With fraud on the rise, we asked Candice Tal, a licensed private investigator and CEO of Infortal Worldwide, permission to publish this excerpt of A Case of Mistaken Identity, Infortal’s comprehensive guide to investigating your potential hires more thoroughly.
Statistics regarding deep-dive background checks reveal disturbing facts: 20% of executives have serious no-hire issues (hidden & undisclosed information), and 35% of 3rd parties are found to have corruption related issues. Read on.
*
Executive background checks are standard, but sometimes if not done thoroughly, can lead to cases of mistaken identity. Routine background checks are important, but are inadequate to detect all critical information necessary to protect a company’s board of directors from fiduciary exposure, and potential shareholder lawsuits if adverse information is discovered after the executive or key employee is hired.
There are many public records that can provide important information to help companies have improved options for their executive hiring decisions. Criminal records may yield false positive and false negative results, yet skilled investigators typically avoid these basic issues.
False positives in background checks occur when the background results turn up false information on an individual, such as a felony conviction. This may occur for a variety of reasons, including a database search with a return of information for someone with the same name and/or location.
False negatives occur when a criminal record that should have been found in an executive background check does not happen.
The results of either of these can be detrimental or even devastating to a company. An ideal candidate may end up not being hired because of a poorly executed background check or an unsavory candidate might get the corner office.
Modern Imposters
Examples of what can happen are plentiful. These are a few major scandals as a result of simply not verifying education credentials:
Yahoo CEO Scott Thompson was fired in 2012 after 4 months when it was found that he lied on his resume. He claimed to have degrees in accounting and computer science from Stonehill College, but only had an accounting degree. He did not have the background qualifications that he alleged to have. His termination cost Yahoo over $7 million.
In 2014, Wal-Mart’s vice-president of communications and chief-spokesman David Tovar resigned after it was found that he never had the degree he claimed to have received from the University of Delaware.
A woman in China, Lee Lam, used fake credentials and references to land a CEO position which she held for 10 months and received approximately $11,000/month in compensation for her less than satisfactory job performance.
In 2018, ride-share companies Uber, Lyft, and Via, agreed to pay the city of Chicago a total of $10.4 million for their failure to properly do background checks on their employees. According to Forbes: “Uber’s Los Angeles-area drivers included people driving under false names and those convicted of sex offenses, kidnapping and murder, the prosecutors said…[while] prosecutors settled a similar suit in December against Lyft, an Uber rival, for $250,000.”
Were these mistakes made because an executive background check was not made? Or were these failed hires made because a poorly done routine background check was made? In the case of Uber, Lyft, and Via it appears their false negative hires were due to a less than effective background check. For the others, we don’t know if they performed a background check, but if so, they failed.
All Background Check Firms are Not Created Equal
The importance of choosing the right investigative firm cannot be overstated when you are doing routine employment background checks. In the case of Lyft, Chicago required the company drop their investigative firm, when it was found they had failed to identify a convicted terrorist who had been hired as a driver for the ride-share company. Lyft was also required to do another background check on all its drivers and adhere to stricter background check measures in the future. The criminal hires, bad press, and financial cost all could have been avoided, if they had made a different choice in their choice of background screening firms.
Routine background checks are commonly run on new executive hires. However, routine employment background checks do not look at enough public records data. So how can executive background checks lead to false positives and false negatives? Most routine background checks usually consist of very limited public record searches. While this may seem sound, there is no singular data base that holds all the information needed to do a thorough background investigation. These typical background checks are run through a single or multiple multi-jurisdictional database that contains an aggregated collection of criminal records data. Criminal record databases often only include felony convictions, rarely misdemeanor convictions. Therefore, most companies do not realize they are not receiving all misdemeanor convictions; many of which may be serious, and may have started as felonies that were plea-bargained down to a misdemeanor.
Often Miss as Much as 75% of All Criminal Convictions
These background checks are often inexpensive and have a quick turnaround, and should not be used as the only background screening tool.
“Statewide” and “nationwide” criminal searches, done in routine background checks, often miss as much as 75% of all criminal convictions. There is no single database that contains all information needed to conduct a thorough executive background check.
Not only that, there are times that records still need to be accessed in person to safeguard that the correct information is reported about that specific person, not someone else of the same name, which may result in a case of mistaken identity.
Incorrect search terms can also lead to false positives and false negatives during executive background investigations. For example, since a person’s social security number does not usually appear in criminal files, criminal records must be searched using date of birth.
Other issues include varying quality and availability of data and information being returned on persons with the same or similar name being mistaken for the searched candidate. Furthermore, use of national databases as a standalone source for background checks may not follow the Fair Credit Reporting Act (FCRA).
Conducting Thorough Executive Background Checks
By contrast, a deep-dive executive background check or executive due diligence, looks at over 30 components of public record data, takes an in-depth review of news sources, and conducts a deep internet search.
A thorough executive background check takes an in-depth look at: reputation, misrepresented education and overstated work history, undisclosed business involvement, conflicts of interest, civil litigation issues, federal and interstate criminal history, real estate holdings (which can show signs of money laundering), financial and legal issues, relationships with other companies and board advisory positions, behavioral history (for example litigiousness), and undisclosed or adverse issues to name a few areas. Through detailed investigative analysis of numerous data points, it is often possible to identify con artists who are deliberately concealing past or present adverse behaviors.
These deep dive executive background checks are necessarily more costly than routine background checks. They also take more time involving extensive investigative analysis, but the information gathered is immensely valuable and can save a company substantially in the long run. A high-quality executive background check can uncover vital information which a routine background check would fail to find.
Possible Findings Include Serious Negative Issues
Possible findings include: IP theft, hidden aliases, signs of misconduct, significant numbers of name changes, murder, manslaughter, embezzlement, interstate bankruptcy, litigious behavior, signs of malfeasance misconduct (with or without criminal conviction), media negatives, social media negatives, undisclosed business and board level involvement, undisclosed business ownership, bribery and racketeering, financial pressures, money-laundering, con-artists, and other serious negative issues.
20% of executives have serious no-hire issues (hidden & undisclosed information). 35% of 3rd parties are found to have corruption-related issues.
A well-done executive background check will also include reference interviewing. These interviews are conducted with 6 to 8 individuals and typically take from 30 to 40 minutes each. In the hands of a highly trained interviewer, these interviews reveal a number of important pieces of information, including issues of malfeasance in prior roles, or persistent character and behavior patterns.
Times to conduct an Executive Background Check
· Hiring a new executive
· Selecting new board members
· Screening corporate board of directors
· Acquiring a new business subsidiary (Mergers & Acquisitions due diligence)
· Contracting with third party business parties and agents globally
· As a routine on their executives, and board members
· Regulatory compliance to meet requirements of the Foreign Corrupt Practices Act (FCPA)
And What About Investors?
Investors should perform executive due diligence on the executive and board members of a company they want to invest in. If you are willing to invest your money on a company’s future profitability, the additional investment needed to perform a deep dive executive background check should be included to prevent potential negative ROI. There have been many instances where the investor does not have the stalwart background or wealth they may claim.
Examples of Bad Hires
The Enron scandal: The founder, CEO, and Chairman were found guilty of corporate abuse and accounting fraud. Other charges against executives included money laundering, securities fraud, wire fraud, mail fraud, money laundering, conspiracy, and insider trading. Enron’s shareholders lost $74 billion during the four years leading up to the company’s bankruptcy. The employees lost billions in pensions.
Stanford Financial Group of Companies: Cost: $8 billion; owner and CEO; involved in major fraud and Ponzi scheme; violated US securities laws.
Fry’s Electronics: Cost: $65.6 million; Vice President of merchandising and operations; used vendor fraud and kickbacks in purchasing electronics inventory for store, including a dummy store he set up.
Clients of Bernie Madoff : Cost: Billions of dollars; Investment advisor; involved in widespread frauds that squandered the investments of thousands of investors.
Peregrine Financial: Cost: $200 million; CEO; embezzled and reported false income statements.
Tenens Corp., d.b.a. Essex Street Associates: Cost: $61 million; Chief Operating Officer; transferred funds from the trusts of heirs of industrialist Frederick Ayers, whose accounts he was managing, to his own personal accounts, and submitted false financial statements to not raise suspicions.
NYC Laborers Sandhogs Union Local 147: Cost: $42.6 million; Employee Benefits Manager; embezzled through employee benefits plan, mostly money laundering.
Pacific Seafood Group: Cost: $900 million estimated; Vice President of employee leadership and development; embezzlement, wire fraud, filing a false tax return. He used a company credit card and his authority to issue corporate checks to secretly divert company funds to make personal purchases, including electronics, jewelry, firearms, vacations, and prostitution services
Koss Inc. : Cost: $30 million; Vice President of finance; devised plan to commit wire fraud in order to keep up with compulsive shopping disorder.
First Security Bank of Malta: Cost: $3.7 million; Vice President of operations, created fraudulent credit cards at bank to cover personal debts.
Dane Cook: Cost: Millions of dollars; business manager and brother, used positions to steal through larceny, forgery, and embezzlement.
Woodruff Arts Center: Cost: $1.48 million; Accounts Receivable employee, created fictitious company with an assigned vendor number, and turned in invoices for it regularly.
Ongoing and routine executive background checks could have caught any number of instances of malfeasance in these cases and saved the company in money, reputation, loss of profitability, and associated costs.
How to Choose the Right Background Check Firm
Executive background checks should always be performed by an expert, unbiased, external firm specializing in due diligence checks. The firm should have long-standing expertise in the investigative field, global reach and resources, the ability to conduct deep-dive Tier III executive due diligence checks, and use top-tier technology. They should also be knowledgeable of risk types in your industry, be able to rank risks according to your business, and have the ability to identify transaction risks for your company & industry.
Other areas of expertise should include: experience with M&A due-diligence investigations, skill in identifying transaction risks for your company and industry, an understating of risk types prevalent in the target high risk market, talent in stratagems to recognize and prevent likely issues, and the ability to conduct thorough and effective due diligence. Lastly, the selected investigative firm should be your partner in assuring lasting security to your company in knowledgeable hiring and employee retention. They should be effective at communicating strategy and risk to both your domestic and in-country teams, and give personalized on-going support.
Make No Mistakes
There are no compromises to be made in protecting a company and its investments. Doing the best by your shareholders, employees, and profits means investing both the time and cost to thoroughly vet future hires and current employees with recurring and well-conducted executive due diligence. This should be done on board members as well. An effective executive background check can make the difference between hiring wisely and a case of mistaken identity. It also protects a company from losing out on a great new employee if a bad executive background check reveals a false positive and the candidate is passed over due to faulty information.
Infortal Worldwide is a global security and risk management company that enables clients across all industries to mitigate their business risks, and protect employees and assets globally. It has conducted over 2,000,000 investigations for some of the largest corporations in the world using an international worldwide network of 800 professional investigators in over 160 countries fluent in local language, resident culture, and regional politics.
Candice Tal, CEO, Infortal Worldwide