Following the judgment of the English High Court in Serious Fraud Office v Barclays Plc & Another1, prosecutors are aware that they now face a more onerous task when trying to establish corporate criminal liability. However, a recent clarification of the law on dishonesty may lead to prosecutors bringing more prosecutions against individuals for complex frauds.
On 29 April 2020 the English Court of Appeal (Criminal Division) in R v Barton and Booth2, affirmed that the test for dishonesty should be judged by reference to society’s standards rather than the defendant’s understanding of those standards. The decision in Barton makes organisations and their senior executives or employees more vulnerable to conviction when charged in cases involving fraud and other dishonesty-related offences.
This OnPoint considers the impact of the Court of Appeal’s decision in Barton on the prosecution of defendants in complex fraud cases and practical issues for firms to consider.
Decision in Barton
The Court of Appeal ruled that the correct test for dishonesty is as prescribed in the obiter remarks of the Supreme Court in Ivey v Genting Casinos (UK) (trading as Crockfords)3, meaning that the two limb test for dishonesty set out in R v Ghosh4, and applied for over thirty years, is no longer valid. Under the subjective limb of the Ghosh test, prosecutors were required to prove that a defendant was aware that their actions would be viewed as dishonest, creating the risk that a defendant could escape conviction if they had warped standards of honesty.
The case of Barton involved a nursing home owner who defrauded elderly and wealthy residents to turn over their finances to him. A number of these residents allowed Barton to assume control of their finances and he used this control to enrich himself.
As a result of the decision in Barton, the test for dishonesty to be applied by the jury is now more straightforward. First the jury will need to consider, as part of their fact-finding duty, the defendant’s actual knowledge or belief as to what was going on, i.e. what caused the defendant to act as they did; and then the jury will apply the standards of ordinary reasonable people to judge whether the defendant’s conduct was dishonest5.
The Court of Appeal’s decision in Barton also clarified that for the purpose of proving the offence of conspiracy to defraud, there must be a dishonest agreement which includes an element of unlawfulness in its object or means. The Court explained that the defendant must act with an intention to prejudice another's rights but the agreement need not necessarily include the commission of a substantive offence if carried out.
The Ivey test confirmed in Barton provides a wider scope for conviction than the test in Ghosh, and no longer protects a person who genuinely believes that their conduct was not dishonest if it falls below the standards that society would expect of them. This, combined with the clarification of the application of the conspiracy to defraud offence in Barton, will make it easier to prosecute defendants in complex fraud cases, including market misconduct in the City.
Practical implications of Barton
The impact of the revised test for dishonesty is particularly relevant for individuals in cases involving complicated financial or business activities, whose context and general operating practices may not be known to ordinary people. This creates the risk that the subjective defences which remain open to the defendant, such as market practice and cultural standards, will now be judged by a juror’s objective standards.
In Ivey, the court made it clear that “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”6.
When exercising its regulatory and disciplinary powers, the Financial Conduct Authority (FCA) may find it easier to impose prohibition orders preventing a person from operating in the regulated financial services sector where the FCA determines that a person lacks honesty.
Although the decision in Barclays makes it more difficult to prosecute large companies in complex fraud cases, companies can still face significant reputational damage and economic consequences from a prosecution involving their executives or employees. Firms should take steps to mitigate the risks of being held criminally liable for the acts of their executives and to minimise the impact of any investigation or prosecution of such individuals, such as undertaking risk assessments for critical areas of their business (see further below).
Issues for organisations to consider
The Serious Fraud Office (SFO) and the FCA have made it clear that they are eager to hold individuals to account. As a consequence, firms should:
- Undertake a risk assessment to ensure that the firm’s internal culture and controls adequately deter individuals from abusing or taking advantage of the firm’s clients/customers for either their own or the firm’s benefit;
- Identify potential conflicts of interests that may exist with a client and ensure that effective policies and controls are in place to deal with this issue;
- Identify any conduct or financial/business activity which may be viewed by outsiders or ordinary people as potentially unfair or prejudicial to a counterparty;
- Ensure there is effective monitoring in place to prevent abusive trading or business practices;
- Ensure there are sufficient policies and procedures in place to address financial crime risks;
- Ensure all senior executives and employees have received training on financial crime risks;
- Ensure the firm’s senior executives and employees attest to their understanding of the firm’s financial crime policies and their obligations to comply with these policies;
- Implement a clear policy and practice of encouraging individuals to report misconduct concerns;
- Ensure clients provide written acknowledgment that they understand the risks of a transaction and provide their written consent; and
- Ensure the business cannot unduly influence the independence of the firm’s finance team when assessing the accuracy and fairness of financial statements.
Footnotes
1) [2018] EWHC 3055 (QB).
2) [2020] EWCA Crim 575.
3) [2017] UKSC 67. In October 2017, the Supreme Court in Ivey overturned the second limb of the test in Ghosh, stating that Ghosh did not correctly represent the law and that the correct test was the objective test set out in the cases of Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 and Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37.
4) [1982] QB 1053.
5) CPS case redefines the legal test for ‘dishonesty’ in criminal law.
6) Ivey v Genting Casinos (UK) Ltd t/a Crockfords [2017] UKSC 67, paragraph 59.
