British Telecom has been forced to pay the Ministry of Defence £1.3 million in compensation after its call centre staff were found to be meeting targets by phoning each other.

Between May 1999 and February 2005 there were 1.25million fraudulent calls made at a cost of £197,000.

The scam, exposed in a report by the Audit Commission, was used to help BT staff to maintain service targets set by the MoD, which pays the telecommunications giant £3 billion to operate the Armed Forces telephone system.

If the call centre involved, based in Kettering, Northamptonshire, had been found to be answering calls too slowly it would have been liable for a fine under the Defence Fixed Telecommunications System contract.

The report by the public spending watchdog said that the call centre had been shut down and BT had dismissed the “small number of staff” involved. The company had also paid more than £1million in service charges, the £122,000 cost of investigating the fraud and the £197,000 cost of the bogus calls.

The report said that the scam had taken so long to detect because it had not had enough of an effect on the telephone service to cause user complaints.

Although most of the MoD's private finance projects have proved successful, Tim Burr, the head of the National Audit Office, called for the MoD to be “more alert to the risks that can emerge once the project is up and running, such as inaccurate performance reporting”.

The incident was called a “real-life Whitehall farce” yesterday by Edward Leigh, the Conservative MP who chairs the Commons Public Accounts Committee.

“It says a lot about the MoD's oversight of its contractors that the department's systems failed to spot a serious fraud,” he said.

BT was unavailable for comment yesterday.

Explore UK News

• Crime News

• Education News

• Health News

• Scotland News

Times Recommends

• Postmen: We bind the nation together
• Tewkesbury: when the memories flood back
• Cast Offs actress: I’m happy that my face fits