Given the gossip mechanic, you can expect that some amount of players will disparage the reputations of characters linked to players who have done things out of the game that they disapprove of. It's not that it's something anyone will encourage, it's that the mechanics of the world allow you to sully the reputation of another with false gossip, so it's possible -- and in my experience, what is possible in an MMO will be done, plain and simple.
Now, whether that works or not depends on the reputations of the characters involved and their avenues for dropping poisoned gossip. It's also possible to work against that sort of action using the same mechanics, which means that you can at least attempt to defend yourself, should it happen to you.
It's all an aspect of the way trust works in this game. A more traditional MMO will give the community zero trust: They will rigidly control the systems, and the actions players take within them, to ensure no one ever does the unexpected. Chronicles of Elyria isn't that kind of game. (I often argue it's not a game at all, but that's another conversation)
Instead, Elyria is a world of collaboration, where we trust you as much as you trust us. Even among yourselves, the most precious commodity in Elyria isn't gold, or even life, it's trust. We have to leave you free to use the systems in as many ways as we're able so that you can build and operate the nations you want in your world. But that does leave open negative consequences, such as graft, fraud and criminality.
To realize the world of Elyria then, we have to ensure you have the tools you need to determine the trustworthiness of your fellows. That's what systems like contracts, reputation and gossip are about, but they're not automatic. You'll have to use those systems yourselves in the world of Elyria.
Hope that helps! :)