Most fraud offences require dishonesty
A large number of offences fall within the definition of fraud for the purposes of the new failure to prevent fraud offence. Almost all of them involve dishonesty.
Assessing allegations of fraud requires knowing how English law defines dishonesty. For example, can someone be dishonest if they genuinely thought that they were doing nothing wrong? What if they thought they were acting in accordance with ‘market practice?’
Understanding the legal standard for dishonesty will assist businesses to design and implement safeguards to prevent fraud from occurring within their business.
Test for dishonesty
Until 2017, to prove that someone had acted dishonestly in theft or fraud cases, the jury had to find that the defendant’s conduct was dishonest by the standards of ordinary, reasonable people; and the defendant appreciated that what he or she did was dishonest by the standards of those ordinary, reasonable people.
This is no longer the correct test.
The current test is based on obiter comments of Lord Hughes in the civil Supreme Court case of Ivey v Genting Casinos (UK) Ltd . The alleged dishonesty centred on Phil Ivey, a professional gambler, using a technique called "edge-sorting" while playing Punto Banco (a form of baccarat) at a casino in London. Edge-sorting involves identifying tiny, asymmetrical patterns on the backs of playing cards to determine their face value. Ivey, with the help of an accomplice, persuaded the croupier to rotate certain cards under the guise of superstition, thereby arranging the deck so he could distinguish high-value cards from low-value ones.
He won GBP7.7 million. The casino refused to pay out, arguing that Ivey had cheated by manipulating the game in a way not intended by the casino and that his conduct was inherently dishonest. Ivey, however, maintained that edge-sorting was a legitimate advantage play and did not consider his actions to be cheating or dishonest.
The Supreme Court ultimately found that Ivey’s conduct amounted to cheating and was dishonest by the standards of ordinary decent people. Importantly, Ivey’s own belief that he was not cheating was considered irrelevant.
Lord Hughes said that the jury must consider: (1) what was the actual state of the individual’s knowledge or belief as to the facts at the time of the allegedly fraudulent act; (2) taking account of that, was the act dishonest by the standards of ordinary, decent people?
Note that the test therefore no longer explicitly referred to having to show that an individual appreciated that what they did was dishonest.
Barton and Booth v R
The Ivey test technically remained non-binding for the English courts given it was only obiter. However, the Ivey test was later held to be binding in Barton and Booth v R and is now the undisputed test for dishonesty. In Barton and Booth, the Court of Appeal (Criminal Division):
- endorsed the test in Ivey, finding that dishonesty should be assessed “by reference to society’s standards rather than the defendant’s understanding of those standards”.
- said that there should still be an emphasis on the subjective elements of dishonesty: “all matters that lead an accused to act as he or she did will form part of the subjective mental state, thereby forming a part of the fact-finding exercise before applying the objective standard… [and] may include… the experience and intelligence of an accused”.
What did the accused know or believe?
The current test therefore relies on applying the standards of ordinary and decent people to the facts as the accused knew or believed them to be. The reasonableness or otherwise of an individual’s belief is a matter of evidence, and will go to whether the belief was genuinely held.
Let’s take, for example, a senior finance employee who misrepresents revenue in a large listed company’s accounts. At worst, this could constitute fraud and false accounting for the employee, failure to prevent fraud for the business, and potentially even fraud for the business (if the employee is classed as a ‘senior manager’).
But was the employee dishonest? Consider some of the following scenarios:
- the employee knows the revenue figures are wrong but is motivated to misrepresent the company’s financial health in order to meet market expectations (and therefore benefit the company);
- the employee believes them to be correct. Evidence shows that he was provided with inaccurate revenue figures due to incorrect application of accounting rules by others, of which he is unaware; or
- the employee says that he believed the revenue figures he was given were correct. However, there are multiple emails that he received showing internal concerns about the improper application of accounting rules.
Under the Ivey test, Scenario (1) would lead to a finding of dishonesty. For (2), applying the Ivey test, the jury is unlikely to find him dishonest as they would judge his conduct on the facts as he believed them to be, and the evidence supports his lack of knowledge of the incorrect figures. In (3) the jury would be asked to make a finding based on the evidence that was available to him at the time. Given the email evidence, a jury may find it hard to believe the employee.
Internal investigations
These examples show just how carefully the question of dishonesty must be assessed in the context of an internal investigation and the importance of keeping an open mind and also taking into account the evidence that points away from potential dishonesty. SFO enforcement has included companies that have accepted that dishonesty offences have been committed, only for a jury subsequently to find that the individuals responsible had not acted dishonestly.
Assessing dishonesty requires understanding the test, and then applying it forensically during document review and interviews. Assessing what the individual understood the facts to be, particularly when some time has elapsed since the alleged offending, has to be done extremely carefully.
An inaccurate finding of dishonesty could have serious consequences for an individual. And with the new failure to prevent fraud offence (and senior manager test for corporate liability), it risks the business not assessing its exposure correctly too.
Key takeaways
- Dishonesty is core to most of the fraud offences covered by the failure to prevent fraud offence. Employers will want to ensure that there is a culture of honesty and transparency instilled in their employees and associated persons and that they are encouraged to act with integrity in their roles. This should come from the top of an organisation. Whistleblowing reporting lines will be a key part of this so that staff can report when they think others might have been dishonest.
- When designing fraud prevention procedures, employers will need to be aware that the test is that of ordinary standards of reasonable and honest people. As a way of instilling the correct standards, some businesses may choose to use team meetings or other fora to talk through example scenarios with integrity related challenges which are relevant to their business.
- Establishing whether there has been any dishonesty needs to be handled very carefully during an internal investigation. Ensure interviews are organised and managed in a way that encourages accurate recollection. An employee under pressure may not always have an accurate memory of what they knew at the time of the alleged misconduct. This could impact findings on intention and dishonesty and, ultimately, individual and corporate exposure.
Ensuring that compliance programs keep up with new corporate criminal offences was one of the key challenges identified for in-house counsel in the A&O Shearman 2025 Cross-border White Collar Crime and Investigations Review.
