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Re-defining criminal dishonesty: why does it matter?

 

06 November 2017

Ivey v Genting Casinos [2017] UKSC 67

In a landmark case, the UK Supreme Court has clarified the test for dishonesty under criminal law. This re-alignment of the criminal test for dishonesty is significant for both organisations and their employees  The court overruled the long-standing second subjective limb of the test for criminal dishonesty (as set out in R v Ghosh) in favour of the objective civil law test.  This will erode the availability of subjective defences, possibly increasing the frequency of prosecutions for white collar crime offences against businesses and individuals.

The house always wins – even at the Supreme Court. The appellant, Mr Ivey, was a professional gambler. In August 2012, he enjoyed an enormously profitable two days at Genting's casino playing Punto Banco – a type of Baccarat.  By ‘edge sorting’, a technique which helps a gambler recognise specific cards in a pack, Mr Ivey won GBP 7.7 million. Genting, however, refused to pay out. They took the view that applying such a technique to a game of luck was tantamount to cheating.
 
Cheating
 

It was common ground between the parties that the contract for betting between Mr Ivey and Genting contained an implied term that neither party would cheat.  There was no dispute that Mr Ivey had used edge sorting to gain an advantage against the casino. He viewed it as a perfectly legitimate technique and was open about having done so.

The case therefore centred on whether Mr Ivey’s actions, given his mental state, could amount to cheating. The meaning of cheating was taken to be the same under the implied term as for the criminal offence of cheating under s42 Gambling Act 2005. For this reason, the criminal law test for dishonesty came to be considered in a civil trial.

The original Ghosh criminal test for dishonesty

Mr Ivey argued that cheating necessarily involves dishonesty.  Dishonesty has long been recognised as a jury concept of fact.  To be satisfied of dishonesty, the jury must apply the two-stage test famously set out in R v Ghosh [1982] QB 1053:

        the conduct in question must be dishonest by the standards of ordinary, reasonable and honest individuals (an objective limb); and

  • the accused must have realised their conduct was dishonest by those standards (a subjective limb).

Mr Ivey maintained that he genuinely had not believed edge sorting was dishonest by ordinary standards.

The Supreme Court declined to define cheating precisely. It held that cheating was a clearly understood concept which did not need to be conflated with dishonesty. On that basis alone, the Supreme Court found that Mr Ivey had indeed cheated and was not entitled to his winnings.

However, no doubt seeing a generational opportunity to refine the criminal test for dishonesty, the Supreme Court went much further.

The new correct test for dishonesty – removing the subjective element

The five Justices unanimously held that R v Ghosh was an incorrect interpretation of the law. The correct test was that at civil law (as set out in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378). This test is an objective one: was the accused dishonest by the standards of an ordinary, reasonable individual (having the same knowledge as the accused)? Whether or not the accused viewed their actions as dishonest by those standards (ie the subjective limb of the test in R v Ghosh) is irrelevant.

In making its decision, the Supreme Court was influenced by three main factors.

        The test in R v Ghosh was complex, combining both subjective and objective elements. This could be puzzling and difficult for juries to apply.

        There was no logical or principled basis to have different definitions of dishonesty in civil and criminal proceedings.

        R v Ghosh had the unintended consequence that the more warped a defendant’s standard of honesty, the less likely they were to be found criminally responsible for (objectively) dishonest behaviour. It is a crucial function of the criminal law to establish acceptable standards of behaviour notwithstanding an individual's mistake of fact as to societal standards of honesty.

The Supreme Court was at pains to emphasise that the removal of the subjective limb does not mean that an individual's state of mind is disregarded entirely when considering dishonesty.  A dishonest state of mind remains a subjective mental state.  When considering dishonesty, the first step remains to determine what an individual subjectively knew or believed about the facts affecting the activity in which they were engaging. 

However, once that state of mind is established, the applicable standard of behaviour is now to be judged solely on an objective basis: if an ordinary reasonable and honest person would regard the accused's mental state as dishonest, it is irrelevant that the accused would not have judged their own mental state as dishonest, nor that they would not have appreciated their conduct to be dishonest. 

The practical implications

In practice, dishonesty has been assessed by many juries without undue difficulty on a daily basis. That is unsurprising: a thief would struggle to argue they did not know stealing was dishonest by ordinary standards.

However, dishonesty is a crucial element of many complex acquisitive criminal offences. In the white collar crime context, this includes offences under the Fraud Act 2006 and conspiracy to defraud (as demonstrated by the recent prosecution of Tom Hayes), and certain ‘failure to prevent’ corporate criminal offences (for example, the new tax evasion offences introduced on 30 September  under the Criminal Finances Act 2017).  Dishonesty may also be included as an element of the intended general failure to prevent the economic crime offence currently being considered by the UK government. 

The impact of applying a purely objective test in more complex cases was spelt out by Lord Hughes: “There is no reason why the law should excuse those who make a mistake about what contemporary standards of honesty are, whether in the context of insurance claims, high finance, market manipulation or tax evasion”.

Many practitioners will pause at that. To take two of Lord Hughes’ examples: What do contemporary standards say of a multinational company which pays virtually no UK tax due to clever corporate structuring? Does the ordinary honest individual view pre-hedging a client order as a legitimate risk management strategy?

The added complexity of the subjective Ghosh test may well be blamed for the difficulties in prosecuting complex acquisitive offences.  Trials may now be more straightforward because, as in Mr Ivey's case, facts are often agreed, such that the focus is solely on an accused's knowledge or belief about those facts with reference only to objective standards of honesty.  This may well allow prosecutors to bypass altogether previous subjective defences such as market practice, or cultural standards, and leave the question of dishonesty to the jury within the context of their objective standards.

As such, this change to the criminal test for dishonesty is significant for both organisations and their employees. In keeping with the prevailing political will, it puts even more of an onus on businesses to operate in a way that reduces the risk of their employees (and those who act on behalf of the company) being involved in dishonest conduct.  This requires clear risk-based prevention policies and maintaining a keen eye on the public (and not just market) barometer of what constitutes dishonesty.   

Finally, from the perspective of regulatory or disciplinary proceedings, the Supreme Court's clarification that there is a single, unitary test for dishonesty across both the civil and criminal spheres will offer welcome clarification to any body or entity exercising regulatory or disciplinary power (including the Financial Conduct Authority and those responsible under the Senior Managers and Certification Regime) where the issue of an individual's honesty is called into question.

 

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.

 

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