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From: Charles Colquhoun
Sent: Fri 20/06/2014
To:
Subject: RE: Fwd: Errors that arise between POL and its clients and others
Thanks Rod, unfortunately I had to go back yesterday and got some helpful comments from your team. See my email
below to Chris Aujard:
Chris
It is extremely unusual for us to have an unidentified mis-balance. Where we can identify the client or branch we will
resolve the mis-balance. Whilst its being resolved the monies are held on the balance sheet. Where we can’t identify
the client or branch we hold the monies for 3 years before releasing to the p&l. Typically these amounts are less than
£200k pa —a tiny % of our cash throughput.
It is worth repeating the point that as far as I’m aware no client has a lack of confidence in Horizon and as can be seen
from the number above the % of successful balanced transactions is very high (>99.9%)
Regards
Charles
Charles Colquhoun I Head of Corporate Finance
First Floor — Old Street Wing, 148 Old Street, LONDON, EC1V SHQ
Public & Voluntary Sector
Best Finance Team Best Annual Report & Accounts
BusinessFinance 4
Awards 2014
=,
From: Rod Ismay
Sent: 20 June 2014 00:44
To: Charles Colquhoun
Subject: RE: Fwd: Errors that arise between POL and its clients and others
As you say, clients do not appear to have an issue with Horizon. Similarly for your other comment, one could not say
that it would never have happened, but we do challenge client data streams if they differ to POL streams and we
would not charge branches without a justifiable reason based on our understanding of activities at the counter. As
explained below a branch is able to challenge any such matters if they are concerned.
Firstly, the phrase “could Spmrs have been charged by POL” needs dissecting.
e Charges by POL would purely be by Transaction Correction or Transaction Acknowledgement. These have
evidence streams as previously explained in various stages of this investigation. For these reasons, this strand
should not become part of the kind of event that the question asks about. And if a branch were dis-satisfied
with the evidence, they can challenge it. Therefore a branch should not be disadvantaged
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¢ The other scenario would be that the branch has made an error in how the transaction and the method of
payment were dealt with in Horizon. If a surplus or deficit arises here then that is due to the branch
conformance locally, not to POL making a charge
Centrally, we do have a “miscellaneous client creditor suspense account”. This is made up of differences between
what we felt we owed a client based on branch transactional data versus what the client said they were owed.
This is driven by the difference between what the branch has recorded and what the client indicates is due. It is not
driven by a TC or any form of charge to a branch. It is driven by what the branch recorded themselves.
If the branch had themselves made an error in recording the transaction such that a surplus or deficit had arisen
locally then, if they transparently declared that they had an issue, it would go through normal enquiry processes to
seek a resolution and a branch would not be disadvantaged. If they do not transparently declare it then POL would
not know the branch had a deficit or surplus.
If a branch records the transaction properly but an issue subsequently arises in leading to the client view of it then we
or they would have transactional evidence to rebut the client claim.
Rod
Rod Ismay I Head of Finance Service Centre
(28 Floor West Block, N , West Bars. Chesterfield. $49.1 PE
_IMobil mail:
ance — 2014 Winners Public &
Best Finance Team 2014 Best Annual Report & Accounts
BusinessFinance ‘
Awards 2014 /
From: Charles Colquhoun
Sent: 19 June 2014 07:32
To: Rod Ismay
Cc: Chris M Day; Sarah Hall
Subject: Fw: Fwd: Errors that arise between POL and its clients and others
Hi Rod see below. This is now urgent. I think the answer is they could but it rarely happens and never material. Is that
right if so can we quantify how often and how much? Think this is good time to point out clients don't have a problem
with Horizon
From: Chris Aujard
Sent: Wednesday, June 18, 2014 07:15 PM Coordinated Universal Time
To: Belinda Crowe; David Oliver1; Charles Colquhoun
Cc: Chris M Day
Subject: Fwd: Errors that arise between POL and its clients and others
Hi all (and Charles) - see below for the question from Second Sight regarding suspense accounts, taking
unreconciled balances to our P&L etc. Is this something that you could take forward (Charles)? Happy to talk
through if anyone is interested! Cheers Chris
Sent from my iPhone
Begin forwarded message:
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From: Ron Warmington <.
Date: 18 June 2014 02:
To: ‘Chris Aujar
Ce: <mediati
Subject: R
Reply-To:
1at arise between POL and its clients and others
b
Chris:
As promised in Monday's Working Group Meeting, the purpose of this
email is to state, hopefully more clearly previously, the question that we
are asking in regard to the reconciliation and writing off of differences.
The key question that we are trying to address here is: Could any
Subpostmasters have been charged by POL for amounts that
became incorporated in suspense account balances that were
subsequently taken into profit by POL or by any of its Counterparty
Companies, or that remain as credit balances on the Balance Sheet
of POL or of any of its Counterparty Companies?
First of all, what do we mean by "POL and its Counterparty
Companies?". We are referring here to Companies or other Entities
which POL deals with in regard to products and services delivered at or
through its branches. We have seen POL refer to these Companies as
its ‘Clients’. These will include, for example:
2 Royal Mail
2 Camelot
2 DVLA
2 The TV Licensing Body
2 Banks such as Alliance & Leicester/Santander and others,
including the Bank of Ireland
2 Alarge number of Utility Companies
2 Other Government Departments
2... and possibly hundreds of others
How can differences arise?: Taking say the London Electricity Board
(LEB) as an example, if a branch has processed in a day £1,000 worth of
customers’ electricity bills, that branch will have accounted for those
payments through Horizon and POL will then owe the LEB £1,000 and
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will settle that sum. If one of the bills (let's say one for £90) was paid
by cash but the actual bill was not or could not later for some reason be
processed (we have several examples of this happening) then the LEB
will not record that customer's bill as having been paid even though the
branch took the customer's cash. It follows that, at that point, the
customer is down by £90 and the branch is up by £90. All other things
being equal, the branch would have shown a £90 surplus on the day if
the bill payment failed to be processed through Horizon at the counter,
or would be in balance if the bill payment failed at a later stage.
In the event that the bill payment process failed at the branch
counter, POL will have overpaid LEB by the £90 that its branch will, in
effect, have ‘overcharged’ the customer. The LEB will then (hopefully)
tell POL that it has been overpaid by £90 and will credit POL's account
in its books with that amount. When that happens then, at that point,
POL (Central) and the LEB are all square but the branch still has its
£90 surplus and the customer's bill remains unpaid. POL will then try
to re-process the customer's bill and, when it succeeds in doing so, will
need to charge the branch the £90 cost of doing that... and of course
pay the LEB £90 in settlement.
POL will balance its central books by offsetting that £90 that it has
paid to the LEB by sending a Transaction Correction (‘TC’), in the sum
of £90, to the branch. When that TC is accepted by the branch, it will
have the effect of increasing, by £90, the amount of cash that the
branch is then meant to have in its tills. All four parties (The LEB; POL;
the branch; and the branch's customer) are then all square and, in
effect, the branch's £90 surplus has been removed.
The opposite effect occurs when a customer's bill does get recorded as
paid, but the non-cash payment (e.g. where a credit or debit card,
rather than cash, is used as the method of payment) does not hit the
customer's bank account. We have seen many examples of this
happening, particularly when power or telecommunications interrupts
prevent one side of a transaction from going through, but the other
side does go through (the two ‘sides’ being the bill payment and the
LiNK payment).
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While all this is going on, there will be balances, made up of the
amounts that have been over or under paid, shown in the LEB's books as
under or over paid by POL. POL clears these by issuing TCs to its
branches. In the event that this process breaks down, a mismatch will
occur such that the amount that LEB shows as due from POL will be
different from the amount that POL shows as due to the LEB. In many
companies (clients), this will result in unreconciled balances that are
held in suspense accounts and that have, in due course, to be written
off to (or written back to) that company's Profit and Loss Account.
Those write-offs/write-backs would ordinarily (where there are only
TWO parties) occur in one or both companies. In POL's case, there are
FOUR parties involved (the Client (in this example the LEB); POL itself;
the branch; and the branch's customer). Because POL is acting only as
an Agent/Intermediary, those write-offs and write-backs will impact
only the three parties other than POL.
In this context, we are aware of a situation where a string of payments
were mis-routed to a charity instead of to the intended recipient
company. We understand that the cause of this was that part of the
POL and client company customer reference fields corrupted the
beneficiary sort and account code fields in the outgoing payments.
And what of BoI?: In the case of Bank of Ireland, we know that
there have been many instances where the actual amounts loaded into
or taken out of ATMs (whether dispensed, removed by theft or lost) is
different (sometimes by tens of thousands of pounds) from the figures
entered into Horizon by the branch staff. The consequence of these
differences is that the BoI's figures (as to how much has been loaded
or dispensed) are different from POL's. This gives rise to debit or
credit adjusting entries made by Bol in its account with POL. POL deals
with those adjustments, in the same way as described above, by sending
TCs to those branches that it believes have generated the differences.
Again, given the huge volumes and complexity, one would reasonably
expect differences and disputes to arise practically every day - and we
know they do. One would also expect that, until such time as those
disputes are resolved, there will be a mismatch between what POL
shows it needs to pay to Bol and what Bol shows POL needs to pay to
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it. Where such disputes cannot be resolved, one or both parties (POL
and Bo) will need to write the difference off to, or write it back into,
its Profit and Loss Account. Until such time as the difference is
written to the debit or credit of BoI's P&L account, it will reside on
BoI's Balance Sheet as an asset or a liability. Once again, we
understand that POL will have no unreconciled balances to be written
off or written back because all differences are zeroed out by the
issuance of TCs to its branches. The point remains, however, that the
only check and balance as to the numbers notified by Bol are those
carried out in the branches, rather than by POL. Second Sight regards
this as a systemic control weakness.
In our experience, the only time when no differences ever surface in
account relationships between entities is when one or both parties are
not checking the other party's account entries and simply accepts them
as being correct. Furthermore, what we have experienced is that,
when such account relationships remain unverified and unchallenged,
errors will remain undetected. We have also found that such situations
provide a perfect opportunity for fraud since fraudulent entries will
routinely (and predictably) remain undetected and consequently always
be absorbed by the victim(s). In this case, since POL is not checking
BoL's (or its other clients’) entries other than by comparing some of
them with the figures that the branches have supplied, the
checking/verification/investigation processes that would normally be
deployed by the second party (in this case POL) devolve to the third
party (POL's branches) and to the fourth party (the branches’
customers). We know that branches have little or no investigative
abilities or resources so the entire process relies on the accuracy - and
integrity - of those first and fourth parties. Put bluntly, were
erroneous or possibly even fraudulent entries to be passed by any of
those first parties (such as Camelot, Royal Mail, Bol, etc.), the impact
would pass straight through POL to the victim branch(es). Similarly, we
know that, where customers have benefitted from ‘one-sided'
transactions, not all of them have admitted to their good fortune.
Where such customers have benefitted, the SPMR will, under the
current process, in many instances finish up suffering the cost.
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Chris, you have twice mentioned, in the above context, that Second
Sight is challenging Regulated and Audited Entities and that it is
unreasonable or unacceptable for us to do that. Our understanding of
your reasoning here is that such entities can and should be trusted to
produce accurate data. We absolutely reject that notion. History (and
our own experience as External and Internal Auditors; as Bank
Directors; and as Corporate/Bank Fraud Investigators) has clearly
shown us that Regulated and Audited Entities do not suffer materially
less error and fraud (including internal/employee fraud) as Unaudited,
Unregulated ones. We therefore reject the suggestion that data
emanating from such entities can be so heavily relied upon that there is
no need to check it.
So... that brings us back to the Question: Could any Subpostmasters
have been charged by POL for amounts that became incorporated in
suspense account balances that were subsequently taken into profit
by POL or by any of its Counterparty Companies, or that remain as
credit balances on the Balance Sheet of POL or of any of its
Counterparty Companies?
Best regards,
Ron Warmington