Corporate Crime: What's the Difference Between Sharp Practice and Dishonesty?Published: August 16, 2011 in Knowledge@Australian School of Business
Lawyers have been warned that keeping to the letter of the law may no longer be enough in commercial matters. The trend in lawmaking now is to add offences of acting dishonestly to corporate criminal law. And it's being left to juries to be the judge of what's dishonest behaviour.
Letting juries make the call is common sense because in corporate crime there is often a gap between what existing laws proscribe as unlawful and what the public sees as morally wrong. Dishonesty remains one of the key components of corporate crime and there are moves towards enacting dishonesty offences generally, both within and beyond the corporate crime context, according to former federal crown prosecutor and Australian School of Business lecturer Janet Austin.
In her paper, When does sharp business practice cross the line to become dishonest conduct?, Austin gives the example of law firm Clayton Utz advising its client British American Tobacco Australia that, in effect, it could destroy documents that showed the company's knowledge of the dangers of smoking. This occurred in 1990 in circumstances where there was no pending litigation and this destruction of the documents was eventually found to be lawful. However, people may question the morality of behaviour of the type undertaken by Clayton Utz.
Writing in the University of Queensland Law Journal, Austin gives another example in the transfer of the Australian publicly listed company James Hardie Industries from Australia to The Netherlands. The transfer was purported to provide the company with a more favourable taxation environment. "However, the reality was far more sinister," says Austin, who is now a law professor at Canada's University of New Brunswick. "The motivation was to separate the company from its asbestos-related liabilities to the detriment of the public and, in particular, so that the company's assets were beyond the reach of existing and potential tort claimants. If dishonesty is included as an element in offences this may prevent or capture these types of reprehensible behaviours and bridge this gap between standards of morality and the 'black letter' of the law."
It appears that lawyers and their clients will have to adapt to dishonesty becoming a key consideration in commercial crime and this fostering of ethical behaviour should benefit the wider community. It should encourage lawyers to advise their clients to adopt the highest ethical standards and behaviour to ensure they will not subsequently be found to be dishonest. "As such, the use of dishonesty as an element of criminal offences in areas of commerce, where the community expects the highest standards of ethical conduct – such as dealings between financial advisers and the public – should probably be encouraged," says Austin.
Yet this can pose difficulties for lawyers when advising their clients about whether their conduct may breach the law. Prosecutors cannot be entirely confident that if they proceed with a criminal prosecution what they allege is dishonest will be accepted by the jury. There is criticism of making dishonesty an element in commercial crime – and Austin says this point of view is not without merit if certainty in the law is the criteria being judged.
A key question is whether dishonesty is an appropriate basis for identifying and criminalising conduct – and what its broader implications are for business regulation, according to Alex Steel, an associate law professor at the University of New South Wales who teaches a course in fraud, forgery and dishonesty. Steel does not see a problem with dishonesty being an element in corporate crime. "It is useful. I think the problem is where it is too vaguely expressed," he says. "Dishonesty is a good backup, useful as a negative test. But you should not use it to distinguish between lawful and unlawful behaviour." For instance, if something looks like criminal behaviour but the accused had reasons for doing it, you could conclude it was honest and not criminal. "To say 'it is an offence to act dishonestly' is too vague. If you have an offence for a director to use company funds dishonestly that is okay – if you first show he or she misused the funds," Steel says.
Dishonesty can provide a safety element "to ensure that the person is acting criminally wrong and civilly wrong", Steel says.
In the UK, there's a trend towards the introduction of general dishonesty offences. These "fuzzy" provisions have the attraction of adding flexibility to the law by more effectively addressing rapid changes in business practices, which leave specific offence laws behind. "It is perhaps hoped that these offences can catch types of behaviours which fall outside of the boundaries of more specific offence provisions," suggests Austin. "[They] may also provide less room for lawyers to engage in 'creative compliance' – where transactions are structured to comply with the letter of the law, but the transaction itself goes against the spirit of what the law was trying to achieve." Along the way, legislation might also become more concise and accessible in response to calls for the volume of offence provisions to be reduced, as other specific provisions are repealed.
It is logical to apply the same standards to commercial entities as are applied to individuals and communities, says the Australian Commonwealth Director of Public Prosecutions Chris Craigie. Far from revolutionary, it's the assertion of the traditional and proper role of the community and jury in the justice system. "More commonly than not, cases do tend to have in them some inherent and obviously plain aspect of misrepresentation," he says. Craigie would like to scrub the term "white-collar crime" because in essence it is theft – though on a scale that can affect national economies, as evidenced by the Lehman Brothers scandal in the US.
However, Austin sees downsides to making dishonesty an element in white-collar crime. Where there is a specific problem area that the legislature wishes to stamp out, the uncertainty around the legal definition of dishonesty may make prosecutors hesitant to launch prosecutions. And without obtaining convictions to deter others, the legislation may not produce the desired outcome.
Putting Dishonesty to the Test
Dishonesty is a slippery concept. It embraces the defendant's behaviour, and how his or her conduct conforms with generally accepted standards and the defendant's belief about that conduct. Courts have refrained from defining exactly what is dishonest in relation to generally acceptable standards, leaving this decision in the hands of the jury.
Outlawing dishonesty stems from the mid-19th century in British law when offences were introduced for directors and trustees falsifying books, appropriating funds or making false statements. The element of dishonesty has replaced fraud as these types of offence provisions have been revised and amended. Dishonesty became a key element in Australian commercial law starting with the Corporate Law Reform Act 1992, which provided the Australian Securities and Investments Commission (ASIC) with the option of bringing a civil action as an alternative to a criminal prosecution for a breach of the directors' duties provisions of the Corporations Act. Dishonesty was also a key element of many of the offence provisions in the Corporations Act 2001, and later a "catch all" dishonest conduct offence was introduced: "A person must not, in the course of carrying on a financial services business in this jurisdiction, engage in dishonest conduct in relation to a financial product or financial service."
Current tests of dishonesty all contain an objective test of what is dishonest, taking into account the state of mind of the defendant. A jury must then determine whether it is dishonest according to the standards of "ordinary, decent people", as set down in the Peters' test case by the High Court of Australia in 1998. To this was added, from the UK Court of Appeal's Ghosh case, the provision that the defendant must know that the conduct would be dishonest.
Austin says from a lawyer's point of view, when advising a client who is intending to undertake a transaction that could be seen as either sharp practice or unethical conduct, it is essential to identify what act or conduct may be problematic and what facts could give rise to an inference of a dishonest state of mind on behalf of a client. Then they must decide whether this act, conduct or state of mind might be seen as dishonest in accordance with the standards of ordinary people.
What is dishonest does not necessarily mean the same thing to everyone and can depend upon a person's background, morals and ethics. Some actions – such as stealing a handbag – are clearly dishonest, while other actions – such as taking home an office pen, inflating expenses and tax claims, or buying goods "off the back of a truck" – are more disputed. Yet Austin says the law operates on the assumption that a lay jury can determine a universal objective test of what the community would regard as dishonest.
Mythical Ordinary People
Sydney QC Peter Hastings, who has broad experience prosecuting and defending cases, including corporate crime, says standards of the mythical "ordinary people" change with time. "What now may be regarded as unacceptable corporate governance could have been tolerated or accepted some years ago. Similarly in relation to tax minimisation arrangements, what may have been considered fair game in endeavouring to outsmart the Commissioner of Taxation in the past could well be considered dishonest by current moral standards," he points out.
"Often current proceedings are still concerned with events of more than 10 years ago and there is a component of hypocrisy in urging jurors to apply their own standards to the test, apart from the fact that most jurors have little or no experience in corporate governance or tax minimisation."
Issues also arise in relation to persons who act in conformity with respectable professional advice, says Hastings. "Even if a jury may be persuaded that the conduct was dishonest according to the standards of ordinary people, it is difficult to see how it can be determined that the accused knew that his or her conduct would be regarded as dishonest when what he has done was to seek and then follow his lawyer's or accountant's advice."
Public prosecutor Craigie disagrees, arguing the prosecution rates indicate that juries are more than capable of applying objective standards. It depends on lawyers and judges to ensure the essential questions of the matter are extracted from the evidence in complex cases and to ensure the evidence is proven beyond reasonable doubt. "I am annoyed when people say juries do not understand the issues. If people can elect a government they can participate in the justice system and it is up to us to make it coherent," he says.
The types of commercial conduct and behaviour which may be seen as dishonest by ordinary people include: deception (for example, company directors concealing a conflict of interest); making representations or promises which the person knows are false and would not be carried out; concealing facts, which the person knows that they have a duty to disclose; and wilful blindness – engaging in conduct that they know they have no right to engage in (for example, where company directors divert funds for private purposes).
On the other hand, in a scenario where the company, shareholders, creditors, employees or others were unlikely to benefit, a finding of dishonesty would be less likely. Or where there is a claim of right – that is, if a person has a genuine belief that he or she has a bona fide claim to property – then that person may not be held to be acting dishonestly, even if their belief is unreasonable and unfounded.