WITNO0740131
WITNO0740131
5. Project Sparrow and Prosecuting Authority
Exhibit WITNOO740131
Strictly Confidential — Subject to Legal Privilege - DO NOT FORWARD
POST OFFICE AUDIT, RISK AND COMPLIANCE COMMITTEE
Prosecutions Policy
1. Purpose
441 The purpose of this paper is to:
. update the ARC with respect to certain aspects of Project Sparrow;
. seek the ARC’s (directional) views on potential changes to the
prosecutions policy; and
. seek the ARC’s views on the further work we are proposing to undertake
prior to a formal recommendation being put to the ARC with respect to a
new prosecutions policy.
2. Background
2.1 In the last (October) CEO report to the Board, an update was given on Project
Sparrow in which it was noted that “.... a paper [will be submitted] to the
November ARC reviewing our overall policy for investigating and prosecuting
future cases.”
2.2 Since that update, Brian Altman QC has prepared two separate reports, one
commenting on “[POL’s] strategy and process for reviewing past and current
criminal prosecutions in light of Second Sight's Interim Report’ (the “backward
looking report”) and the other making recommendations as to the future
approach to the conduct of prosecutions (the “forward looking report’). This
second report did not seek to comment on whether continuing with prosecutions
was itself a sensible course of action, either from a business or reputational
perspective, simply whether it was an effective use of resources from a criminal
law perspective, and if so, whether there was scope for improvement.
23 The headline conclusion of the backward looking report is that the “...review [of
the cases that had been prosecuted over the last few years] is fundamentally
sound” and that no “systemic or fundamental flaws in the review process” were
detected. In addition, a number of relatively small procedural recommendations
were made regarding matters such as document retention etc
24 The forward looking report is similarly positive in tone, with Brian Altman
commenting that he had “..... seen no evidence to suggest that Post Office Ltd
exercises its investigations and prosecution function in anything other than a
well-organised, structured and efficient manner, through an expert and dedicated
team of in-house investigators and lawyers, supported by Cartwright King
solicitors and their in-house counsel...” That said, it was noted that “Post Office
Ltd’s prosecution role is perhaps anachronistic...”, and that “POL is the only
commercial organisation (albeit Government owned) I can think of (apart from
RMG who retains a residual prosecuting function) that has a prosecution role,
and it is, to that extent, exceptional if not unique.”
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24 An important, and previously little-appreciated, finding to emerge from the 2
reports is that Post Office does not have any special statutory power to
bring prosecutions; rather it brings prosecutions in a purely “private” capacity
further to section 6(1) of the Prosecution of Offences Act 1985, which gives all
individuals and companies the right to bring a private prosecution. Prior to Brian
Altman’s review it was believed in many parts of the organisation that the Post
Office had been given special powers by parliament to prosecute. In reality, no
specific legislation or regulation currently requires Post Office to undertake
prosecutions, nor is there any current legislative policy that mandates that
prosecutions should be brought.
2.5 The fact that prosecutions are conducted on a private basis does not mean that
the standards of evidence are in any way reduced, or that the process is less
rigorous than would be the case with a public prosecution. It simply means that
Post Office steps in to assume a function that typically would be undertaken by
the CPS, after the referral to it of a case by the police.
2.6 The reasons why Post Office developed a private prosecutorial capability are
historical; reasons given for its retention include:
. It serves as a “deterrent” i.e. it provides a clear signal to the whole
network that offences of dishonesty will be taken seriously;
. It assists Post Office with its relationship with insurers; and
. It re-assures employees that “securing the company’s assets will be taken
seriously”.
No empirical evidence has been given in support of the above, though from first
principles it would seem doubtful that the cost of, or the terms on which,
insurance can be obtained would be materially impacted by the existence, or
non-existence, of a prosecutorial capability.
27 In addition, it has been said that one consequence of using the criminal process
against sub-postmasters is that the associated debt recovery actions (done
under the Proceeds of Crime Act) are quicker and “more efficient”. This is clearly
true, though the criminal recovery process, albeit very efficient, is a fairly blunt
and sometimes brutal process that involves the forcible sale of assets against the
backdrop of a criminal conviction and possible prison sentence. In the case of
sub-postmasters that are in financial distress, this may well involve the sale of
their main residence.
2.8 A similar outcome could be achieved using the civil recovery process, though
making claims through the civil courts is a more cumbersome process, and the
ability to obtain orders “freezing” assets ahead of trials is much more restricted
than it is in criminal cases (in criminal cases, a “prosecuting authority” has the
right to request a judge to make an order freezing the defendants assets once
the investigation has commenced, but before it has gone to court).
3. Acti
ies/Current Situation
3.1 Typically, some 250 investigations are conducted each year into cases of
suspected fraud or unexplained loss. In turn, this leads to around 50
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prosecutions being brought all of which result in the conviction of either a sub-
postmaster (or very occasionally) an employee. The most common charge is
“false accounting”, itself a very serious offence carrying a maximum tariff (7
years) not dissimilar to theft (10 years); this offence of false accounting is
technically committed every time the end-of-day return is made on the Horizon
system declaring that the sub-postmaster’s books balance when the sub
postmaster knows they do not. Indeed, more often than not, criminal
investigations are started when the books have not balanced. The internal
“Network Support/Audit and Training” team (a team of around 200, some of
whom are charged with responsibility for undertaking stock-takes in the network)
identifies the fact that there is an unexplained cash or stock shortfall, and that
the books don't balance. In turn that team then notifies the security team which
mounts an investigation and decides whether or not prosecute.
3.2 Prosecutions, however, are only brought to the extent that they fit within the
internal prosecution policy. This policy focuses on 2 factors: sufficiency of
evidence and likelihood of conviction — latterly a third factor has been added,
which is the quantum of the loss (amounts below £5k are now not pursued). The
highest “risk” group of offenders appears to be those sub-postmasters who have
been in post for less than 5 years but more than 18 months. Amounts involved
are generally less than £20,000, though there are a handful of high value cases
involving outright theft of cash or very large stock deficiencies.
3.3 Immediately following the Second Sight report, work was done to rationalise and
consolidate the pre-existing prosecution policy. That said, the consolidated policy
is in substance no different to that which has been applied previously; in any
event, it has in essence been held in abeyance and no further prosecutions have
been initiated.
Options Considered
41 At a practical level, there are a number of alternatives to mounting our own
criminal investigations and undertaking private prosecutions. In particular, most
companies when faced with theft from employees, or agents, would simply
contact the police, and if fraud were a persistent problem, develop processes for
engaging with them.
4.2 Alternatively, it is open to companies (effectively) to bypass the police and go
directly to the local prosecuting authority (e.g. the CPS in England and the
Procurator Fiscal in Scotland); indeed for technical reasons, this is the approach
that is adopted by Post Office in Northern Ireland and Scotland. The experience
in those 2 jurisdictions, however, is that there is reluctance to prosecute all but
the most serious, or the most clear-cut, cases, as to some extent it is seen by
them as a debt recovery (i.e. civil) matter. We have been advised by Brian
Altman that should Post Office go down the route of referring matters to the
police or the CPS, there would be a limited appetite to prosecute, even if all the
preparatory work (witness statements, fact finding etc.) had been done by Post
Office in house.
4.3 In light of the above, four broad options were considered:
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Exhibit WITNOO740131
Strictly Confidential — Subject to Legal Privilege - DO NOT FORWARD
a) Preserving the status quo — i.e. retaining prosecutorial capability and
continuing with a prosecutions policy that is not dissimilar to that which
has been used in the past;
b) Pursuing a prosecutions policy focussed only on high value
cases/cases involving vulnerable members of society, and engaging
with the police in relation to other matters;
c) Ceasing all prosecutorial activities but instead actively involving the
police/CPS etc where it is felt that they are likely to take matters forward;
and
d) Ceasing all prosecutorial activities as per option c) BUT coupled
with work (as yet not formally defined but some of which has already
started as part of Project Sparrow and NT):
. to gather better MI from the network;
. to improve the overall control framework around the branch
network; and
. to provide more support to sub-postmasters.
This last option is perhaps closest to that adopted by banks and other
organisations facing serious losses through fraud and criminal activity.
44 As part of the evaluation process, however, consideration was given to broader
policy factors, including:
e Post Office’s brand image;
«whether undertaking prosecutions is consistent with a commercial franchisor-
franchisee relationship; and
e the overall drive to develop better stake-holder engagement and a more
mature working relationship with sub-postmasters.
In light of these considerations:
« Option a) above was felt to be, at best, sub-optimal and was not explored to
any great extent, other than to ask the question of Brian Altman whether it
was “efficient” in terms of the criminal process (which it is).
* Option b) carried with it the risk that any residual prosecutions undertaken by
Post Office would be conducted so infrequently (probably only a handful
each year) as to mean that it was not efficient to maintain an internal team to
handle them. Accordingly, it too was discounted for the time being; and
* Option c) was rejected as carrying an unacceptable risk of fraud and loss
given the scale of the “losses” currently suffered through theft and false
accounting.
5. Proposal
5.1 Option d) is the favoured way forward. That said, before a final recommendation
can be made, further work needs to be done. Accordingly, it is proposed that:
« Work now commence to ascertain the scope, and the cost, of the additional
work that would need to be undertaken to gather better MI from the network
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(including MI as to the “deterrent” value of the current policy), improve the
overall control framework, and provide better support to sub-postmasters
whilst protecting public funds. Part of this work will also be focussed on
exploring additional (non-criminal) sanctions that could be used as a
deterrent against sub-postmasters who have deliberately committed fraud.
A programme director and sponsor has already been identified for this work,
which will in part build upon work that has already been done as part of
Project Sparrow and some of the work that has started in the Audit team;
e The Communications team develop a strategy for effectively delivering
messages about any change in prosecutions policy, given that any move to
change our prosecutions policy, once in the public domain, could:
i. attract significant comment in the media and amongst stakeholder
groups, with potential for an adverse impact on brand and reputation; and
ii. be perceived as an ‘admission’ that past prosecutions are somehow
flawed.
e A deeper analysis is undertaken of the financial impact of adopting option d).
In particular, this will look at:
i. the ways in which civil proceedings (as opposed to criminal proceedings)
can be used more effectively to reduce the financial impact once Post
Office becomes unable to continue to use the Proceeds of Crime Act to
recover money that has been mis-appropriated; and
ii. any headcount savings that may be available.
5.2 This last piece is important. Under the terms of the sub-postmasters’ contract,
sub-postmasters are liable to Post Office for all “losses” of stock/cash etc.
Accordingly, a “fraud” involving the loss of stock or cash gives rise to receivable
in the hands of Post Office, which if not recovered leads to a bad debt. Although
there is a dedicated team that keeps track of bad debts that arise in the normal
course of events, and the recovery for them, anecdotal evidence from the
criminal prosecutions team suggests that once matters are handed to them,
around 75% of all bad debts are recovered. The evidence further suggests that
around £1.5m is recovered annually. As noted above, it is likely that a civil
recovery process would lead to a slower, and slightly lower, recovery rate. We
will therefore need to consider and monitor closely the potential impact any
policy change may have on the “deterrent effect” of the existing policy.
6. Commercial Impact/Costs
6.1 See 5.1 and 5.2 above. There may well be an offsetting impact on the headcount
in certain areas, in particular the security team and the legal team, though this
has yet to be quantified. However, there will be additional costs associated with
enhancing the MI and control framework. These too have not yet been
quantified, but should to some extent fall within BAU budgets (for example to the
extent that they form part of the audit function, they may be part of that budget).
Indeed, some of the work referred to in para. 5.1 above is already being
undertaken given its importance to Post Office’s brand and wider business
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Strictly Confidential — Subject to Legal Privilege - DO NOT FORWARD
objectives, and therefore has a value which is independent of the issues
discussed in this paper.
7. Key Risks/Mitigation
71 These pertain mainly to the potential increased risk of fraud, and being seen to
be “soft” with public money, but should be capable of being addressed by
enhanced MI and improvements to the control framework etc.
8. Long term considerations — horizon scan
8.1 Not taking action now in relation to the prosecutions policy could lead to, or
exacerbate, the impact of further adverse publicity regarding Post Office’s
treatment of sub-postmasters.
8.2 Taking this action may assist in developing better stakeholder engagement.
9. Communications Impact
9.1 The communications team is already heavily involved in Project Sparrow, and it
is proposed to manage the communications of the above through that channel. A
key issue will be to ensure that any change of policy is properly positioned with
MPs, the JFSA and the wider Network.
10. Recommendations
The ARC is asked to:
10.1 note the update set out above; and
10.2 approve the proposals set out in paragraph 5.1 above.
Chris Aujard
13 November 2013
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