August 23rd, 2018 | Melissa Kluttz, Sterling Talent Solutions

Best Practices for Employee Due Diligence in the Financial Services Industry

Vetting new hires is important for any position, especially within the financial services industry. The Undercover Recruiter broke down the cost of a bad hire (earning $62,000 a year and terminated after 2.5 years), in a recent infographic, The Outrageous Costs of a Bad Hire. The formula is: Hiring Costs + Total Compensation + Cost of Maintaining Employee + Disruption Costs + Severance + Mistakes, failures and missed business opportunities equals a bad hire cost of $840,000 in this example.

A bad hire can happen because the candidate gets away with misdirection or even outright lying during the hiring process. Other times, critical information about the candidate is either not requested, obtained or acted upon. A bad hire can result in many types of painful and costly outcomes, including:

  • Attrition and wasted hiring budgets
  • Theft or embezzlement
  • Damaged employee relations and morale
  • Endangerment of employees, clients and business associates
  • Lost productivity
  • Litigation
  • Public scandals and negative publicity

Hiring the right talent, maintaining accountability for those you hire and managing through the complex regulatory landscape has never been more important – and more challenging for financial institutions. Sterling Talent Solutions partnered with Compliance Risk Concepts (CRC), a business-focused team of senior compliance consultants and executives, to publish the White Paper, “Employee, Client and Third Party Due Diligence: The Cost of Ineffective Monitoring Procedures”. We share the importance for the financial services industry to have effective ongoing due diligence procedures in place for candidates and current employees. Gathering background information to deem an employee as low risk is a great start, but engaging in truly effective due diligence practices, monitoring, oversight, and investigation must be an ongoing priority. Having inadequate due diligence practices in place leaves an organization open to potential risks.

What is Due Diligence?

According to the Merriam-Webster Dictionary, due diligence is the care that a reasonable person exercises to avoid harm to other persons or their property. For businesses, it can be research and analysis of a company or organization in preparation for a business transaction (such as a corporate merger or purchase of securities). Due diligence is woven throughout the regulatory landscape, impacting various areas, including, but not limited to, cybersecurity, information security, custody and books and records. Many of the agencies that govern the financial services sector, such as Financial Industry Regulatory Authority (FINRA)the Securities and Exchange Commission (SEC) and the Foreign Corrupt Practices Act (FCPA), require stringent due diligence procedures.

Employee Due Diligence Best Practices

When onboarding new hires and registered representatives, firms should obtain and verify information such as an individual’s education and work history, industry qualifications and certifications, criminal and fingerprinting records, credit checks, disciplinary information and outside business activities, among other things. Due diligence procedures should be sufficient to unearth material “skeletons in the closet.” As the regulatory landscape evolves, so too does the information that firms need to collect.

Businesses operating in the financial sector should use a reputable FCRA compliant background screening vendor or follow up and confirm all screening information they receive from new hires to ensure accuracy. Firms should implement ongoing screening processes and disclosure monitoring that cover a nuanced array of outside business activities, and ongoing credit checks, among other things. Organizations need to be sure that they are capturing a complete picture when it comes to employees by screening professional and financial information as well as continuing criminal background checks.

There are four key factors that financial businesses should consider when performing due diligence for their employees:

  • Data Collection: Businesses should develop a comprehensive process that will result in a detailed risk profile per individual. One consideration is for companies to include questionnaires that pertain to outside business activities, personal brokerage accounts and social media and online footprint, among other things.
  • Verification: Initial processing and continued reviews, while time-consuming, help firms generate clear and accurate information to identify real or perceived conflicts of interest, criminal activity, or regulatory issues. Organizations should have procedures in place to verify the information that is provided during the data collection and monitoring process. Information should be reviewed from a variety of sources. Once verified, this information can help form the basis of assigning a risk rating to the individual and identifying areas that require additional inquest or research.
  • Monitoring: Companies should have ongoing monitoring tools to screen for factors that traditional monitoring might miss, such as criminal activity, liens and judgments to get a complete picture on a continual basis. Businesses should not just rely on a candidate’s self-reporting (such as via the questionnaire listed above) since these reports might not detect disclosable issues or might have information that is withheld by the employee. This can protect a firm from various consequences. FINRA fines will vary depending on the type of violation. According to Investment News, FINRA fines have been growing over the past ten years. In 2016 alone, broker-dealers were fined over $173.8 million an 85% increase from 2015.
  • Obtaining and Verifying Information: Allowing the employee to self-report could open the possibility for gaps in accuracy. Ultimately, a company should continue to verify the information an employee shares to make sure all required data points have been investigated. Organizations should carefully review initial and continual information from the following sources to obtain the most detailed profile of employees:
    • OBA Certifications
    • AML Checks–OFAC List
    • DDQs
    • Credit Reports
    • Criminal Background Checks and Arrest Records
    • Lien and Judgement Data
    • Educational Institutions (Universities, CFA Institute, etc.)

Partner with a Third-Party Screening Provider

Having adequate onboarding procedures for employees, while a good start, is not enough to avoid potential risks for an organization or its clients. Continual monitoring, risk assessment, and review of such information is imperative to protect assets and personally identifying information. Sterling Talent Solutions helps the world’s top banks, brokerage houses, private equity firms, insurance companies and other financial services firms efficiently and effectively screen and hire top talent while maintaining stringent compliance standards across their existing employee bases. Find out more information about the importance of continuous due diligence monitoring to mitigate the risks in Employee, Client and Third Party Due Diligence: The Cost of Ineffective Monitoring Procedures.

Download Employee Client and Third Party Due Diligence White Paper

This publication is for informational purposes only and nothing contained in it should be construed as legal advice. We expressly disclaim any warranty or responsibility for damages arising out this information. We encourage you to consult with legal counsel regarding your specific needs. We do not undertake any duty to update previously posted materials.