A recent Court of Appeal judgment has now consigned the previous dishonesty test to legal history, but in doing so, has replaced it with a test that is arguably unfair for defendants charged with dishonesty offences and will especially impact white collar defendants.
With fraud and other financial wrongdoing investigations and prosecutions expected to increase in in the aftermath of the Covid-19 pandemic, the time is right to consider some of the implications for those accused of white collar crime allegations by the alteration of the legal test for dishonesty.
In a judgment handed down on 28 April 2020, the Court of Appeal hammered the final nail into the coffin of the subjectively honest mental state defence. The Lord Chief Justice's ruling in R v Barton & Booth confirmed that the test for dishonesty in Ivey v Genting Casinos in 2017 has displaced the test in R v Ghosh from 1982. The judgment will be received with great relief by the SFO, FCA and other prosecuting authorities. The new test is considerably more generous to the prosecution than the previous, removing the opportunity for defendants to argue on a subjective assessment that they did not realise that their conduct would be considered dishonest.
Since 1982, the criminal test for dishonesty was:
(a) Was what was done dishonest according to the ordinary standards of reasonable and honest people? If no, D is not guilty. If yes —
(b) Did the defendant realise that reasonable and honest people regard what he did as dishonest? If yes, he is guilty; if no, he is not.
This test allowed a defendant to present evidence of his subjective view of the honesty of their conduct.
Our criminal laws, such as the Fraud Act 2006 was drafted with the subjective test of dishonesty being the relevant mental state for fraud offences. The mental state for the offences was drafted broadly. Provided the relevant criminal act is carried out, a person will be guilty if they dishonestly intend (i) to make a gain for themselves or another, or (ii) to cause loss to another or to expose another to a risk of loss.
This all changed following the Supreme Court's ruling in the civil case of Ivey. Mr Ivey being a professional gambler, who sued a casino to recover his winnings that the casino refused to pay out because it believed he had cheated. The Supreme Court considered questions about the meaning of the concept of cheating at gambling and the relevance of dishonesty to that concept. In this judgment the Supreme Court held that the Gosh test for dishonesty did not correctly represent the law. Lord Hughes identified a number of "serious problems" with Ghosh, including that it is a "test which jurors and others often find puzzling and difficult to apply". He argued that the test for dishonesty should be the same in both the civil and the criminal courts.
In Barton, the Court of Appeal agreed that Lord Hughes' argument was compelling and was bound to follow it. Therefore in criminal cases juries will be directed to consider:
What was the defendant's actual state of knowledge or belief as to the facts; and was his conduct dishonest by the standards of ordinary decent people?
But does it matter that a defendant can be prosecuted without realising that their conduct was dishonest? And if so, should we be concerned?
The jury must now consider the defendant's knowledge of facts as relevant to their objective assessment of his dishonesty. A defendant's mental state and appreciation of their conduct based on the facts as understood can be taken into account as part of the jury's assessment of the facts presented at trial. Defendants will, however, not have the safeguard of being able at trial to stand back from those facts and defend their actions based on whether they realised that what they did was dishonest.
This matters because, as outlined above, the mental state test for the Fraud Act 2006 offences is extremely broad. An offence can be committed where a person neither dishonestly intended to make a gain or cause a loss but where they dishonestly "expose another person to a risk of loss".
If we highlight, by way of example those individuals employed by banks and other financial institutions, their conduct inherently exposes a counterparty or their firm to a risk of loss. Conduct which they considered at the time to be genuinely honest and in line with appropriate market conduct or standards could be considered by a jury to have fallen below its own standards for honest conduct. The accused trader was wrong and should have realised that his conduct was dishonest. While a negligent trader should not be held to be dishonest, the margin is now wafer thin, and for an offence that carries a maximum custodial sentence of 10 years and irreparable reputational damage, the law has now become uncomfortably uncertain.
The decision has significant implications for complex fraud offences relating to the financial markets. While a defendant can adduce evidence of their knowledge of the market and subjective trading strategy, it is largely irrelevant that they did not appreciate that their conduct would be considered dishonest.
Another example where the change of test for dishonesty may help prosecutors is for offences such as conspiracy to defraud and cheating the public revenue, the constituent part of the mental state is dishonesty. People engaged in complex schemes for the purposes of mitigating tax, which may include holding assets in offshore jurisdictions, done so in the belief that it is legitimate tax avoidance may now come to be investigated and prosecuted by HMRC on the basis that a jury would be more likely, including for moral reasons, to find such conduct dishonest tax evasion by wider society's standards.
Whilst having the same test for dishonesty applied to both civil and criminal cases has its benefits of being more straightforward, the benefit clearly swings towards the prosecution. This creates obvious risk in the law and defendants convicted even if they did not realise their actions would be seen to be dishonest. It will be interesting to see how this plays out in the courts in future cases.