
across many cases,
1.4, The report structure follows a modular approach, with each Thematic Issue forming a separate
section within the report, that will be added to as the document evolves,
2. The Contract between Past Office and Subpostmasters
2.1, This section deals with two separate issues. Firstly the Impact on Subpostmasters of some of the
terms and conditions set out in the Contract and secondly, Issues relating to the notification to
Subpostmasters of the terms of the Contract.
2.2, The following extracts are taken from the ‘Standard Contract’ (dated September 1994) between
Post Office and Subpostmasters. This is a 114-page document, that now incorporates several
post-1994 amendments. A copy of the entire document is available on request.
2.3. The Standard Contract contains a number of provisions, the most significant of which are set out
below, especially those related to responsibility for losses and shortages. As a result of these
provisions the contract transfers several financial and other risks to Subpostmasters who may
not have understood or appreciated those risks, particularly if they failed to seek independent
jegal advice before taking up their post. Observations relating to the more significant of these
clauses are set out more fully below.
2.4, The Standard Contract spells out the rights and responsibilities of both Post Office and Sub-
Postmasters. The clauses most frequently referred to by Sub-Postmasters are as follows:
a) Section 17: (in the November 2002 amendment) which lists the Key Products and Services
{also referred to as the core products and services).
b) Section 15: {in the November 2002 amendment) refers to responsibility for the training of
the Subpostmaster and, in turn, of the staff employed in a branch. Under this section the Post
Office undertakes to provide the Subpostmaster with relevant training materials and processes to
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carry out the required training of his Assistants on the Post Office Products and Services... and I
the Sub-Postmaster accepts the responsibility to ensure the proper deployment within his Post
Office branch of any materials and processes provided by Post Office Ltd and to ensure that his
Assistants receive all the training which is necessary In order to be able to properly provide the
Post Office Products and Services and to perform any other tasks required In connection with the
operation of the Post Office branch,
Also... Post Office Ltd may request from time to time that where it has obligations as described ij
above the Subpostmaster should conduct specific training (whether through written/distance
learning that may require confirmation of completion or via presentations) in relation to certain
Post Office Services (such as, but not limited to, money laundering). Failure by the Subpostmaster
to arrange for such training to be properly applied will be deemed to be a breach of this Contract
by him.
c} Section 1, paragraph 10: which requires three months notice of contract termination from
the Sub-Postmaster to Post Office and allows Post Office to:
terminate a Subpostmaster’s contract at any time in case of Breach of Condition by the
Subpostmaster, or non-performance of his obligation or non-provision of Post Office Services, but
otherwise may be determined by Post Office on not less than three months notice.
In section 12 of the Standard Contract there are a number of paragraphs, as set out below,
addressing responsibility for losses and shortages. These paragraphs are at the heart of all of the
cases being considered in the mediation process.
d) Section 12, paragraph 12:
The Subpostmaster Is responsible for ail 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.
e) Section 12, paragraph 13;
the financial responsibility of the Subpostmaster does not cease when he relinquishes his
appointment and he will be required to make good any losses incurred during his term of office
which may subsequently come to light.
f) Section 12, paragraph 14;
surpluses may be withdrawn provided that any subsequent charge up to the amount withdrawn
is made good immediately.
g) Section 12, paragraph 17:
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25.
2.6.
27.
2.8.
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Subpostmasters may exceptionally not be requlred to make good the full amount of certain
losses at his office. If he feels entitled to relief in making good a loss he should apply to the Retail
Network Manager.
h) Section 19, paragraph 12; deals with Enquiries by officers of the Post Office Investigation
Division and states that:
The main job of the Investigation Division is to investigate, or help the Police to Investigate,
criminal offences against the Post Office, British Telecommunications and the Department of
National Savings. The Investigation Division does NOT enquire into matters where crime is not
suspected.
1) Section 19, paragraph 49: allows persons interviewed by Post Off ffice's Investigators to have a
friend present during the interview but that that person may not Interrupt in any way, either by I
word or signal.
Having considered the Standard Contract in some detail we are of the opinion that the terms of
the contract appear to be biased in favour of Post Office and can, In some circumstances,
operate to the detriment of the Subpostmaster, Also, we have not seen any evidence that Post I
Office either advises or requires the Subpostmaster to seek independent legal advice before I
taking up their post. We are also unaware of any cases where Post Office was prepared to vary
the terms and conditions of the Standard Contract at the request of the Subpostmaster.
The Standard Contract transfers financial and other risks to Subpostmasters who may not have
properly understood or appreciated those risks, particularly if they failed to seek independent
legal advice. Consequently, there is a risk that appropriate risk mitigation measures may not
have been implemented by the Subpostmaster. Post Office has the power to require
Subpostmasters to Implement new products and services and failure to do so represents a
breach of contract that could give rise to suspension or dismissal. The risk here is that Post
Office could implement decisions from which it reaps the benefits (such as by reducing operating
costs) while the risks (and therefore the costs) fall onto the shoulders of the Subpostmasters
who have no choice other than to accept the decision.
Post Office controls the Horizon infrastructure including back-office accounting functions. A
consequence of this is that Post Office may hold Subpostmasters accountable for shortages that
they are unable to easily investigate. ASubpostmaster has very limited options in these
circumstances and often have to make good losses, where the underlying root cause has not
been established.
Many Subpostmasters are unaware that, under Section 19, Paragraph 12 of the Standard
Contract, the Post Office Investigation Division {'POID’) does not have a mandate to provide
general investigative support to Subpostmasters. There is therefore no general investigative
function readily available as POID would only act where suspected criminality had occurred.
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29,
2,10,
2414,
3.
3.4,
3.2,
3.3.
3.4,
3.5,
We also note that when a POID criminal investigation is in progress, the Interviewee is not I
allowed to he legally represented, although they may be accompanied by a ‘friend’, which could
be considered as being unfair,
We have been told by many Subpostmasters that they were not given a copy of the 114
page Standard Contract until long after they had committed to purchase their sub-post office; or
long after they had started work as a Subpostmaster, or even atall, We are advised that in some
cases, copies of the Standard Contract were not provided until Post Office commenced litigation.
Post Office has stated that its standard operating procedures require that Subpostmasters are
provided with a copy of the Standard Contract no later than the day that they start work, We
have, as yet, seen no example where any Subpostmaster at any point signed the Standard
Contract Itself. Rather, the practice seems to have been for new Subpostmasters to sign an
‘Acknowledgernent of Appointment Letter’ which includes the following text: "I accept the
Appointment as Subpostmaster at: XXXXX Branch and agree to be bound by the terms of my
contract; and by the rules contained in the book of rules and the instructions contained in those
postal instructions issued to me".
It is worth noting that, In many cases, evidence of the provision of the Standard Contract.
{and of any document having been signed by the Subpostmaster) has not been retained by Post
Office.
Automated Teller Machines (ATMs)
Part One provides, in sections 5.23 to 5.29, background information on the installation and
operation of Automated Teller Machines (“ATM”).
When a Post Office branch Is equipped with an ATM it can be located either within or external
to the branch premises, The installation of an ATM ata branch Is often desirable as it can
result in greater footfall and, as a consequence, increased sales of Post Office products and
services.
Of the 150 applicants to the Mediation Scheme, approximately 20% have referred to problems
with ATMs. The reported problems have included both small and large shortages that were
charged back to Subpostmasters by Post Office. In other cases large surpluses occurred, which
caused concern to some Subpostmasters,
(Most of the reports that we have seen relate to Bank of freland (‘Bol’) ATMs and some to.
HANCO, as well as other, ATMs,
The normal cash dispensing process on Bol ATMs involves electronic interaction between the
Branch's ATM; Wincor Nixdorf (the service and maintenance provider); the LINK platform and
the customer's bank, The ATM cash balancing/reconciliation process Involves electronic and
also manual interaction between the Branch's ATM; the Branch's Horizon system; Post Office's
Financial Service Centre (the 'FSC’); and Bol, This is a more complex arrangement, requiring
greater human intervention at the end of the business day, than that typically deployed by most
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high street and other banks whose ATMs are seamlessly connected to their own computer
systems.
3.6. One notable problem, reported by several Applicants using Bol ATMs, seems to relate to the
manual (rather than electronic/automatic) extraction and use of the 'cash dispensec’ figures I
from the ‘Bank Totals' receipt that Subpostmasters are required to obtain each day from their
ATM and the daily input of ‘cash declarations' into Horizon. This is sometimes referred to as “a
problem with the ‘air gap' between the ATM and the Horizon system".
3.7. In February 2008, Post Office issued an ‘Operations Manual interim’, Post Office stated that it
was issuing new instructions because "a number of ‘non-conformance issues are still affecting
the processes for ATM reconciliation and settlement and to explain the correct end-to-end
accounting processes relating to Bank of dreland ATMs."
3.8. The Introduction to the Operations Manual interim stated:
The Bank of Ireland, via the LINK network, extracts a 16:30 -16:30 ‘cash dispensed’ figure
automatically from your ATM each day. This figure. forms the basis of a settlement to Post
Office. This figure is the value of cash dispensed from your ATM from 16:30 the previous day
until 16:30 on the current working day." In other words, the amount of cash dispensed to I
customers, from each branch's ATM during the previous 24 hours (or during the previous
72brs between Friday at 16:30 hrs and Monday at 16:30 hrs), would be available to Bol and
that data would be extracted by Bol from each ATM.
3.9. The Operations Manual interim goes on to say:
In order to meet the required business accounting standard, branches are required to obtain
each day the 16:30 - 16:30 ‘cash dispensed’ figure from the “Bank Totals’ receipt which is
available from the Bank of Ireland ATM, and to enter this figure on the Horizon system on a@
daily basis:.. The Manual later describes that as needing to be done each day after 16:30 but !
before 19:00 hrs...
The Manual continues:
In Product and Branch Accounting (P&BA) a comparison is made between the LINK generated
(figure and the figure you enter on Horizon. If the totals differ, they are queried with Bank of
Ireland and may result in a Transaction Correction sent to your branch. Ifyou do not enter
the daily 16:30 - 16:30 ‘cash dispensed’ figure on Horizon, this means that the settlement
figure by Bank of Ireland cannot be confirmed. In this case the two sets of figures are
automatically reported as differing, resulting in reconciliation problems.
3.10. In addition to obtaining the cash dispensed figures from thelr ATM and entering it into
Horizon at the right time of day, Subpostmasters were also instructed to make a daily cash
declaration (and do this every day including on days when the branch closed before 16:30 hrs}
through their Horizon terminal, Specifically:
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3.11. It would appear that some Subpostmasters either misunderstood the complex instructions
3.12, Aconsequence of getting things wrong with the ATM cash dispensed figures was that an
3.13. This out-of-sync situation and assoclated reconciliation difficulties, became, it seems,
3.14.
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You must make a daily cash declaration on the Horizon system for the separate stock unit
you have set up for ATM transactions {including days when you close before 4.30pm {16:30
hours) and you have logged on to the ATM stock unit). Unlike cash declarations for your
counter stocks, however, you do not need to make a physical count of the cash contained in
the ATM in order to complete the declaration.
You must make the declaration before 7pm (19:00 hrs) and you must include all funds stored
in your official safe that you have received on a Remittance specifically for your ATM. i
or were told by Helpline staff that the problem would sort itself out (though it did not) and
subsequently found that the Helpline's advice was later countermanded. This comment and
other similar ones referring to Helpline advice is found In nearly every instance where there
were problems with the operation of an ATM.
out-of-sync situation could develop where the branch's ATM would be expected (by Bol and by
Post Office) to have an amount of cash in Its cassettes different from the cash figure that the
Subpostmaster had entered into Horizon.
commonplace in some branches prior to the February 2008 release of the Manual Update.
Indeed, the Manual says:
If following the instructions contained in this workald means that the way you will now enter
data on Horizon and balance your ATM cash will change (for example, if you have previously
entered figures which are not based upon the 16:30 - 16:30 figures or if you have nat
completed this task daily, moving to the correct process is likely to result in a cash balancing
difference).
If this is the case, P&BA will issue a Transaction Correction, to address the cash balancing
differences, and will try to provide clear evidence and as much information as possible to
help with correcting transactions. The correction assumes that all previous ATM dispensed
figures have been recorded on Horizon accurately and that branch cash has been correctly
dectared,
Many Applicants have commented on the complexity of the processing of transactions by
Horizon and the general lack of clarity and hence ease of use of the guidance and instructions
issued by Post Office. The February 2008 instructions represent a good example of this
complexity and the following extracts demonstrate how easy it might have been for some
Subpostmasters to make mistakes, even after the new instructions were released:
From the paragraph titled Loading cash into the ATM:
Always enter in the ATM the number of notes loaded In the machine, not the value
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Ensure that you enter the number of notes you are loading, not the amount already in
the ATM
Please remember: At the weekly balance all figures are cleared, Therefore, you will
need to enter all amounts in total when you reload the machine next.
3.16. The following extract is from the paragraphs dealing with Weekly balancing and recording
figures on the Cash Management Sheet:
You must make a physical count of the cash in your ATM at least once a week and record the
figures on the Cash Management Sheet before removing the cassettes for your physical
check of the cash. You must not enter any of the figures on the Horizon system, The weekly
balance can be carried out on any day of the week, even at the end of a Branch Trading
period as long as your premises are closed to the public. It should be completed at any time
after 16:30 hrs when the Disp 16:30 - 16:30 figure has been entered,
Please note: You do not have to reconcile the cash in your ATM with the cash declaration you I
make on Horizon. The ATM is balanced using the Cash Management Sheet as described
below. If the Cash Management Sheet balances, your ATM has balanced, I
... and the following extract is fram the paragraphs dealing with If the Cash Management
Sheet balances, but there is a.discrepancy on Horizon:
The Horizon system should not be recording a discrepancy in the ATM stock. if a discrepancy rot
is not rectified, it will give you a wrong carried forward figure and the problem could be ° I
compounded. If there is a discrepancy on Horizon but the Cash Management Sheet balances,
you could have entered incorrect figures on the Horizon system.
Go back through your receipts and double check that the 16.30-16.30 “cash
dispensed’ figures for each day have been entered correctly on Horizon
Check that any ATM cash originally remitted into a counter stock has been
transferred into the ATM stock
Check that the transfer into the ATM stock has been accepted
Double check that the daily cash declaration has been completed accurately
If you cannot resolve the discrepancy, do not phone the Wincor Helpdesk; please
phone the NBSC for advice.
3.17, The Subpostmasters, in virtually every case that we have reviewed, state that they had no
idea what was causing the out-of-syne situation. Of potential significance Is whether the
problems reported occurred before or after the February 2008 Manual update as the new
instructions should have reduced or eliminated the potential for errors, If the branch's ATM
was operating after the 16:30 hrs Bol 'cut-off' time during the week and/or at weekends (as
would clearly be the case with externally located ATMs}, then the transaction volumes and
associated accounting entries on the following Monday would include all cash dispensed in the
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preceding 72 hrs between 16:31 hrs on the previous Friday afternoon and 16:30 hrs on the
following Monday afternoon.
3.18. We have also been told that when ATM-related reconciliation and out-of-syne problems I
were reported to the Helpline, Subpostmasters were often told to Ignore the shortfall because
it will sort itself out, This advice runs the risk of allowing a large shortfall to build up, whilst
awaiting the possible issue of a Transaction Correction, rather than deating with the underlying
problem. Inadequate and possibly inappropriate advice, particularly prior to the 2008 Manual
update, appears to have been frequently provided which rnay have resulted in Subpostmasters
eventually giving up trying to understand and resolve problems and hence coming under
pressure to falsely account as part of a temporary solution to an as yet unresolved problern.
3.49. Many Subpostmasters have commented on the apparent impact on ATMs of power and
communication failures. Although there are standard processes in place to deal with
with power cuts and a loss of connection that should reduce the potential for data loss the need
in such circurnstances for an ATM to require restarting by the Subpostmaster, or remotely by
Bol could introduce this possibility depending upon the point in the process at which such
failure occurred.
3,20. There have been many reported instances where a cash withdrawal cannot be completed I
due to a problem occurring during a transaction. Depending on when the problem arose it is '
possible for cash that should have been dispensed to the customer to be withheld by the ATM
but the customer's bank account nevertheless debited,
3.21. tn addition when cash is dispensed by an ATM, but there Is a delay In the customer physically
removing the cash from the ATM, then after a set period the ATM will retain the cash. This is
known as a retract.
3.22. _ Inaddition to a customer innocently delaying retrieval of cash it is also possible that some of
the large discrepancies reported could also include losses due to external theft using
sophisticated methodologies such as retract fraud or the more advanced transaction reversal
fraud. The risk and consequences of this and the need to take remedial action have been
discussed at length with Post Office although action on this has only been taken quite recently.
4, Motor Vehicle Licences
4.4. Not all branches are authorised to issue Motor Vehicle Licences ('MVL') and only a small number
of Subpostmasters have reported problems with MVL processing. We have seen however,
repeated Instances of a particular problem. This relates to V11C forms that were misprinted
with an incorrect bar code. This seems to have resulted In Horizon recording the sale ofa12
month tax disc, when in fact a 6 month tax disc was sold.
4.2. If this error is not Immediately noticed at the Horizon terminal, a discrepancy, being the price
difference between the 6 and 12 month MVL Tax Discs, will occur, In branches issuing large
numbers of MVLs this may become a significant amount.
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5, National Lottery
5.1. Not all branches sell Lottery tickets or Lottery Scratch Cards. Where these items are sold, they
are usually sold from the co-located shop's retail counter, rather than from the Post Office
counter, even though they have to be accounted for using the Horizon terminal at the Post
Office counter, I
5.2. There is often a significant difference in the opening hours of the counter In the retail shop and
the Post Office counter. The retail counter will therefore be selling Lottery tickets/Scratch Cards
outside the hours where the Horizon system is operating at the Post Office counter. Since
branches are not allowed to sell National Lottery produets other than through the Post Office, all
ticket sales have to be recorded, each day, in Horizon, Also, before any Lottery Scratch Cards
can be sold, they must first be ‘Activated’ on the Camelot terminal and then ‘Remmed in'to
Horizon.
5.3. We have received many reports where Subpostmasters have stated that their branch's Horizon i ot
system would get ‘out-of-sync' with the quite separate Camelot system, thereby generating
material surpluses or deficiencies that were eventually corrected by Post Office Issuing
Transaction Corrections (‘TCs’) through the Horizon system. The average Lottery-related TC was
approximately £650 and many of these TCs were for amounts that were exactly divisible by
£160, that being the value of a full pack of Scratch Cards. I
5,4. These problems appear to have been most serious and frequent between 2005 and February
2010, when Post Office made a significant change to its standard operating procedures that
made it impossible, after that date, to have packs of inactive Scratch Cards recorded in Horizon
at the same time as in the Camelot system. A further important improvement was made in
February 2012 when Post Office introduced a system change that finally eliminated the
possibility of synchronisation errors between the Horizon and Camelot systems. I
5.5, We have also been told that, before these important system Improvements were introduced,
Inconsistent and sometime conflicting advice was provided by the Helpline which further I
exacerbated the problem.
5.6. The out-of-syne problem was particularly relevant in branches where the retail shop sold Lottery
tickets late into the evening, after the Post Office counter had closed. A further complication
often occurred on those Wednesday evenings marked the end of the monthly Trading Period.
Subpostmasters were required to reconcile the Horizon/Camelot figures first thing on a
Thursday morning, rather than at 17:30 hrs on the Wednesday, but this requirement was not
always advised by the Helpline. It Is not clear whether the training that Subpostmasters received
covered this important point.
5.7. A specific example of the Camelot/Horizon synchronisation issue Is described in Appendix 4 to i
2nd Sight's Interim Report dated 8th July 2013 and this provides further important information I
about this matter.
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6.
6.1.
ny
6.2.
6.3.
6.4,
6.6.
6.7.
6.8.
Limitations in the Transactional ‘Audit Trail
Many Applicants have claimed that they were unable to determine the root causes of
discrepancies (both shortfalls and surpluses) reported by Horizon, because the underlying
transaction data was not made available to therm.
The concerns fall broadly into two areas:
a) data that Isn't available even on the day of the transaction; and
b) data that was only available for 42 days after a transaction occurred (later increased to 60
days following a system change by Post Office).
Daia that isn't available even on the day of the transaction
Applicants! concerns principally relate to transaction types where Horizon produces, at the end
of day, only an aggregate amount and volume for that day's transactlons e.g.: Transactions: 35,
Value: £17,112.55.
This occurs, for example, where customers have paid for goods and services by Debit or Credit
Card,
. Inthe event of an end-of-day discrepancy for this transaction type, and without the benefit of a
disaggregation of a total amount into its constituent transactlonal components, Subpostmasters
found it difficult, if not impossible, to identify the individual transaction(s) that brought about
the discrepancy.
Typically, a Subpostmaster will need to find items:
a) that should be, but are not, included in the aggregate total; or
b) amounts that have been incorrectly entered such as £50.00 entered as £500.00, £39.00
entered as £93.00, etc.; or
c) amounts that form part of the aggregate total, but should not have been included in that
total at all.
Only by finding those errors and omissions can the Subpostmaster begin the process of
correction and loss mitigation. That may sometimes involve contacting the relevant customer
but in order to do that, he needs not only to identify the incorrect or missing transaction, but
also know the name, and perhaps also the address, of the relevant customer.
Many Subpostmasters have told us that prior to the introduction of Horizon it was easy to do
this since the paper dockets retained to evidence each transaction provided this information. It
is regrettable that the Horizon system does not provide the same functionality as the previous
manual system.
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6.9.
~
7.
7.2,
co
8.2,
8.3.
b
Data that was at first available, but after 42 days (later extended by Post Office to 60 days) is
no longer available
The main concern expressed about data availability is the need to go back to a previous period in
the event that delayed Transaction Corrections (‘TCs’) are Issued by Post Office. If the delay In
issuing the YC exceeds 42 days (now 60 days), the Subpostmaster has little choice other than to
accept the TC. Requests for supporting evidence that would enable the substance of the TC to
be validated were routinely rejected by Post Office, usually on cost grounds. Also, the difficulty
in both printing out and examining Horizon's 8cm wide ‘till rolls' was a significant issue in
isolating discrepancies.
‘Transactions not enterect by the Subpostmaster or their staf
Many Applicants have reported that Horizon transactions have been entered, or cash or stock
balances changed, when the branch was closed and no one had access to any of the Horizon
terminals. Evidence has also been provided of transactions apparently occurring after a
Subpostmaster was suspended and had no access to the relevant systems. Enquiries on these
matters are continuing.
Post Office has confirmed that it is its understanding that it is not, and never has been, possible
for anyone to access Branch data and amend live transactional, cash or stock figures without the
knowledge of the Subpostmaster or their staff. However, we are aware that certain error
recovery and correction processes can result in transaction reversals that carry the System
Identities ('IDs’) of the branch employee who entered the originating transaction that the system
itself is automatically reversing (see ‘Automatic Transaction Reversals’).
Automatic Transaction Reversals
As mentioned above, a number of Applicants have reported transactions that appear to have
been input when the branch was shut and no one had access to the Horizon terminals.
Also in some instances ‘ghost' transactions appear to have contributed to shortfalls for which the
relevant Subpostmaster was later held accountable. ‘Ghost’ transactions are genuine
transactions that for some reason appear multiple times In the Horizon records. We briefly
deatt with this issue in our interim Report (see Spot Review 01), fn that example, the Horizon
system had automatically reversed a transaction which was only partially completed. Although
the Subpostmaster had entered the original transaction, he had not entered the reversal of that
transaction. Rather, the Horizon system had automatically generated a transactional reversal
after suffering a telecommunications Interruption,
The transaction identity assigned by Horizon to that reversal was that of the Subpostmaster,
rather than a system-generated ID. We note that this appears to fail to differentiate between
entries genuinely made by a User and those that are system generated, We regard this asa
systems design error.
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8,4. This misuse of User IDs for system generated transaction reversals appears to be inconsistent
and not yet fully understood. Various assurances and evidence have been provided by Post
Office and further enquiries are continuing.
8.5, This matter was also highlighted In a report by Helen Rose, Post Offlce Security - Fraud Analyst -
dated 12 June, 2013:
"itis just that I don’t think that some of the system based correction and adjustment }
transactions are clear to us on either credence or ARQ logs."...
“However, my concerns are that we cannot clearly see what has happened on the data available
fo us and this in itself may be misinterpreted when giving evidence and using the same data for
prosecutions."
N.B. ‘Credence’ is a Post Office Management information Reporting System and "ARQ logs' is a i
reference to a request for Horizon Information archived through the ‘Audit Retrieval Query’ to
process.
9. Cash and Stock Remittances (‘Rems') in and out of the branch
9,1. Anumber of Applicants have raised issues concerning 'Rems'. '
9.2. 'Rems' are inward and outward remittances of stock or cash (including foreign currency). Large
amounts of cash and stock are routinely sent to and from branches using thls process. Robust
procedures are in place to ensure that the process normally operates reliably and that errors, or i
theft, are rapidly detected. '
9.3. Occastonally branches will report that a Rem 'pouch' was not received or that it contained fewer I
iterns, or lower value, than the sender claimed. Post Office deals with these discrepancies by
issuing ‘Transaction Corrections’ (TCs} that show the details of the shortfall or overage. Because
such discrepancies relate to physical items it is necessary to rely on witness statements and
other documentary evidence as to the exact content of Rem packages.
9.4, Some Applicants have described instances of foreign currency shipments being accidentally sent
to the wrong branch, We are aware that some of these errors have occurred due to Post
Office's Business Partner for Foreign Currency ('First Rate’) using an incorrect delivery address.
10. Missing Cheques
10.1. As with outward Remittances (see Cash and Stock Remittances ('Rems') In and out of the
branch above) sub post offices 'Rem' to Post Office's main processing centre (in Chesterfield)
all cheques that the branch has taken in each day, These are put together into ‘Stripey'
envelopes and collected by the Royal Mail after each day's cut-off point.
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10.2. For almost all of the many cheques that Post Office handles each day, everything normally
goes smoothly, but some cheques do get lost or accidentally spoiled either within the branch
or at Chesterfield, while some get lost [n transit.
10.3. We have been informed that Is possible for cheques to get damaged in Post Office's cheque {
processing equipment and subsequently not be processed. In such cases, if the cheque Is so i
badly mutilated as to be unreadable, the possibility arises that a branch might be charged,
through the TC process, for a missing payment. Also, where a customer's cheque 'bounces',
these will be charged back to the branch if the branch staff has failed to follow standard
operating procedure. Post Office will attempt, where possible, to obtain a replacement
cheque from the customer.
140.4. Assertions have been made by some Applicants that customers’ cheques (received in I
exchange for goods or services rendered at the counter) never clea! red and they were held
accountable for the value of those missing cheques, Post Office asserts that there have
been no examples of this occurring and, as the mediation process develops, Post Office will
have an opportunity to respond to several specific examples cited by Applicants.
10.5, Some Applicants have complained that the TC process was sometimes so stow (in regard to
cheques) that, by the time they had been advised that a cheque had been lost, mutilated or
returned by the paying bank, all chances of them mitigating their loss were gone.
11. Pensions and Allowances
14.1. Asmall number of Applicants (eleven) have reported problems with Pensions and
Allowances. Some of these cases Include allegations of fraudulently manipulating pension i
and/or allowance payments, for example by showing amounts as having been paid out when
they were not {"overelaims") or by allowing a green GIRO cheque to be re-used
("reintroductions"). Several of these Applicants were accused of and same of those charged
with offences of fraudulently processing overclaims and/or reintroductions and we have
asked Post Office to help us gain a deeper understanding of the cases that were investigated
and the subset of those that were prosecuted in order to find out why so few of those cases
seem to have resulted in convictions. We will only be able to develop a properly evidenced
view on this subject when we have examined more of the relevant cases.
11.2, Enquiries on these issues are continuing,
12. Post Office's Data Retention Policy I
42.1, Werhave been told that Post Office has a 7 year Data Retention Policy. This Policy applies to
not only Horizon transactional data (held by Fujitsu) but also to all other business records
including emails, letters, memos, interview recordings and transcripts, Audit and
Investigation Reports and Legal Files on cases that have been concluded.
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12.2.
12.3,
124,
12.5,
The application of this Policy would be understandable if an Applicant had never mentioned
to Post Office the need for assistance in order to find out, or to obtain the data needed, to
determine how a discrepancy arose, or had remained silent since the matter first surfaced.
Post Office's assertion that, absent evidential proof, a claim should be rejected might now be
viewed as unreasonable in instances where it can be shown that the Applicant has
repeatedly, during the intervening years, sought Post Office's help In establishing facts and
where, during those intervening years, the relevant records were routinely deleted,
Many Applicants and their Professional Advisors assert that it is unreasonable that the
burden of proof should fall on the shoulders of the Applicants to prove that the
(acknowledged) events did cause actual losses, particularly when Post Office had access to
all of the necessary data and far greater Investigative resources.
In many instances Applicants have been unable to directly link their claimed losses with
specific incldent(s) and it has not been possible, for either Post Office or Second Sight, to
conclusively prove or disprove their claims. Post Office has typically stated that “ the time
perlods of these complaints are now outside normal document retention periods. There is
therefore very limited information now available."
Although many of these cases were closed (to Post Office's satisfaction) more than seven
years ago, many of the Applicants had made it clear to Post Office that, to them, it was not a
closed matter.
43. Cash withdrawals (accidentally) processed as deposits and other counter-errors that
benefit customers at the expense of the Subpostmaster
Cash withdrawals accidentally processed as deposits:
13.1,
Mistakes can occur if the counter clerk accidentally touches the ‘DEPOSIT" icon on the
screen instead of the adjacent ‘WITHDRAWAL’ one thus generating a deficit of twice the size
of the customer's withdrawal. Such errors can be difficult to isolate from the system-
produced totals of card transactions (see Limitations In the Transactional ‘Audit Trail’
above),
Other counter errors that benefit customers at the expense of the Subpostmaster:
13.2.
Several situations have been encountered where Subpostmasters have been held
accountable for shortages that seem to have arisen through errors made at the counter and
where customers have profited at the expense of the Subpostmaster.
Where a customer has received cash or goods and later discovered that their bank account
has not been debited or their card account has not been charged, it is quite possible that
they may keep quiet about it, leaving the Subpostmaster to be held accountable for the
resultant shortfall.
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13.4. The difficulty in resolving such errors Is demonstrated by the following description of the
changes In the processing Of Giro transactions.
43.5. _ Inmid-2008 the method of processing receipts Into Giro Bank accounts was changed.
Previously, customers completed a two-part paying-In slip. One copy of the paying-in slip 1
was retained by the customer, another was retained In the branch and cross-referenced to
the entry made on Horizon. If, for example, the counter clerk accidentally keyed in £2,000
instead of £200 and clid not spot that the error immediately then, when the next balance
was carried out, Horizon would have reported that there should be £2,000 cash in the safe
whereas in fact there was only £200 In it (i.e. there would be a £1,800 cash shortfall).
13.6. The Subpostmaster would have been able to identify that £2,000 cash had been entered I
onto the system relating to a customer whom, by cross-checking with the paying-in slip, in fact
had only paid in £200, Hence, a correction could have been actioned and the branch's books
brought into balance, In such a case, the apparent cash shortage would have been eliminated
because the audit trail enabled the specific cause of the ‘shortage’ to be Identified and
corrected,
13.7. The Subpostmaster would have been able to Identify that £2,000 cash had been entered
onto the system relating to a customer whom, by cross-checking with the paying-in slip, in fact
had only paid in £200, Hence, a correction could have been actioned and the branch's books
brought into balance. In such a case, the apparent cash shortage would have been eliminated
because the audit trail enabled the specific cause of the ‘shortage’ to be identified and I
corrected,
43.8. However, after the processing change, paying monles into Giro Bank accounts was actioned
via swipe cards and one-part paying in books with no supporting documentation being
retained in branch.
13.9. After that processing change, the counter clerk would swipe the card to access thé account
details and then key in the cash deposit, After Inputting the deposit, the system printed out
‘one copy of a receipt {which specifically states on it ‘NOT TO BE RETAINED’) and this was
then passed back to the customer along with their swipe card and paying-in book.
43.10, If the counter clerk had accidentally input £2,000 instead of £200 Into Horizon and did not
immediately spot the error, the balance will show an £1,800 difference between the cash
holdings on Horizon and the actual cash holdings (as in the previous example), However,
after the processing change, there would be no supporting documentation available to
either the Subpostmaster, or to Post Office centrally. Therefore neither the Subpostmaster
nor the Post Office's central processing unit would be able to check whether or not the cash
deposit entries on the system reflected the actual cash that was deposited.
43.11, The lack of an audit trail is a fundamental flaw in any accounting system and the revised
process made it almost impossible to identify processing errors and action corrections.
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143.12, Normally, when a business detects errors or fraud occurring repeatedly, investigative and
analytical work will be carried out to determine whether changes to its standard operating
procedures, to Its hardware or software, or to its employee training, should be made so as to
reduce the likelihood and/or seriousness of future recurrence. This process of investigation I
and analysis generates, over time, a ‘Virtuous Circle’ of detection, loss mitigation and
process correction/improvement which builds the entire system's robustness and efficiency.
13,13. Businesses are motivated to carry out such improvements when the projected Return on
investment shows that the savings (loss reductions} that will accrue from implementing
those improvements will be well in excess of their initial and ongoing cost. If It looks as
though the cost of reducing those losses will exceed the likely return by way of reducing I
them, the company may, quite appropriately, take a risk-acceptance decision to continue to
absorb the losses. The skill, in Loss Management, is in finding the ‘Sweet Spot! where losses
are minimised at the lowest possible cost.
43.14, Other than In regard to Lottery and Scratch Card processing, we have found little evidence
that Post Office has evolved the above-mentioned Investigation-led improvement processes,
In not taking responsibility for "errors made at the counter", even where it is obvious that
some of those errors have been systematically repeated in a branch, or even across the
Network, Post Office seems not to taken ‘ownership’ of finding ways to reduce (or manage) {
those errors. This is unsurprising in that the costs of those errors or fraud is, in Post Office's
Business Model, generaily borne by its franchisees, the Subpostmasters, rather than by Post
Office itself.
43.15... This has led to 4 situation where Subpostmasters have been bearing cost of the losses
caused by errors and fraud that could have been designed out of the system, while Post
Office has benefitted from the savings it made by not implementing the improvements that
woutd have reduced them. Since it was not Post Office that would save money by
developing more error and fraud-repellent processes, the above-mentioned motivation,
present in most businesses, has been absent.
14, Giro transactions
14.1. Anissue has been raised by Applicants in regard to Giro transactions, The assertion is that,
when Horizon goes into Recovery Mode (for example following power or
telecommunications failures that result in the branch terminals freezing), it goes through a
complete system reboot. Then, when the system has finally rebooted, a message appears
on screen asking "do you need to recover any giro transactions ran
44.2. It is difficult to understand how Subpostmasters, when faced with this question, could know
whether or not the system needs to recover any giro transactions before they have accessed
the system to find out? If a Subpostmaster responds in the affirmative, the system asks for
the details of the giro transactions that need to be recovered. As the Subpostmaster does
not have any details as to whether or not any Giro transactions need to be recovered or, if
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they do, which ones need to be recovered, the Subpostmaster Is forced into responding In
the negative and hoping that is the correct response.
15. One-sided transactions
15.1, Many Applicants have raised concerns regarding transactions involving debit or credit cards
where Horizon has processed a transaction but the corresponding charge to the customer's:
ban account was not processed... or the opposite situation, where Horizon rejected {or
appeared to have rejected) a transaction but the corresponding charge to the customer's
bank account was processed.
15.2. One possible cause for this might be that telecommunications failures (as reported by rnany
Applicants) have occasionally prevented one side of a transaction from going through i
whereas the other side of it has gone through properly. These sort of processing interrupts j
might result in customers being charged for goods that they have not received (for example
deposits that don't get processed or bills that don't get paid) or customers receiving goods
(or cash) for which they have not been charged. '
45.3. These transaction processing failures would be less troublesome if they were always
detected, at the counter ideally, or later by additional control and reconciliation processes bo
carried out by the Subpostmaster or by Post Office itself,
15.4. __ It is however not yet clear whether Post Office's in-house {after-the-event) reconciliation
processes can be relied upon to always detect any one-sided transaction that the
Subpostmaster fails to detect.
15.5. Where a customer has been charged for something that he has not recelved, there is a very
high likelihood that he will detected that and complain. On the other hand, where the
opposite has happened, and a customer has recelved cash, or goods, and later discovers that
his bank account has not been debited or his card account has not been charged, is it not
perfectly likely that he will keep quiet about it, leaving the Subpostmaster to be held
accountable for the resultant shortfall?
15.6. It is important to understand that, where that sort of Horizon-generated error occurs, no
evidence of it is visible to the Subpostmaster unless the customer discloses It.
45.7. Post Office has asked for examples of one-sided transactions and several have already been i
supplied, with more coming in from Applicants whose cases have yet to be reviewed by Post i
Office. Greater clarity on this point will be gained as the mediation process continues and
this section of the Part Two Report will be updated to reflect that.
16. Hardware issues
16.1, An examination of the hardware In use in a typical branch, reveals that the equipment
appears to be very old fashioned and in some cases quite shabby. This is because the I
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hardware in use, developed over a decade ago by Fujitsu, seems no longer to be
manufactured,
46.2. There seems to be no routine hardware maintenance. Instead, equipment known or
suspected of being faulty is replaced as and when needed. This process Is referred to as "kit
swap outs" and principally Involves the replacement of broken units with reconditioned
Items. Reports of several components or units being tried before a working one is found are
not unusual, The most commonly raised issues concern printers, PINpads, touch screens
and base units.
16.3, The possibility has yet to be eliminated, or proven, as to whether faulty equipment could be
responsible for otherwise unidentified shortages has been raised by many Applicants.
16.4. Applicants have stated that they fear that printers may have sent messages to the main
Horizon system telling it that postage labels have been printed when they have either not
been printed at all or have been spolled in such a way that the Subpostmaster is unable to
claim the money back from Post Office. tn regard to PiNpads, the concern Is that failures in
those could result in partially-processed transactions (see One-sided transactions above},
whereas the principal concern in respect of touch screens is that they are said to sometimes
go out of alignment such that touching one icon can result In the execution of steps that are
meant to be invoked from an adjacent icon (see, for example, Cash withdrawals accidentally i
processed as deposits above) or the accidental mis-keying of values that are ten times
greater ,or less than, the intended amount.
16.5. Where Applicants have cited Hardware issues and voiced thelr concerns that hardware
failures (particularly transient ones) might have been the cause of mysterious shortfalls (and
surpluses}, Post Office has typically sought from them specific dates as to when devices
stopped working and when the refurbished units were installed.
16.6. Second Sight has questioned why Fujitsu, which is the company that handles the call-outs
and will have dealt with failures like inoperative base units, PINpads, screens, power packs,
base units, etc., should not have been asked to supply a log of all call-outs/hardware I
replacements/refurbishments for any branch that refers to this problem.
17., Post Office Investigations
147.1. Assertions have been made by Applicants that Post Office's investigation team has, in many
cases, failed to Identify the underlying root cause of shortfalls prior to initiating civil recovery
action or criminal proceedings, even in those cases where Subpostmasters brought to the
Auditors' or Investigators’ attention their own suspicions as to the underlying root causes. {
17.2. Many Applicants, and almost all the Professional Advisors, assert that there was inadequate
investigation prior to suspension (without pay); termination; or civil/criminal action.
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17.3. Inanalysing these assertions it seems reasonable to consider that over the years the t
i
following has happened:
47.4. Post Office's investigators seem to have defaulted to seeking a False Accounting charge,
evidence of which is easily obtained and, when confronted during interview with evidence of
obviously over-stated cash figures, the accused person will often readily admit to several
counis of falsifying the end of Trading Period Accounts, Since such interviews are carried
out under 'PACE' Rules, there will normally be a digital recording of any admission and that
will virtually always, trigger a 'Guilty‘ plea by the defendant. As a result, Post Office
investigators learned over time that acquiring such recorded admissions of False Accounting
was the key to achieving relatively rapid, and (to Post Office) Inexpensive, asset recovery.
47.5. Asa consequence of this, Post Office's investigators seem to have de-emphasized the
importance of unearthing the true root cause of the "mysterious shortfalls" that
Subpostmasters claimed to be suffering. Even when faced with requests, from
Subpostmasters, for investigative help, none has been provided. This refusal to provide
Investigative support to Subpostmasters is also in line with the Standard Contract (see The
Standard Contract between Post Office and its Subpostmasters above). Section 19,
paragraph 12 of that Standard Contract states that Post Office's investigators will only
engage "when crime fs suspected”. .
17.6. Even in cases where the Subpostmaster suggested that the underlying root cause might be
theft by one of his or her own staff, Post Office's investigators still refused to carry out any
investigative work. This is unsurprising given that the investigators would realise just how
difficult it is even to prove that theft has occurred, fet alone to Identify the individual who : }
stole the cash or goods. The fact that every person in a branch would have known the IDs of 1
all others there, and may well also have known their passwords, is also relevant here.
47.7. Since none of the Applicants had trained investigators available to them when the problems
surfaced, no meaningful investigation work was ever carried out,
17.8. Post Office's instructions to (and training of) its Investigators apparently seems to disregard
the possibility that the Horizon system can be in any way relevant to their investigations. toy
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