The reasonable man test for dishonesty

This article was originally published in the September issue of Butterworths Journal of International Banking and Financial Law and is reproduced with permission from the publisher.

On 29 April 2020 the Court of Appeal (Criminal Division) handed down judgment in Booth & Anor v R (2020) EWCA Crim 575, clarifying that the test for dishonesty to be applied by the courts is the test expressed obiter in Ivey (2017) UKSC 67, not the test in Ghosh (1982) QB 1053. This decision has wide implications for financial services firms as dishonesty is a key element in a number of criminal and regulatory offences, including fraud.

Background

David Barton ran a nursing home in Southport. He was charged with dishonestly taking advantage of his relationship with the residents of the care home in order to profit from them, thereby breaching the trusted position that he occupied. In addition, Rosemary Booth was accused of abusing her trusted position as general manager of the nursing home by aiding Barton in his fraudulent activity.

Both defendants were convicted of dishonesty offences in May 2018. On appeal they argued, inter alia, that the judge had erred by directing the jury on the issue of dishonesty by reference to Ivey rather than Ghosh.

The Court of Appeal’s decision – the test of dishonesty

The two-stage Ghosh test can be stated as follows:

• was the defendant's conduct dishonest by the ordinary standards of reasonable people? If so;
• did the defendant appreciate that his conduct was dishonest by those standards?

The second limb of this test is problematic for a number of reasons, as noted by the court in Ivey:

• the more "warped" a defendant’s standards of honesty are, the less likely it is that he will be convicted of dishonest behaviour;
• the second limb was not necessary to preserve the principle that dishonesty must depend on the actual state of mind of the defendant;
• jurors find the test confusing and difficult to apply; and
• it has caused an "unprincipled divergence" between the test for dishonesty in criminal proceedings and civil actions.

The Supreme Court therefore proposed an alternative test for dishonesty:

• what was the defendant's actual state of knowledge or belief as to the facts; and
• based on those facts, was his conduct dishonest by the standards of ordinary decent people?

It directed that the second leg of the test propounded in Ghosh did not correctly represent the law and that directions based upon it ought no longer to be given.

Whilst the Supreme Court’s comments on dishonesty in Ivey were strictly obiter, the Court of Appeal in Booth held that it was bound to follow the Supreme Court’s direction on the appropriate test for dishonesty, and therefore held that the test for dishonesty to be applied in all criminal cases is that set out in Ivey.

Practical implications for financial services firms

The decision in Booth removes the opportunity for defendants to rely on the second limb of the Ghosh test to argue that they were not subjectively dishonest i.e. the “Robin Hood defence”; that although reasonable people consider stealing from the rich to be dishonest, Robin Hood believed that ordinary people feel it justified, and not dishonest. In a business context, this defence – based on the subjective belief in the honesty of one’s actions - was rejected by the jury in R v Hayes (2015) EWCA Crim 1944, where the defendant asserted that his attempts to manipulate the LIBOR rate were not dishonest as everyone else was doing the same and it was the market norm.

The Court of Appeal’s decision is likely to work to the disadvantage of defendants. The court in Booth emphasised that the first limb of the Ivey test remains a test of the defendant’s state of mind (it still requires the defendant’s knowledge of the facts to be considered), however what is not subjective is the standard of what constitutes honest conduct. There is, therefore, the potential for a defendant to be convicted for a shortfall in conduct which he did not himself appreciate was dishonest.

Financial services firms, and senior decision makers within them, should be alert to this. Now, dishonesty will be judged by the standards of an ordinary and reasonable person, not by the standards of other bankers or financial service professionals. The new test will not protect those in businesses where they fail to recognise what the contemporary standards of honesty are.

Key practical takeaways of the decision are:

• the alignment of the civil and criminal definitions of dishonesty now means that there is a heightened risk of employees’ actions being viewed as dishonest;
• when implementing or reviewing working practices, it is not sufficient to simply follow the example of other firms / the market generally – following the herd is no longer an excuse; and
• the importance of these changes and the increased obligations under the senior managers and certification regime must be reflected in training to emphasise the need for independent judgment when making decisions.