Background Checks: What, Why, When, How, and Who

If you’ve applied to a job in recent years, you’ve probably signed a form consenting to a pre-employment background check. While most people know that a background check is a common prerequisite for employment, an investment agreement, or a corporate merger, many people may not understand the specifics of background checks and why they are so important. The following is an explanation of the five most important questions about background checks: What are they? Why are they necessary? When can they help you? How are they done? And who should be doing them?

Skeletons in the Closet: What Is a Background Check Actually Checking?

If you are a jobseeker, it is imperative that you understand exactly what you are agreeing to when you sign that consent form. As an employer or business owner, you need to know what information to look for in order to make educated hiring and financial decisions. Even in your personal life, you need to be sure that the people you trust with your finances, personal information, and safety are worthy of that trust. The scope of a background check will vary based on whether the subject is a potential new hire, business partner, investment opportunity, or other individual, as well as on the purpose of the investigation. However, standard background checks on a person or a company will often include research on:

  • Criminal records and arrest histories
  • Financial statements, bankruptcy filings, and credit reports
  • Education, employment, and reference verification
  • Civil court records, tax liens, and monetary judgments
  • News, internet, and social media searches
  • Verification of personal identifiers such as social security number and dates of birth

The truth is, you never can be too careful – the more you know, the less risk you will incur. Few people would go on a date with someone without at least examining their dating profile or briefly looking at their social media presence first. In your personal life, you may also want to know that a doctor treating you is qualified or that your lawyer is reputable. In business, knowing exactly who you are dealing with is equally important when thousands or possibly millions of dollars, your company’s reputation, and even your own safety are at stake.

The Truth Will Set You Free: Why are Background Checks Necessary?

In a perfect world, we’d all be honest, we’d all be trustworthy, and we’d all give our trust freely. Sadly, we don’t yet live in that world. The truth is that more often than not the people you are dealing with, especially in business, have their best interests in mind and not yours. The jobseeker wants to get hired. A loan applicant wants to be financed. Other companies want to make money for themselves. This look-out-for-number one mentality can lead people to stretch the truth, conceal important information, or just plain lie. Here are the facts:

  • A 2015 survey of over 2,000 employers found that of them had identified lies on a job applicant’s resume, including falsified work and educational experience.[1]
  • In another 2015 survey of over 2,000 job applicants, almost of them admitted to lying on their resumes.[2] Imagine how many more chose not to own up to their deception.
  • A 2016 study of 2,410 instances of occupation fraud in a variety of industries and countries determined that the total losses for the victims of these frauds was over $6.3 billion.[3] The average loss was $2.7 million.
  • As of 2012, employers lost 70 of lawsuits in which they were accused of improperly vetting potential employees.[4] The average judgment in these cases was over $1.6 million.

Not only are fraud and misrepresentation more common than you might think, but the cost of not catching those deceptions can be much higher than most people realize. No matter how honest someone seems in an interview or initial meeting, you can never know for sure what they are trying to hide. You may think you are a good judge of character, but it literally pays to make sure that you are right getting all the facts. Simply going with your gut could leave your bank account gutted.

Check Yourself Before You Wreck Yourself: When Can a Background Check Prevent Disaster?

With so much on the line and fraud so pervasive, when can a background check really save you from loss and embarrassment? The above-referenced 2015 survey of employers found that most hiring managers spend less than ten minutes reviewing an applicant’s resume. Some extra time and a moderate amount of research can pay off in a big way. Consider these instances of when poor hiring and due diligence practices led to calamity:

  • In 1997, Kenneth Lonchar was appointed CFO of Veritas Software Corp. after it merged with another technology company. Five years later, it was revealed that Lonchar had lied about receiving an MBA from Stanford University. Lonchar lost his job, but Veritas stock lost 20 of its value.[5] Soon after, the SEC launched an investigation into allegations that Lonchar had falsified Veritas’ earnings in government filings. In 2007, Veritas paid $30 million to settle the claims.[6] A simple check of Lonchar’s credentials before the merger would have exposed his lies and warned Veritas about his propensity for fraud.
  • In 2010, Amy Bishop, a professor at the University of Alabama Huntsville, opened fire during a faculty meeting, killing three people and injuring three others. A subsequent investigation revealed that she had been convicted of assault eight years earlier after she punched a woman for taking the last booster seat in a restaurant.[7] Had the university performed a proper pre-employment criminal background check, it would have uncovered Bishop’s history of violence and possibly prevented a violent incident.
  • After NSA contractor Edward Snowden leaked numerous classified government documents to the public, several concerns about the thoroughness of his 2011 background check were brought to light. Most glaringly, no one ever attempted to verify Snowden’s prior employment at the CIA. After the leak, Snowden’s former CIA supervisor told reports that he suspected Snowden had been trying to illicitly access classified documents during his time at the agency.[8] Had the government-contracted background check company performed the most basic resume verification and contacted Snowden’s old boss, one of the largest national security breaches in modern history could have been avoided.
  • In 2015, the United Kingdom’s Financial Conduct Authority (FCA) fined Barclays Bank £72 million (over $97 million U.S. dollars) for failing to perform proper due diligence on several international clients believed to pose a high risk for corruption and money laundering. While the FCA did not allege that any financial fraud took place when the clients moved several billion pounds through the bank to various offshore companies, trusts, and temporary bank accounts, the government body alleged that Barclays had failed to properly vet the finances and backgrounds of these individuals. Some basic financial due diligence, even if it didn’t uncover any wrongdoing, would have saved Barclays the massive fine as well as legal expenses and potential loss of credibility.

These are just four significant examples, but stories of lies on resumes, undisclosed civil and criminal records, and financial misdeeds that could have been easily exposed or prevented by a thorough background check can be found across diverse industries and throughout the world. Even in one’s personal life, the consequences of not performing proper due diligence could be disastrous. Imagine if you used a personal accountant without knowing they were under investigation by the SEC or put your children in the hands of a nanny with an undisclosed history of sex offenses. Background checks are essential when assessing new hires, reviewing current employees’ licenses and clearances, entering into mergers and acquisitions agreements with entire companies[9], and anytime you are placing your trust, your money, or your safety in the hands of someone else.

A Method to the Madness: How Are Background Checks Conducted?

By now, you may be sold on the necessity of background checks. It sounds simple to say that you should verify someone’s degrees or make sure that your new employee doesn’t have a dangerous criminal history, but how is it actually done? There is a considerable amount of court and government records available to the public; however, often financial documents, criminal convictions, and other records require special permissions to access. Additionally, the rules about how and why that information can be used are both complicated and strict. Many of these rules are governed by the Fair Credit Reporting Act (FCRA). They include:

  • To release some types of protected information, an individual must be informed in a stand-alone written document that a background check is being conducted on them and why. The subject of the investigation must provide written consent to release some categories of protected information in the background check.[10]
  • The background check process must treat people of all races, genders, ages, religions and other protected classes the same. Neither the scope of the investigation nor the decisions based on the results can be affected by any of those criteria.
  • For certain types of background checks that uncover problematic information, the subject must be informed of what was found and given an opportunity to dispute it. If the results of the background check lead to an applicant not being hired or other adverse action, the subject must be informed in writing that the results of the background check were at least partially involved in the decision making.[11]
  • The body conducting the background check must take extensive measures to ensure the complete accuracy of the information uncovered during the investigation.

The risks of intentionally or inadvertently violating these and other regulations can be great. Starting in 2004, the Equal Employment Opportunity Commission launched an initiative to address complaints of discrimination in hiring practices and has since filed numerous lawsuits alleging that the use of criminal records and credit histories in some hiring decisions resulted on discriminatory action against certain races and ethnicities.[12] In 2017, a federal appeals court determined that Spokeo, a website that collects data and provides informational reports on individuals, had violated FCRA regulations by publishing inaccurate information about a person, even though that information portrayed the individual more favorably than the true facts.[13] While the lawsuit is ongoing and Spokeo has not yet received any penalty, it is clear that the rules and regulations regarding background checks are complex and difficult to navigate, especially for someone not well acquainted with them.

Help! I Need Somebody: Who Should Conduct Your Background Checks?

Given the incredible risks inherent in hiring, doing business with, or otherwise associating with individuals and companies without first conducting a background check, as well as the dangers of potentially violating the laws governing background check procedures, it is imperative that whoever conducts background checks for you or your business knows exactly what they are doing. The safest way to ensure the accuracy and legal compliance of a background check report is to hire an investigation company with experience conducting this sort of research and industry knowledge of the relevant rules and regulations. Not only does outsourcing your background checks to professionals mitigate risk, it also saves you time and guarantees the most comprehensive investigations possible. Hiring managers and risk management officers have little time to comb through legal records, and others are saddled with responsibilities that prevent them from performing the in-depth research required for an effective background check. Indeed, in 2014, Forbes magazine published a list of 20 subject areas (each with numerous subsections) that should be covered during proper corporate due diligence[14], surely a time-consuming task. Additionally, criminal records and other essential information are often not available to the general public. A qualified investigation service possesses the licenses, resources, and capabilities to conduct the most thorough and efficient background checks. Of course, not all background check companies are created equal. For example:

  • The federal government hired an outside company to look into Edward Snowden, and that company failed to do the most basic reference verifications.[15]
  • In 2017, doubts arose about whether the background check conducted by a firm hired to find a new general manager for the Massachusetts Bay Transit Authority (MBTA) had uncovered a class action suit and SEC investigation against the selected candidate. Consequently, the new executive’s qualifications and the MBTA’s hiring practices have been called into question.[16]

With so much at stake with background checks, you need a company that you can count on to provide thorough, accurate, and legally compliant reports. At Beau Dietl and Associates (BDA), we have over 30 years of experience conducting background checks, often on high-profile and high-net-worth individuals, throughout the United States and the world. Our team of former law enforcement investigators and trained researchers possesses the expertise necessary to perform the most comprehensive and efficient background checks tailored to your specific due diligence needs. Before you put your trust in a new employee, enter into a merger, commit to an investment opportunity, or give anyone access to your private information, make sure you have the best background check investigators on your side to protect you, your assets, your employees, and your reputation.

Contact us.