POL00031322 - PO Risk & Compliance Committee Report

Evidence on official site

POL00031322
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Risk & Compliance Committee Report

June 2009

Distribution

Committee Members

Other attendees at the meeting (lead on reporting)

Luke March (Chair)
Alan Cook

Gary Hockey-Morley
Paula Vennells

Post Office®

John Scott (Head of Security)

Peter Tansley (Internal Audit & Risk Management)
Keith Woollard (Head of Compliance)

Lynn Hobbs (General Manager Network)

Andrew Spice (Head of Financial Services)

Kiron Farooki (RMG Legal)

Contents

oRena

ZZZEBSREREBBE

Ala
AIS
AIS
AIT

‘Contents
Losses Report
‘Security Team Risk Summary
Qurrent Regulatory Fisks & Issues
\Netowrk Compliance Scorecard Indicators
Internal Audit and Risk Management

Appendix A
‘Supply Chain Robbery Losses

Post Office Network Robbery and Burglary Losses
‘Supply Chain and Network —Firearms & injury
‘Casework —Losses by Type

‘Asset Recovery Against Fraud

‘Grown Offices Loss Initiative

‘Cheques / Qpen tems

‘Chargeback Data

‘Commercial security —Fisks and Issues

Fejected Postage Labels

‘Savings Stamps

‘Cash in tills Over Night Cash Holdings

ATMGime

Lottery Scratcheards

Mails Integrity

Grapevine

(Grown Office False Alarms

Post Office®

ga

Appendix B

Network Audit Activity 29
Assurance activity ~ headiines 30
Information Security risks 31-33
Appendix C 34
Risk Management Maturity Assessment 35

Assignments Planned and in Progress (ARM) 36-37
POL IASRM Open Actions Summary —June 09 38

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1. Losses Report Period 2

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[Pillar Losses £mI [Channel Losses _ _£mI [Other Losses* £mI {Total Losses: £m)
IFull Year Actuals 08/09 5.6I Full Year Actuals 08/09 4.0 Full Year Actuals 08/09 18.5) Full Year Actuals 08/09 28.1
}YTD Actual 0.5I }YTD Actual 06 }YTD Actual 2.3] }YTD Actual 34
YTD Budget 0.8] IYTD Budget 07 0.4) — {YTD Budget 19)
IFull Year Budget 5.4 Full Year Budget 43 3.2 Full Year Budget 13.0)
[Full Year Forecast 5.4] [Full Year Forecast 4.3I IFull Year Forecast 9.8] IFull Year Forecast 19.6

* Previously net losses

Pillar Losses (Financial Services, Mails, Telephony, Government Services)

Year to date favourable variance of £292k due to timing and budget calendarisation of Mails and Financial services products.
Telephony losses of £495k for bad debts/write offs.

Channel Losses (Crown, WH Smith, Account Managed, Centrally Supported)

Channel losses favourable variance of due to a £136k due to controls in place to reduce losses.

Other Losses (Robberies and Burglaries, Former Subpostmaster Accounts, Foreign Exchange, Provisions and any
Other Losses not Connected to Pillar or Channel)
Year to date adverse variance of £1.9m, from actual losses of £2.3m due to losses of £516k from robberies and burglaries,
provisions of £1391k and Foreign Exchange (Bureau hedge) of £443k. See breakdown below for the year to date provisions
and the full year impact taken to forecast (resulting in £6m increase in full year forecast)

RMG Stock - £379k - Amount settled with RMG (approx 200k per month). Full year effect of £2.4m taken to forecast

Post Office savings stamps - £527k as advised by E&Y until old style savings stamps is withdrawn, full year forecast
£2.0m

Former Sub Postmaster debt - £300k, Full year effect at run rate taken to forecast £1.6m
Maintained Errors - £100k
Other provisions - £85k

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2. Security Team Risk Summary (See Appendix A for

detail)

Value in £ks YTD
£158

£470 ae aoe

£367

‘Commentary

+ Casework losses year to date amounts to £470k in 31 matters raised year to date.

+ Network robbery and burglary losses year to date amounts to £366.9k in 78 incidents

+ Supply Chain robbery losses year to date amounts to £157.5K in 18 incidents

Crime Risk Indicators These are summarised as below. A red downward arrow indicates a worsening trend and a green upward arrow an improving

fea oes resial Robbery & a Cheques/Open Items T
‘Supply Chain Robbery Losses tT Ghargebacks t
fast Feary t Rejected Postage Labels a
‘Ciawn Cifiowe' icases a ‘Savings Stamps T
Lottery ad ae .

Post Office®
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3. Current Regulatory Risks & Issues

Irrelevant

Post Office®
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3 continued. Current Regulatory Risks &
Issues

Irrelevant

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4. Network Compliance Scorecard Indicators 09/10 -
Period 2

Audit Indicators

4. Validity of promotional material in branch (90%)

Staff awareness of how to deal with suspicious transactions

(94%)

3. Staff awareness of differences between introducing,
arranging and advising (98%)

4, Mails Integrity Compliance (91%)

4 5. Staff awareness of Data Protection principles (95%)
Potential 6 Adherence to Horizon password and user controls (89%)
fine

IMPACT

Travel — Staff providing regulatory statements and

3 information (64%)
Potential 8 Travel — Staff quoting correct price (91%)
damage to 9. Savings — Staff informing the customer that the Post Office

reputation provides investment products by other providers (54%)

10. Savings — Staff refraining from giving advice (100%)

11. Credit Card — Following a question of ls the interest rate
‘good'?, Staff mention that itis generally competitive or
‘customer told to make the comparisons themselves (77%)

12. Credit Card — Staff refraining from giving advice (100%)

‘Compliance Bureau Transaction Monitoring
13. Identification requirements met (84%)

Insignificant

100%-95% 94% -90% 89%-85% 84%-80% Less than
80%

—\——._ cowpuiance

@ Positive Trend — @ Negative Trend I) No change to last month

4 continued. Network Complianc

Indicators 09/10

Commentary
The latest results show a drop in overall performance from last month (87% to 85%). This is mainly due to reduced levels of
compliant Bureau transactions over £5k, from 90% in April to 84% in May (which is more in line with the level of compliance

recorded in 2008/9). However, the Compliance Mystery Shoppi

e Scorecard

ing savings scenario showed some encouraging signs of

improvement, with an increase in score from 69% in April to 77% in May.
The top three areas of non conformance in the Network, as measured in the scorecard and illustrated on the previous slide

Regulated Area

Remedial Action

Staff mentioned that Post Office provides products from other}
providers (such as NS&l) as well as its own range of branded
products — 54%

INDICATOR NO. 9)

jessage reinforced in savings WTLL in March 2009 and
ther communications with branches and reviewed as part ofI
the remedial action plan, in response to NS&l audit.

Staff selling travel insurance to a mystery shopper provided
the regulatory warning statements — 64%

INDICATOR NO. 7)

500 Crown Office BMs and Product Champions attended

raining provided by Aon in May and further initiatives are

being considered. TI product mangers will review in July
hether there are changes to the customer journey that
jould improve conformance.

hen asked by a mystery shopper if the interest rate for the
Post Office Credit Card was good, the response actively
provided a view that the rate is generally competitive or
Included a suggestion that the customer makes comparisons
for themselves - 77% (INDICATOR NO. 11)

JA WTLL session on Credit Card was delivered in January
2009. Given the wider implication of the result of this
kcenario, a further WTLL session is being planned in June
(with a view to covering the broader regulatory issue, beyond
hat identified for credit cards)

There has been limited improvement, following the recent impl

lementation of remedial actions. Given that these have tended

to focus on training and communication initiatives, there is a need to explore (with Network Management), more innovative

approaches. Plans are in place to explore this further at a Compliance Workshop with the Account Managed segment )

Post Office®

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5. Internal Audit and Risk Management (see Appendix C for

detail)

Top Business Level Risks

Risk profiling workshops have been held for the five directorates for which they were scheduled. The outputs are being
consolidated with a view to providing input to an ET level refresh of POL's risk profile.

Completed reviews
‘Since the May 2009 report to the Risk and Compliance Committee, there have been no reports produced for POL.

POL Open Actions

There is currently one overdue action from the WH Smith Financial Benefits review. The expected completion date is now mid
June.

There are 23 other remaining actions from seven IARM reviews. 21 of these are on schedule.

Of those for which timely completion is at risk, one, relating to Retail Cash Inventory Management, may slip beyond the end of
June target date. In the other case, proposed Equal Opportunities legislation may lead to a reconsideration of the validity of the
action.

Post Office®

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Appendix A

Post Office”

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A1. Supply Chain robbery losses

Irrelevant

Post Office®

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A2. Post Office Network robbery & burglary losses

Irrelevant

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A3. Supply Chain and Network — Firearms & Injury

Irrelevant

Post Office®

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A4. Casework - losses by type

(Cases Raised by Value (EK) YTD 2009-10

70
0
‘OS ae
a ‘rath a
0 mocen ete
ashes
wo.

Commentary

+ Casework losses year to date amounts to £470k in 31 cases with an average loss of £15.1k (Compared to £722k in 43 cases, with an average loss of,
£16.8k in 2008/09 ~ P2).

Audit deficiencies year to date amount to £435k, (93% of all casework raised) compared to £313k ~ 43% for 2008/2009 - P2.

‘An average audit loss of £20.7k per case in 21 cases raised year to date, compared to £28.5k per case for 2008/2009 - P2.

Within the ‘Business’ heading are matters raised for enquiry that contain ‘Multiples’ where the fraud loss liabilty sits with the multiple retailer (e.g. W
H Smith's) or matters not linked to any of the other three headings.

Cases Raised above 50k in period 2 - 2009/10

“Gass RefNo I [Main Case Type I Enauiry Type [Office / Location, ‘Branch code [Initial Loss reported I Gurrent LossI
POLTDI091070074 Aut ‘Cash Loss WILLESDEN 181005 84,779.52 274,880.75
POLTDOB09/0231 Aaa Cash Loss BIDDIGK HALL 412328 £69,000.00 69,000.00

Post Office®
A5. Asset Recovery Against Fraud

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Mitigating actions, update and status

LossesiRecoveres trom cases closed by period 2009-10 ‘Accumulative figures from cases closed YTD - 2008-10
25000000 ‘400,000
20000000 £350,000
 £18000000 —r =—_
3 —esearty Recor] I “°°
‘0000000 ses
. soni a
ss00000 ‘150,000
000 ‘100,000
12345678 sn pas
Period a
‘Commentary

+ From all cases closed, year to date £237k has been recovered against identified losses of £360k.
+ The current year to date figure for recoveries is 66%.

+ The Security Team currently has 56 cases on hand, with a total loss £4.8m being investigated under the Proceeds of Crime Act 2002.

+ Through the provisions of the Proceeds of Crime Act 2002 legislation, the security team continue to robustly restrain identified assets. This has

resulted in significant funds being recovered when cases are progressed to Confiscation that may otherwise have been dissipated.
Case Reference 0708/0269 was concluded following a Proceeds of Crime 2002 Confiscation hearing at Kingston Crown Court on the 27% May 2009.

‘A Confiscation Order of £43.6k was set, this being the available amount from assets identified, of which £25.1k cash had been restrained in various
bank accounts. Post Office® Ltd was awarded the full amount in Compensation. A total ‘benefit from crime’ figure was set at £99.4k. The initial

investigation loss was £73k

Post Office®

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A6. Crown Office Loss Initiative

Post Office®
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A7. Cheques/Open Items

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A8. Chargeback Data

Irrelevant

Post Office®
A9. Commercial Security — Risks and Issues

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Project Globe

An initial meeting with the Bank of Ireland has been organised to establish the requirements for POL’s new current account
sHorizon on-line

‘Security have provided concurrence for the Horizon on-line migration process

+Travel Money Card

Security are working with the product team and FRES to change the Experian scoring to allow improved sales of TMC
without reducing the security of the product

-Budget Card
‘Security are working with the product team in the design of the new PO budget card that will replace savings stamps

-Overseas Property Money Transfer (HiFX)

Security have provided support to the product team in the launch of the Overseas Money transfer approving the contract for
the service

Post Office®

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A10. Rejected Postage Labels

Post Office®
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A11. Savings Stamps

Post Office®

A12. Cash In Tills Over Night Cash Holdings (ONCH)

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Cash In Tills Value Over target P2 Number of offices over target by £25K ormore
: ‘00
H ws
H i ,
i is [in
i Po : Alla afialleaannd
LJ ai4]5]6 1/6 glolnfals 2
— pew I BW] I mo) ] 6 Ie) 2p} 4 le dl
Lee arc
fowemet ome [eles tte lees [espe
orn

+ At Period 2 there were 4616 offices over target, down from 4877 in Period 1.
+ The number of offices £25K or more over target was 292

+ Overall value at over target offices is £36.0m, down from £37.3m in Period 1
+ Overall Retail Cash In Tills holdings were under target by £42.5m.

Mitigating actions, update and status

+ ONCH 300 - this programme of assessing branches payments v cash on hand has almost concluded. The number of branches reduced due to
various factors and focus was directed towards high risk branches, £327k has been retumied from 12 visits to branches and £983k has been returned
following 14 scripted telephone calls to branches, a total of £1.3m returned. There are 5 audits outstanding, to be undertaken in the next couple of
weeks,

+ Anew ONCH programme is planned to commence in July, to include new analysis of branches across the network and further review of lower risk
branches not dealt with as part of the ONCH 300 programme.

+ The new ONCH programme is subject to discussions around possible activities during the migration of all branches to Horizon Online. Opportunities
are being explored which may result in a wider piece of ONCH activities within the business, supported by the Security Team.

Post Office®

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A13. Automated Teller Machine (ATM) Crime

Irrelevant

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A14. Lottery Scratchcards

Irrelevant

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A15. Mails Integrity

Mails Integrity Non-Compliance Offices

350
300
250
200
150
100

2007/08 2008/09

Mitigating Actions, Update and progress
<The site surveys at non-compliant offices has now been completed.
<The Implementation project to install the solutions has began

Offices are being contacted to inform them of the physical solution identified and the arrangements for installation

Office®
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A16. Grapevine

Irrelevant

Post Office®

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A17. Crown Office False Alarms

Irrelevant

Post Office®

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Appendix B

Post Office”

Commentary

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B1. Network Audit Activity

2009-2010 Auxit Activity
[Annual PlanIYTD Plan [YTD Actual
[All Agency Transfers 600 100] 150]
Event [All Agency Unplanned Closures 400) 68 I 28)

450 22)

[Cash & Stock Checks all Network
[Compliance Testing Agency Branches

[Random Test
[Follow Up

The level of aucit activity performed to date exceeds the current year to date plan
Reduced event driven activity has allowed more risk based activity to be performed

65% of all audits undertaken up to period 2 have been targeted through risk based selection (including those initiated by P&BA,
Cash Inventory, Security and Network Support as well as risk model outputs)

From the available figures 6% of financial audits (selected on a risk basis), in period 2, resulted in the suspension of the
‘Subpostmaster

Net accounting discrepancies from financial audits year to date totals £859k

6% of branches audited, year to date, are responsible for generating 79% of accounting discrepancies

21 audits year to date have revealed net discrepancies totalling £676k

An audit was completed at Cygnet House Cash Centre on 12" May 2009 and this identified a “some improvement required

Post Office®

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B2. Assurance Activity - Headlines

Topcomm QofS Reporting
The Q1:2009 accuracy audit has now been completed with passes being reported, pending completion of the comparability stage, in
all 5 quality of service measures. This is the first time a pass has been reported for Service Provisioning since the beginning of the
managed service provided by BT. The decision has now been made by Ofcom to revoke the Topcomm scheme and, therefore, the
reporting of the Q1/Q2 results will be the final ones in the current format. We await confirmation from Ofcom on what, if anything, will
replace the Topcomm scheme but, in the interim, discussions have been instigated between Compliance, Operations & Marketing to
decide how we move forward, pending the result of the Ofcom consultation.

Crown Office Declaration of Compliance

The report on the results of last year's Annual Declaration of Compliance (ADC) has been issued and has included a
recommendation for a revised future approach, moving to a quarterly declaration on key themes and using Horizon for a self audit
testing. Consideration is also being given to extending a revised approach to parts of the agency network.

Network Change Audits

The Q4 audit, covering October to December 2008, has been completed and the report issued. Four quarterly reviews have now
been completed, covering the calendar year January to December 2008, and overall the schemes have been found to be well
operated with the bulk of compensation and grant payments made accurately. An [ARM review is now awaited, prior to an assurance
statement being issued to DBERR, and this review is planned for July 2008.

Assurance Activity in Progress
+ Review of the Compliance Framework

+ Confidential Waste Assurance Review — To ensure that actions, generated as a result of the Information Commissioner Inspections
in 2008, have been implemented and review current levels of compliance in the Network.

+ Network Change Audit Q1: 2009

+ Review of recruitment processes — Covering vetting and induction training arrangements (aligned to an action arising from the NS&l
audit)

Post Office®

B3. Information Security Risk

Action

insist on a non compliant payment method, instead of using the standard Portal Payment
Manager (PPM) which is under development for all transactions processed on the portal.
PCI compliance is across the organisation, so RMG will not be able to submit their SAQ until
all business functions are compliant. If we have a delay in the portal the card schemes will
not look favourably upon Post branch, especially should we also have any delay on Horizon
Next Generation. RMG have a further risk that by preparing this application to go live without
full PCI compliance, the merchant acquirer may prevent live operation. There will be a
subsequent knock-on to POL.

February 2009
All projects have Received Communication from Group Treasury that BT BuyNet has to be
used. (Not in Post Office control)

The Likelihood of risk is now reduced because there is a clearer understanding. Likelihood
scoring now 3 and Impact 5 (out of 5)

March 2009

The work to implement BT Buynet has been undertaken and implementation is now expected
by the end of the month

April 2009

‘Some work still to do to retrofit BT Buynet solution to existing products. Full implementation
is now expected by October 2009

June 2009

Travel Insurance have indicated a reluctance to move to BT Buynet at this point in time. This
is being followed up, because it will cause problems on PCI certification and also
maintenance contract for Retail Logic will have to be renewed for a further year for Travel

Post Office®

Owner
There will be a delay in completing the self assessment questionnaire (SAQ) for Payment April Sue
Card industry (PCI) on the portal. This is because a Royal Mail Group (RMG) project-OLP2- I 2009 Lowther

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B3 continued. Information Security Risk

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Due Date

Action Owner

Post Office Ltd priorities for a number of group wide functions differ. Our clients are
becoming more proactive in asking for assurances around data loss and data protection
techniques (Department for Work and Pensions in particular) for which Post branch need
an immediate solution. The risk is that RMG are working to a longer term strategy, which
gives rise to a lengthy evaluation and large scale project approach. Whilst we endorse that
strategic objective, we need our supplier to provide robust interim solutions now. Our
requirements as a financial services organisation demand them.

February 2009
Post Office working with CSC to commence the Data Loss Prevention programme, CSC
now prepared to go ahead with Post Office at a commensurate price assuming that Group
will follow.

March 2009

Request for CSC to further develop and implement DLP (discovery) solution being
progressed through the IT Roadmap and BCAP process. Working closely with CSC and
RMG to ensure POL requirements are given appropriate priority.

April 2009

RMG have expressed some architectural concerns but itis proposed to press-on with this
as a POL only solution bought as a fully managed service and not technology. Proposal to
be at next BCAP.

June 2009

‘An RMG project to implement Data Leakage Prevention and Discovery has been initiated
which cuts across the POL only proposal and infers different technology. The risk of
incompatibility on shared infrastructure is too great so the POL only proposal has been
withdrawn,

April 2009

‘Sue Lowther

Post Office®

BRAG
Status

Amber

B3 continued. Information Security Risk

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Risk

Due Date

Action Owner

Unlike many other Level One merchants in the UK, it appears that Post Office Ltd has
escaped fines in 2009 however the delay in undertaking an audit beyond the agreed date
of April 2009 could lead Visa to reconsider

February 2009
PCI project not formally advising Visa and MasterCard of the latest delay because the Pin
Pad replacement programme is also considering delaying the replacement of the devices

have started the Audit as of Mon 23” and there is no doubt our progress will be fed
ck to the card sc

jeme

March 2009

PCI audit is underway as are activities to prepare for any potential Forensic Investigation.
Agreement reached that there are controls in place for HNG-X which would negate the
need to suspend the system whilst any investigation was underway in the event POL
sustained a breach, or more likely, was identified as a potential common point of contact.

April 2009
Audit progressing well and feedback from the auditors has so far been positive

dune 2009
Delay in HNGX is causing a delay in completion of the Audit. The fact that we have track
2 data in the Audit Log and not yet removed means the likelihood of a fine from Visa has

increased to near certainty, since we will have to admit the presence of Track 2 data in our
retum at the end of June.

April 2009

‘Sue Lowther

Post Office®

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Appendix C

Post Office”

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C1. Risk Management Maturity Assessment

Most recently assessed: March 2009

Active executive sponsorship.

Risk champion / co-ordinator in place.

No activity in place —O

Avarenss and actonpann( My

Work inprogreesi under ¢
development

Mostly established / a)
deployed in key areas

Biannual Risk and Control Self-Assessment
sign-off by MD.

Executive level risk profiling.

Business as usual executive level risk and

control reporting,

Risk register in place and operating
effectively.

Vital Few Controls (VFCs)/ Critical BusinessI

Controls (CBCs) refreshed and agreed.

Vital Few Controls / Critical Business

wwtGCoee

ole

1 rOwOOCee@

3 Ip wSOCCOOO

Controls tested
lan
Emerging risk process in place. { Capability fully established /I
deployed
Risk management training in place. C) (
WD) <
‘% Fill 55% 775%

25)

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C2. Assignments Planned and in Progress (IA&RM)

Since the report to the May meeting of the Risk & Compliance Committee , no Post Office-sponsored IA&RM assignments
completed.

ASSIGNMENTS STARTING IN QUARTER 1 2009/10

Assignment I Objective Status

Review of the efficiency and effectiveness of the Leavers process within

POL leavers POL Fieldwork completed
patead Review of the processes employed by the NBSC to interface with the POL. I

usiness Fieldwork in progress

branch network

Support Centre
Complaints Review of the efficiency and effectiveness of the Complaints Handling Fieldworit in proarese
handling process within POL Prog!
Sta retention  Rootoause anaysis of high ves oftumover, wh specie reerencot0 — eetdverk in progress

Assessment of the quality of business cases as submitted and the
effectiveness of the challenge / approval process

HR performance Assessment of whether PALM!

Business cases Fieldwork completed; report is in draft

is being completed by managers in line _ Fieldwork completed. Draft management

management with policy and IPP / MUP policies are being correctly deployed. letter awaiting final agreement.
Risk profile Directorate level risk workshops; consolidated results to provide input to _In progress.
refresh POL ET risk profile refresh All scheduled workshops completed,

Post Office® :

C2 continued. Assignments Planned and in Progress

(IA&RM)

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ASSIGNMENTS PLANNED TO START IN QUARTER 2 2009/10
Assignment I Objective
Agents’ remuneration Assess the effectiveness and reliability of agents’ remuneration for Third Party Products

Diet Ghemes Assurance of programme management and governance, and assessment of key
programme risks

Crown Office FSS

training

LINK Security Standard

seff-certification

Review of training provided to FSSs to confirm compliance with FSA requirements

Provide assurance that POL is compliant with the revised LINK Security Standard

Review of the effectiveness of POL's response to the Deloitte FSA review completed in
2008/9

Control accounts Review of the accounting controls for key reconciliations

FSA Framework

I Comments

Deferred from Qtr 1

Addition to the plan

ASSIGNMENTS PLANNED TO START IN QUARTER 3 2009/10

‘Assignment I Objective
Outreach PIR of the Outreach initiative to determine future viability against other delivery models
Benefits realisation _ Review effective deployment of benefits realisation policy across strategic programmes

Network conformance Root cause analysis of non-compliance with POL procedures in branches
Product Development Assurance of programme management and governance, and assessment of key
Programme programme risks

‘Crown Office Review of the Crown Office Transformation Programme / creating an environment that
Transformation improves the customer experience.

[Comments

Deferred from Qtr 2
May be deferred

Deferred from Qtr 1

Post Office®

7)

C4. POL IA&RM Open Actions Summary — June 2009

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[Not yet due but abiliy to deliver is in doubt OR] [Overdue

JOverdue and ability to deliver is in doubt

Due Jun OF
Not yet due, but significant slippage expected I [Due Sep OF
JOR Currently overdue Bue Senos"

[Not yet due, but some slippage expected Due Get Oo
Due Dec 0F
Not yet due, but on target No.of actions I 1121314151517 1515} ol] 2] 73] [75

WH Smith
Integrity of Agents remuneration

Remuneration of Agents for the Sale of POfs Products:

Retail Cash Inventory Management

Management Information Programe Risk Assessment
Benefits Management in Strategic Programmes:

Introduction of Rew ard & Recognition Broadbanding

Programme Assurance & Financial Benefits Assurance

Post Office® :