INSIGHT

The new test for dishonesty – criminalising conduct that falls short of 'community expectations'?

By Christopher Kerrigan
Financial Services

In brief 5 min read

There has been a lot of talk about the recent amendment to the test for dishonesty in the Corporations Act 2001 (Cth), which lowers the burden on the prosecution. In this article, we take a closer look at what the amendment means in practice, examine whether this change has imported the concept of 'community expectations' into the criminal law and explain why we do not anticipate a significant wave of prosecutions under this new test.

What has changed?

'Dishonest according to the standards of ordinary people'

The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) amended the meaning of the term 'dishonest' in the Corporations Act.

Now, to be 'dishonest' under the Corporations Act means to be 'dishonest according to the standards of ordinary people'.

Before the amendments, to be dishonest under the Corporations Act, a prosecutor needed to prove a person:

  • was dishonest according to the standards of ordinary people (objective limb); and
  • knew their conduct was dishonest according to the standards of ordinary people (subjective limb).

Now, to be 'dishonest' under the Corporations Act means to be 'dishonest according to the standards of ordinary people'.

These changes are prospective for offences committed on or after 13 March 2019. For offences committed before this point, the old test applies.

This two-limbed test was based on the test commonly referred to as the 'Ghosh test', originating from an English criminal law decision, R v Ghosh [1982] EWCA Crim 2, and is the test applied in Australia for common law dishonesty offences.1

While the change amends the test for establishing 'dishonesty', no definition of dishonesty is offered. In fact, there is no definition of 'dishonesty' anywhere in the common law world. It has been said to imply a reference to a standard of morality or ethics;2 and described as being like an elephant, 'characterised more by recognition when encountered than by description'.3

For indictable dishonesty offences under the Corporations Act, it will therefore be for ordinary members of the public sitting on a jury to determine whether conduct is 'dishonest'. Without any definition and a subjective limb, there is a concern, particularly in the financial services sector, that any conduct falling short of 'community expectations' could be found to be criminally dishonest, regardless of the defendant's state of mind at the time. 

What provisions are affected by the change?

As has been widely discussed both during and since the Royal Commission,4 section 1041G of the Corporations Act makes it an offence for a person to engage in dishonest conduct in relation to a financial product or financial service in the course of carrying on a financial services business.

Although less talked about, other parts of the Corporations Act are also impacted by the changed approach to dishonesty.5 For example, s184(1) (Good faith – directors and other officers) was also amended to align with the new definition.

Is the defendant's state of mind no longer relevant?

While the subjective intention or knowledge of a person is no longer an element of the offence, it is still a relevant fact when determining whether an individual's conduct was objectively dishonest. Consideration must be given to what the defendant knew, intended or believed at the time of the conduct. It is that mental state, together with the defendant's action, which is then assessed by the standards of ordinary people. Taking a simple example for illustrative purposes, if a person picks up from the floor a $100 note that does not belong to them, before a jury can assess whether the conduct was dishonest it will need to understand whether the $100 note was collected accidentally or intentionally, or with a mistaken belief as to its ownership.

The consequence of this change is that while the defendant's state of mind will still be relevant, a defendant will no longer be able to escape conviction on the basis that their own standards of integrity were so warped that they were no longer aware of society’s norms of honesty.

The UK experience

The change in the Corporations Act aligns Australian corporations law with the 2017 UK Supreme Court case of Ivey v Genting Casinos (UK) Ltd t/a Crockfords [2017] UKSC 67, which rejected the Ghosh subjective limb. Critically, however, the Supreme Court placed emphasis on the importance of ascertaining the defendant's actual state of mind at the time of the conduct as part of the determination of whether their conduct was dishonest by the standards of ordinary people.

While it is a relatively recent decision, we are yet to see a flood of new prosecutions for dishonesty in the UK. 

Future forecast

Going forward, a defendant will no longer be able to rely on a warped sense of morality to avoid prosecution.

In the Banking Royal Commission, Commissioner Hayne recommended ASIC utilise dishonesty-based provisions in the Corporations Act to refer certain 'fees for no services' cases for criminal prosecution.6 Those cases would need to be charged under the Ghosh test, setting a higher hurdle for the prosecution to clear. It remains to be seen whether ASIC and the CDPP are able to establish that offences have been committed under this test.

The new dishonesty offence does incorporate a concept of morality or 'community expectations', but the offence has always done so.

Going forward, a defendant will no longer be able to rely on a warped sense of morality to avoid prosecution. That removes a hurdle for the prosecution, but they will still need to establish the defendant's state of mind and persuade a jury it was dishonest. For this reason, we do not anticipate the change leading to the prosecution of a significantly broader range of conduct than is currently the case.

Footnotes

  1. Peters v The Queen (1998) 192 CLR 493.

  2. R v Salvo [1980] VR 401, per Justice McInerney at 407.

  3. Ivey v Genting Casinos (UK) Ltd t/a Crockfords [2017] UKSC 67, per Lord Justice Hughes [48].

  4. Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – Final Report (Volume 1), 154.

  5. Other examples include ss1041F, 208 and 209.

  6. Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – Final Report (Volume 1), 151.