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POST OFFICE LIMITED
AUDIT, RISK & COMPLIANCE COMMITTEE REPORT
sete The Historical Operation of Meeting
Title: Suspense Accounts Date: 24 November 2020
Mark Underwood, LCG
. , Ben Foat Group General
Author: Operations Director, Tom Lee, Sponsor: Counsel & Alisdair Cameron,
Financial Controller & Tim Group Chief Finance Officer
Perkins, Head of Security, i
Safety & Loss Prevention
Input Sought:
The Committee is asked to note the findings from KPMG’s review of Post Office’s historical
operation of suspense accounts and subject to legal advice, approve sharing the full findings of
KPMG’s reports with the Government Inquiry.
Previous Governance Oversight
« Post GLO Settlement Programme SteerCo of 1 July 2020.
e Risk & Compliance Committee and ARC of 13 July and 27 July 2020, respectively.
e Risk & Compliance Committee of 12 November 2020.
Executive Summary
1. Allegations continue to be made that Post Office may have recovered sums from Postmasters
which were not ‘real losses’ to Post Office as they were housed in suspense accounts and
taken to profit by Post Office.
2. KPMG were instructed to review Post Office’s current operation of suspense accounts. Given
the robust and transparent investigations process that is undertaken, their principal finding
was that how these suspense accounts are operated today should not result in Post Office
pursuing Postmasters for sums it had or could eventually take to profit (nor had any evidence
been presented to indicate this had happened).
3. The ARC approved instructing KPMG to also review Post Office’s historical operation of
suspense accounts. This review involved looking at two suspense accounts - the Agent
Creditor Suspense Account and the Customer Creditor Suspense Account. Their report has
been uploaded to the Reading Room.
4. The Agent Creditor Suspense Account - From their review of historical practice, KPMG has
found no evidence to suggest that amounts posted to this account relate to discrepancies
which should have been repaid to Postmasters.
5. The Customer Creditor Suspense Account should only include sums that relate to outstanding
/ unmatched customer funds. KPMG’s finding is that overall, a robust resolution process
appears to have been in place for each product type that is posted into this account and
branch affecting discrepancies should not be included within this account, which is a holding
account for customer’s money. However, KPMG has identified two exceptions — both of which
are caused by Postmaster error or failing to follow prescribed process:
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i. Where Postmasters have accepted cheques made out to Post Office as payment for
certain services but have incorrectly recorded this transaction as having been paid for
in cash and the supporting information (which would include branch details) also then
becomes separated from the associated cheque when the Postmaster sends the cheque
to the Post Office Cheques Team to process.
ii. When, between November 2015 and April 2019, Postmasters failed to follow the then
prescribed two part cancellation process for MoneyGram Transactions, which also
coincided with unrelated connectivity issues.
6. KPMG has advised that further investigation into these two potential issues is difficult given
the lack of available data held within Post Office and is unlikely to add any further information
especially in relation to quantification to that already included in their report and this paper.
Further, if a branch were to have made such errors, they would manifest themselves as
shortfalls which if they dispute, the Historical Shortfall Scheme (HSS) provides a mechanism
for such claims to be investigated.
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Questions addressed
What was the scope of KPMG’s review, its limitations and findings?
Report
1. KPMG were instructed to perform a review into Post Office’s historical operation of suspense
accounts. The scope of this review was as follows:
e Conduct research into historical suspense account operating practices pre-March 2019,
holding discussions with key individuals and reviewing relevant documentation (where
still available) to:
i. Identify any additional relevant suspense accounts to the 4 which were identified
during their review of Post Office’s current operation of suspense accounts.
ii. Identify any changes in the suspense account operating processes during the
relevant time period, which would significantly alter the way the identified accounts
operated and whether these changes could have potentially had an adverse impact
on the Postmasters; and
iii, Understand whether the historical resolution processes adopted by Post office for
dealing with amounts posted into these suspense accounts were sufficient to
identify potential instances where amounts should have been reconciled against
branch discrepancies made good by Postmaster.
e Undertake historical analysis of balances held within the relevant suspense accounts for
the relevant time period (where data was still available) to establish whether postings
to these accounts have altered, and if so the potential impact.
e Perform a high level review of the Tier 2 investigation data arising over the past 12
months to inform their understanding of how amounts could get posted to the relevant
suspense accounts
KPMG’s Findings
2. KPMG’s review into how Post Office currently operates the relevant! suspense accounts
concluded that, given the robust and transparent investigations process that is undertaken,
these suspense accounts should not result in Post Office pursuing Postmasters for sums it
had or could eventually take to profit (nor had any evidence been presented to indicate
Post Office had). This was because sums housed in these suspense accounts were either:
e not taken to a profit and loss account; or
e relate to unmatched transactions due to customers (not postmasters); or
¢ relate to surpluses rather than shortfalls.
3. KPMG’s review into the historical practices did not identify any additional relevant suspense
accounts to those which formed part of their review of current practices. Further, KPMG
were informed by Post Office employees, including the product team leaders responsible
‘ Accounts into which Post Office places sums that could relate to discrepancies at a branch level and from which unmatched
sums are taken into the P&L account
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for posting amounts to the relevant suspense accounts that no changes had been made in
the operating processes since they had been established.
4. As such, KPMG‘s overarching finding from its review into how Post Office currently operates
these suspense accounts should therefore also apply to the historical operation of these
suspense accounts, though it should be recognised, as you would expect, Post Office’s
investigation into discrepancies has evolved and improved, with the introduction of the Tier
Two Investigation Team.
5. The two relevant suspense accounts identified by KPMG are the Agent Creditor Suspense
Account (ACSA) and the Customer Creditor Suspense Account (CCSA). Taking these in turn:
e The ACSA holds surplus discrepancies which Postmasters (as opposed to Post Office)
dispute being due back to them. In respect of this account, KPMG’s finding from its
review of historical practices is that is has seen no evidence to indicate amounts posted
to this account related to shortfalls which should have been repaid to Postmasters.
e The CCSA should only have items posted to it once it has been determined that they
relate to outstanding customer funds (as opposed to Postmaster shortfalls). Thus, branch
affecting discrepancies should not be included within this account, which is a holding
account for customer’s money. KPMG's finding is that overall, a robust resolution process
appears to have been in place for each product type that is posted into this account. This
process identified instances where amounts needed to be reconciled against branch
discrepancies prior to them being posted into this account However, KPMG’s has
identified two exceptions:
a. Where Postmasters have accepted cheques made out to Post Office as payment
for certain services but have incorrectly recorded this transaction as having been
paid for in cash and the supporting information (which would include branch
details) also then becomes separated from the associated cheque when the
Postmaster sends the cheque to the Post Office Cheques Team to process (“Post
Office Bulk Cheques Issue”).
b. When, between November 2015 and April 2019, Postmasters failed to follow the
then prescribed two part cancellation process for MoneyGram Transactions, which
also coincided with unrelated connectivity issues (‘MoneyGram Issue”)
Each of these are discussed in further detail below.
6. The CCSA was established in April 2010 and the ACSA was established in January 2012.
Prior to the establishment of the ACSA, such surpluses remained on Postmasters personal
accounts, which were not released to Post Office’s P&L account and remained on that
account until claimed by a Postmaster. Prior to establishment of the CCSA, the Client
Creditor Suspense Account was used to house unmatched customer monies (as well as
unmatched client monies). KPMG performed a high level review of transactions posted to
Client Creditor Suspense Account from 2005 (the earliest date for which data is available)
to 2020 and held discussions with the relevant Post Office employees who manage this
2 It should be noted however that there is no formal documentation detailing what operational processes were or were not in
place.
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account. Limited documentation is available for the Client Creditor Suspense Account prior
to 2018, but no further potential issues to those noted above were identified by KPMG.
The MoneyGram Issue: Postmasters failing to follow the two part cancellation
process requirements for MoneyGram Transactions and unrelated connectivity
problems
7. In November 2015, Post Office made changes to the how MoneyGram transactions were
cancelled on Horizon. Postmasters were required to perform a two part cancellation process
whereby the transaction had to be reversed through the Postmasters till (the Horizon EPOS)
and also cancelled within the MoneyGram interface (also within the Horizon EPOS).
8. In April 2019 Post Office changed the process so that both elements were linked into a one
part cancellation process.
9. KPMG were informed by the Post Office MoneyGram product team that during the same
time period, MoneyGram transactions experienced connectivity issues.
10.The changes to the MoneyGram cancellation process resulted in an increased number of
errors being made by Postmasters when cancelling MoneyGram transactions. In addition,
connectivity issues resulted in an increase in unmatched MoneyGram balances that the
MoneyGram product team needed to investigate.
11.Post Office subsequently stood up a team of 8 individuals who undertook a large-scale
investigation with MoneyGram to try to resolve these unmatched items and identify
customers and Postmasters who may be due money back as a result of these issues. This
investigation ran during 2017 and 2018.
12.All MoneyGram transactions are date stamped, with each posting also including the branch
FAD code. As such, for each MoneyGram transaction, it was possible to identify the branch
where it was performed and when.
13.For each unmatched MoneyGram transaction, the investigation team reviewed whether
there was any contemporaneous data from the branches identified to indicate that a
MoneyGram transaction had not been cancelled in accordance with the two part process.
14.Where the data showed a MoneyGram transaction had been cancelled on Horizon but had
not also been cancelled on the MoneyGram interface, on the date in question, transaction
corrections were issued to move the loss to the Postmaster. The transaction correction
included enough detail for the Postmaster to correct the original error if the money had not
been collected by the recipient.
15.Where the data showed a MoneyGram transaction had not been reversed on Horizon but
had been cancelled on the MoneyGram interface on the date in question and where the
investigations team could identify the issue related to a branch error a transaction
corrections was issued to repay Postmasters.
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16.Where the data did not indicate a branch error or indicated a customer loss the unmatched
sums were posted to the Customer Creditor Account.
17.Investigations did not include speaking to branches unless Postmasters contacted Post
office, regarding MoneyGram related discrepancies.
18. Enquiries have been made with individuals still at Post Office who were part of the 8 person
investigation team, including the Team Leader. Although weekly MI was said to be
produced, reporting on progress, none has been able to be produced owing to emails not
being retained (though they would likely be available via the mimecast archive). It has not
been possible therefore to determine to total amount returned to Postmasters.
19.What has been determined is that £615,178 could not be matched and was posted to the
CCSA in 2017. This was split across 1,804 branches with 97% having a balance of less than
£2,000 and the largest balance being £5,400.
20.Given the level of investigation undertaken by a separate team, the ease with which an
affected branch and potential branch shortfall could be identified and the level of exposure
at each branch, KPMG’s view is that the risk that the £615,178 includes a significant balance
relating to Postmasters is low and this balance is more likely to relate to customer losses.
However, the lack of available documentation means a residual risk remains.
Bulk Post Office Cheques Issue: Postmasters Incorrectly Processing Cheques as
Cash
21.A number of products Post Office offers can be paid for through cheques which are made
payable to Post Office (as opposed to the client) For instance DVLA payments, These are
known as “Bulk Post Office Cheques”. There is a defined process for accepting such cheques
and then sending them to Post Office to process which, if followed correctly, should identify
any Postmaster Bulk Post Office cheque processing errors, with a Transaction Correction
subsequently issued.
22.However, if a Postmaster accepts a Bulk Post Office Cheque as payment but, in error,
records that the transaction was paid for in cash, more cash will be expected in the till than
is physically there.
23.I1f when then sending the Bulk Post Office Cheque to Post Office, the branch information
which should accompany the cheque also becomes separated from the cheque - the
payment is made to the recipient but as there is no matching transaction on Horizon (i.e.
as it was processed as cash) it is difficult for the Cheques Team to identify which branch
has made the error and for a Transaction Correction to be issued.
24.1f Postmasters realise the error they have made, they are able to contact the Cheques Team
to rectify the error. Further, the Cheques Team proactively attempt to identify branches
where there are high value (>£500) Bulk Post Office cheques with no supporting branch
information, but if the branch is not identified, the cheque value is subsequently posted to
the CCSA.
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25.c£134k has been posted to the CCSA as a result of Bulk Post Office Cheques Issues since
it was established in 2010. Although a proportion of this sum could relate to branch
shortfalls caused by Postmaster error, it will also include:
i. Customer losses: e.g. a Bulk Post Office Cheque is processed but a corresponding
bill payment is not made / not made in full (for example, a DVLA transaction is not
processed through the till on Horizon or the DVLA interface but the cheque is
accepted and sent for processing. The cheque is banked by POL but DVLA will not
process the transaction or request payment as it is not on their system
ii. Matching Errors: e.g. the transaction is recorded correctly but the Bulk Post Office
Cheque becomes separated from its supporting information when being sent to Post
Office for processing. The customer’s payment is correctly made, the Postmaster’s
till will balance but when the cheque payment comes to be allocated to a client,
there is no way of knowing which client should be credited as the cheque is made
out to Post Office.
26.KPMG’s understanding is that it is not possible to identify what proportion of the £134k is
made up from matching errors, customer losses or potential Postmaster losses due to the
lack of available supporting information documented on the cheque.
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Next Steps
30.KPMG has advised that further investigation into these two potential issues is difficult given
the lack of available data held within Post Office and is unlikely to add any further
information especially in relation to quantification to that already included in their report.
In respect of the MoneyGram Issue, this is because of the time that has passed, personnel
which have since left the organisation and lack of documentation which exists / has been
retained / was ever produced. In respect of the Cheques Issue, this is for the reasons set
out at paragraph 26.
31. Further, if a branch were to have made such errors, they would manifest themselves as
shortfalls which if they dispute, the Historical Shortfall Scheme provides a mechanism for
such claims to be investigated. As such, no further work into suspense accounts is
recommended.
32.However, and although Post Office’s operation of suspense accounts does not feature in the
terms of reference for the Government Inquiry - subject to obtaining legal advice, the ARC
is asked to approve disclosing KPMG’s findings in full to the Government Inquiry. This should
provide the Inquiry with a level of comfort that Post Office has not been improperly
recovering shortfalls from Postmasters which were housed in its Suspense Accounts, as has
been alleged.
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