Employment Background Checks: Stopping Employee Fraud at the Point of Entry

Transcription

1 Employment Background Checks: Stopping Employee Fraud at the Point of Entry Association of Certified Fraud Examiners (ACFE) 23rd Annual ACFE Fraud Conference and Exhibition June 17 22, 2012 Orlando, FL Lester S. Rosen Attorney at Law Employment Screening Resources (ESR) (c) 2012 Lester Rosen 1

2 About the Speaker Attorney Lester Rosen is Founder and CEO of Employment Screening Resources (ESR) a nationwide background screening firm accredited by the National Association of Professional Background Screeners (NAPBS ) He is a frequent speaker nationwide on the topics of background screening and due diligence He is the author of The Safe Hiring Manual, the first comprehensive guide to background screening and hiring He has qualified and testified as an expert in court cases and has testified before the California Legislature on laws relating to background checks He was chair of the steering committee that founded the NAPBS ( and served as the first co chair 2

3 Why Due Diligence is Mission Critical Employees are typically a firm s greatest investment and largest cost Each hire also represents a large potential risk Every employer has the obligation to exercise Due Diligence in hiring An employer that hires someone it either knew or should have known was dangerous, unfit, or unqualified for the work can be sued for negligent hiring 3

4 The Parade of Horribles Fraud, theft, and embezzlement Statistical certainty that a firm that does not do screening will hire someone with unsuitable criminal record or false credential Workplace violence Time wasted in recruiting, hiring, and training Termination exposure Fraudulent credentials: Up to 40% of resumes contain material lies or omissions about education, past jobs or qualifications Turnover costs 2 to 3 times their salary Brand destruction just one bad apple Lost customers and workplace disruption 4

5 Fraud and Embezzlement Issue: Embezzlers come disguised as your best employees Trust is needed to have access to money (since embezzlement is a crime that is based upon an abuse of trust) Background checks critical, but inadequate as a sole of line of defense in the absence of proper internal controls Per 2012 ACFE Report to the Nations, most occupational fraudsters are first time offenders with clean employment histories Employers may want to consider ongoing screening to catch Red Flags that may occur during employment 5

6 Negligent Hiring Lawsuits Increasing and Employers Are at a Disadvantage Per California survey, employers lose 60% of negligent hiring cases with verdicts averaging about $3 million Average settlement is $500,000 plus attorney fees Cases will normally have some sort of serious harm (death, assault, rape, sodomy, child molestation, theft, embezzlement, identity theft) Employers have the ability, duty, and resources to prevent harm through due diligence Jurors are often employees themselves Unless employer has a compelling reason why injury not its fault, employers often lose 6

7 What Defenses Could an Employer Utilize? Successful defenses have been: Not foreseeable this would happen or too attenuated There was nothing for a background check to reveal We demonstrated due diligence but this hire fell through the cracks despite our best efforts Less successful defenses have been: Applicant lied on application form and fooled us Too costly We were a victim too of the criminal behavior Other firms in our industry do not perform checks 7

8 Other Reasons for Safe Hiring What is the one question everyone will ask you if there is a bad hire? How much time do you have in addition to everything else you are doing to be involved in litigation? Certain industries have legal requirements Under Sarbanes Oxley, arguably background checks are required as part of an environment of control under Sec. 404 for position involving access to financial data or IT Strong evidence to suggest that if people lied their way into a job, they will be dishonest on the job 8

9 Solution: A Safe Hiring Program The solution is a Safe Hiring Program Series of policies, practices, and procedures designed to minimize the probability of hiring a dangerous, questionable, or unqualified candidate Critical pre screening elements Application, Interview, and Reference Checking cost the employer nothing 9

10 Basics of Screening S Sources of information are public (e.g., criminal records) and private records, verification of credentials C Consent in writing under Fair Credit Reporting Act (FCRA) and state laws R Rationale (Pre employment screening discourages applicants with something to hide, encourages honesty, demonstrates due diligence, and helps to hire based on facts and not just instinct) E Even handed (similarly situated people treated similarly) E Effectiveness No single tool can be relied on but need series of overlapping tools N Not an FBI check or Big Brother watching but a valuable due diligence employment tool 10

11 1. Not Screening Gut Instinct Alone Insufficient Cannot always identify potentially bad hire by detecting lies at interview Studies show that even though people believe they can detect liars, only 50/50 chance at best Per recent study, even trained law enforcement officers and judges are generally only right a little more than about half the time Many applicants tell the lie so often it comes across naturally they believe their own story Are body language, eyes, voice, etc. reliable indicators? 11

12 2. Insufficient Screening There is no ONE definition of a Background Check Unless firm is government regulated and screening requirements are mandated, due diligence is a moving target where a jury ultimately decides if an employer exercised due diligence Employers need to carefully audit their current practices to ensure they are practicing Due Diligence 12

13 No National Criminal or Credentials Database Beware of using cheap databases as substitute for due diligence Contrary to popular belief, there is no national database available to private employers to check criminal records or false credentials Fingerprint checks from FBI only available when mandated by law (e.g., teachers/child care workers/banks, etc.) Private databases are NOT official government databases but large private data dumps Databases can have false positives and false negatives Primary method for obtaining criminal records is to physically look at each relevant courthouse Over 10,000 courthouses in America with court records in over 3,200 jurisdictions Searches subject to human error as well 13

14 Higher Duty for High Risk Positions Your level of liability increases with the level of risk and the level of supervision and responsibility Examples where employer's duty is even greater with applicants: Where there is contact or responsibilities with groups at risk (youth, infirmed, aged) Where this is a degree of authority and responsibility such as a security guard or apartment manager Where workers enter homes, or where other unique risks exist Where there is access to personal data 14

15 Scope of Screening Scope is a cost benefit decision based upon the risk Can use: County criminal searches based on a social trace report Seven year search Statewide searches where available Federal records on PACER Sexual offender Driving records Past employment verification Education verification Various disbarment lists 15

16 3. Application and Changes in the FCRA Fair Credit Reporting Act (FCRA) controls screening Employer must sign certification and all screenings done per LEGALLY written authorization and standalone disclosure Beware of illegal consent forms New Statute of Limitations Now 5 years under FCRA in certain situations Walkway point: CRITICAL to follow Pre Adverse and Post Adverse Action procedures 16

17 4. State Specific Laws Numerous states have specific laws governing both the pre employment screening procedures in addition to the Fair Credit Reporting Act (FCRA) and regulating the use of information, such as criminal records or credit reports Some of the laws are aimed at background screening firms and others at end user employers 17

18 Examples of State Rules At least 11 states have a 7 year limit on criminal records some states have an exception if applicant has a higher income level (but Texas and Colorado preempted by FCRA) Various states have special rules for: Disclosure form for consumer Rules for Investigative Consumer Reports Nature and scope letter Disputed accuracy procedures Timing and notice of reports Notification periods Other examples include: CA numerous only in California rules MA Final adverse action letter must be in 10 point type minimum within 10 days with specified language NJ special notifications of reason why dispute is frivolous NY Special criminal notice TX Deferred Adjudication 18

19 5. EEOC Implications of Criminal Records and Scoring Procedures On April 25, 2012, EEOC issued new Guidance on use of criminal matters. EEOC stressed cannot automatically disqualify an applicant based on a criminal conviction without a business justification, taking into account the nature and gravity of the offense, nature of the job, and time elapsed Added clarity to three part test Suggested: Don t ask about criminal history on application If employer denies job, then should offer Individual Assessment s final step: Don t ask broad criminal question EEOC recognizes that some jobs and crimes do not go together Other states/cities have banned the box Arrests have limited use need to locate and evaluate underlying behaviors if possible But if person lied, then the falsehood can be the grounds to deny employment Be careful using automated scoring system (red, orange, and green lights): Can create issue under EEOC rules because of the automated nature of the decision making without an outlet for individualized consideration 19

20 Policy on Convictions/Arrests Remember, people who have made mistakes but have repaid society need jobs in order to live law abiding lives and be tax paying citizens Costs more than $40,000 a year to keep a person in custody society does not want to create a permanent criminal class of unemployable citizens However, due diligence requires the right person in the right job Have policy that employer maintains a safe workplace and will conduct strict review of any applicant with a criminal record, but no automatic disqualification Go through individualized process, taking EEOC factors into account 20

21 6. Credit Reports NEW DEVELOPMENT Credit reports are a potential issue under EEOC rules Credit reports can invade privacy and potentially be discriminatory unless measures taken to ensure their use is fair, accurate, and relevant Issue is Disparate Impact Urban myth Employment credit reports do NOT utilize credit scores Seven states now limit use of credit reports with more expected CA just passed AB 22 joins Connecticut, Hawaii, Illinois, Maryland, Oregon, Washington Need to clearly establish jobrelated reasons why a credit report is a valid predictor of job performance Typical reasons? Debt to income ratio Inability to handle own finances Credit reports can have errors Applicant is entitled to their FCRA rights if a credit report used adversely in any way Credit reports do not stop embezzlement without internal controls 21

22 7. In House Processes The Application, Interview, and Reference Checking Processes are critical and will be reviewed in detail in any litigation Applications: Get consent for background checks discourages people with something to hide Ask about past criminal record in broadest language allowed by law Review for failure to answer questions or omissions nearly every time there is a problem hire, there was a Red Flag on the application Don t limit to just misdemeanors 22

23 Review Application for Ten Red Flags 1. Does not sign application 2. Does not sign release 3. Leaves criminal questions blank (the honest criminal syndrome) 4. Self reports offense 5. Fails to identify past employers 6. Fails to identify past supervisors 7. Fails to explain why left past jobs 8. Doesn t explain employment gaps 9. Makes explanations for employment gaps or leaving past jobs that do not make sense 10.Makes excessive cross outs and changes 23

24 8. The 5 Critical Questions Question 1: We do background checks on everyone we make an offer to. Do you have any concerns that you would like to discuss? Question 2: We also check for criminal convictions for all finalists. Do you have any concerns about that? (Make sure question reflects what employer may legally ask in your state) Question 3: We contact all past employers. What do you think they will say? Question 4: Will your past employer tell us that e.g. you were tardy, did not perform well, etc.? Question 5: Ask questions about any unexplained employment gaps 24

25 9. Past Employment Checks as Critical as Criminal Checks Critical to verify employment to determine where a person has been (even if you only get dates and job title) otherwise you are hiring a STRANGER Looking for unexplained gaps AND for locations to search for criminal records There are over 10,000 courthouses in U.S.; you need to know where to search If you can verify that a person was gainfully employed in the last 5 10 years, it is less likely that he/she spent long periods in custody Just attempting and documenting effort demonstrates due diligence 25

26 10. Vendors, ICs, and Temps Firms that would never hire a criminal often allow vendors, independent contractors (ICs), and temps on premises with no idea who they are Non employees can have access to computer systems, trade secrets, customer lists, etc. For temps, need to review with staffing firm their due diligence standards 26

27 11. International Screening Growing trend Employers responsible for international checks Part of due diligence if applicant has spent time abroad or if past employment or education is outside U.S. Many resources available to check international employment, education, and credentials Ability to do international criminal checks is developing Terrorist databases available (but they have limits) 27

28 12. Be Careful Using Facebook, Google, Twitter, etc. Can expose employers AND recruiters to discrimination claims if Internet search reveals protected data such as nationality, race, religion, age, or medical issue Issues of appearance, grooming, or religious affiliations revealed by photos Is there a reasonable expectation of privacy based on the terms of use and generally accepted standards? Issue of identifiers and authenticity is it really your applicant? Can you consider off duty conduct? What should employers, recruiters, schools, and applicants do? Hot Issue: Asking for Passwords or Shoulder Surfing 28

29 13. Offshoring PII California passed SB 909 effective January 1, 2012, requiring disclosure to consumers if information is offshored for processing Authorization forms must have a background firm s privacy policy, and the background firm must conspicuously post their privacy policy, and specific information about offshoring Issue: Screening firms possess large amounts of PII and large firms send to places like India and Philippines for processing, beyond the protection of U.S. Privacy Law. 29

30 14. NAPBS Accreditation Program National Association of Professional Background Screeners ( has formulated indepth accreditation program covering Information Security, Compliance, Client Education, Information Providers and Business Practices Intensely detailed process confirmed by third party, professional, onsite audit Since background screening is loosely regulated, if at all, employers should consider only dealing with NAPBS Accredited firms 30

31 15. New Trend Ongoing Checks Some employers looking at continuous screening that occurs periodically AFTER hiring Argument: Employees may commit crime after being hired Issues: Accuracy: In some states, the screening is through a database subject to false positives and false negatives Cost: What will be the return on investment given the time, cost, and administrative issues involved? Value: If a person is in custody for criminal offense, presumably will not show up to work Legal Use: What rules or criteria are to be used if a criminal matter is found? 31

32 16. Education and Employment Fraud Background screening firms report high percentage of degree fraud Can range from claiming that a person graduated even though he or she was short credits to lying about attending the school to presenting worthless degrees from diploma mills Also, can now get very generic looking fake diplomas on the Internet for most schools in America Run term fake schools on LinkedIn and see how many worthless degrees are claimed There are now websites that provide fake employment histories 32

33 17. Top Ten Background Check Trends of 2012 #1 Criminal Background Checks by Employers Under Scrutiny by EEOC #2 Credit Report Checks by Employers Increasingly Regulated by State Laws #3 Social Media Checks of Job Applicants More Prevalent & Controversial #4 Automation in Screening Increases Both Efficiency and Risks #5 NAPBS Accreditation Program Proof of Increased Professionalism in Industry #6 Diploma Mills Offering Fake Degrees Increasing in Tight Job Market #7 Lawsuits Increase as Attorneys and Consumers Become Familiar with FCRA #8 New E Verify Laws Create Complex Web of Federal and State Rules #9 Offshoring PII Outside U.S. Increases Privacy and Identity Theft Concerns #10 Self Background Checks Proactively Conducted by Job Seekers 33

34 18. Audit Your Practices Audit your hiring practices Take the Safe Hiring Audit. For more information, see: Last pages of ACFE 2012 Presentation Paper for webinar Warning: Do it as an education tool or through your attorney only. Do not create a document that will be used against you in litigation. 34

35 Thank You For more information about Safe Hiring, see: ESR Website: Lester Rosen: ESR News Blog: The Safe Hiring Manual The Complete Guide to Keeping Criminals, Terrorists, and Imposters Out of Your Workplace (Facts on demand Press/512 pages) The Safe Hiring Manual (Facts on Demand Press/288 pages) 35

36 Association of Certified Fraud Examiners, Certified Fraud Examiner, CFE, ACFE, and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without the prior consent of the author.