An Analysis of the FDIC’s Guidance on Developing an Effective Pre-Employment Background Screening Process
Presented by Business Information Group (BIG)
On June 1, 2005, the Federal Deposit Insurance Corporation (FDIC) released guidance for FDIC-supervised banks on developing an effective pre-employment background screening process.
In this analysis, Business Information Group (BIG) will highlight the key elements of the FDIC guidance and provide practical applications for implementing the screening recommendations set forth in the guidance.
General FDIC Recommendations for Background Screening
The FDIC’s guidance presents background screening as an effective risk management tool that can reduce turnover, deter theft and embezzlement, and prevent litigation over hiring practices.
In order to realize these screening benefits to their fullest extent, BIG recommends that financial institutions work with a screening provider to develop and implement a customized program that provides the most complete background history on an applicant as possible, while offering valuable added protection through industry-specific and/or job-specific checks. The program should be conducted in accordance with all applicable laws, including the federal Fair Credit Reporting Act (FCRA) and analogous state laws.
• Screening for Contractors
The guidance states institutions should ensure any contractors utilized will undergo a screening process similar to the one used by the institution.
To achieve this screening synergy across all types of workers, institutions should consider partnering their contracting organization(s) with their employee screening provider, and predefining required checks and selection criteria for contracted workers. The screening provider can serve as a liaison between the institution and the contracting organization to ensure consistent screening of workers.
• Risk of an Unsuitable Hire Outweighs Screening Costs
The guidance points out that although there are costs associated with an effective screening process, hiring someone without such screening can carry significantly heavier financial consequences. Depending on the extent of the background check, the cost per employee could run from $25 for a basic search to $150 and up for a complete set of searches. Comparatively, the cost to replace an unsuitable hire averages more than $7,000, and a settlement stemming from a negligent hiring lawsuit averages more than $1.6 million.
• Criminal Searches
The FDIC advises financial institutions to establish a background screening process that, at a minimum, ensures that an applicant’s history does not include a criminal conviction or deferred prosecution for a specific crime, such as dishonesty, breach of trust, or money laundering, that would bar him or her from working in the industry (in accordance with the requirements of Section 19 of the Federal Deposit Insurance Act). BIG recommends that such a process include a federal criminal search as well as a statewide or county criminal search in the states or counties where the applicant has lived.
• Determining Screening Levels
The FDIC proposes taking a risk-focused approach to determining the need for additional levels of screening, such as identity verification, reference checks, employment verification, education verification, and professional license verification. Factors to consider include the sensitivity of a position or the access level of an employee. Though the FDIC says institutions should consider an ongoing approach to these checks, BIG strongly recommends establishing a set timeframe, e.g., annually, to re-conduct checks to ensure screening standards are maintained with existing employees over time.
Additional FDIC Recommendations for Background Screening
• Sanctions Checks
In the guidance, the FDIC identifies an important “first step” in the background checking process as a check of each federal banking agency’s listing of individuals who have been assessed civil money penalties (CMPs) or permanently barred from banking.
Screening tools such as BIG’s ActionsBase search can simplify the process. ActionsBase was developed for financial services employers, and includes data from hundreds of regulatory sources, including the FDIC, Financial Crimes Enforcement Network (FinCEN), the New York Stock Exchange (NYSE), and state bank commissioners, as well as the Office of Foreign Asset Control (OFAC) List of Specially Designated Nationals and Blocked Persons, FBI Most Wanted Terrorist List, and numerous international terrorist list sources.
As the FDIC recommends, searches such as ActionsBase can be used as a prescreening tool in a phased screening process, in which certain searches are performed up front and the background screening process is stopped if certain criteria are not met during these initial searches.
• Effective Employment Applications
The FDIC highlights the important role an effective employment application can play in the background screening process. To maximize the value of the background check, the employment application should include certain elements, such as a statement that untruthfulness or material omissions are grounds for termination and that by signing the form, the applicant attests to the accuracy of the information provided. The applicant’s signature on this statement provides the employer with legal means to terminate based on falsification, such as a failure to disclose a criminal conviction.
Another key to an effective employment application is a standardized format that is easily compared across applicants and consistently collects the needed information for the screening process, such as previous addresses and complete employment information, including supervisor’s name and start/end dates of employment.
BIG recommends additional elements for the application that not only can enhance the background screening process, but reveal valuable information about the candidate before the process even begins:
• An effective application should ask for other names used (maiden, married, AKA, etc.), which can assist in successful identity verification, or reveal names the applicant has intentionally omitted.
• Under employment history, the application should ask the reason for leaving each previous position. Reasons such as “disagreement” or “mutual agreement” can be a red flag for a problematic work history.
• The application should clearly note, under employment history, that the name of the actual employer is required. This will eliminate potential confusion during the background screen if the applicant was a temporary worker for a financial institution, but actually was an employee of a staffing firm.
• Under references, detailed contact information should be requested, including complete address, home phone number, work phone number, and even a cell phone number. This level of detail is very useful in successfully reaching the reference during the screening process. If this detail cannot be provided, the employer may want to question how well the applicant knows the reference.
One method for ensuring standardization is to implement a customizable online employment application that, when the need for revisions arises, can be efficiently modified across an entire organization. To ensure information required for the background screen is consistently collected, the online application can be programmed to technically force the applicant to complete required data fields before allowing submission to the employer.
Institutions should ask their screening provider if they can assist in the development and implementation of an online employment application. The application could be linked to the provider’s systems to automatically pull stored applicant information for the background screen.
Fair Credit Reporting Act (FCRA) Requirements
In the guidance, the FDIC stresses that the background screening process must comply with the FCRA, which is the main body of law governing the creation and use of consumer information.
If a financial institution utilizes a consumer reporting agency (CRA) such as BIG to prepare the background report, the report is subject to FCRA provisions.
• Disclosure and Authorization
To ensure FCRA compliance, any applicant on whom an institution wishes to conduct a background screen must be provided with an FCRA disclosure and authorization form advising him/her of the procurement of a consumer report, and the nature and scope of the report. This form must also contain his/her written authorization to conduct the report. This material should include the CRA’s contact information, in the event that the subject wishes to dispute any information contained in the report.
• Adverse Action Notification
Under the FCRA, the employer is required to notify the applicant of their decision to deny employment through pre-adverse action and final adverse action notification letters. A copy of the report, as well as a summary of the applicant’s rights under FCRA, must also be provided to the applicant.
• Screening Provider Support
The FCRA compliance process need not be cumbersome. Many background screening service providers streamline the process by enabling clients to certify the applicant’s authorization directly to the provider during the report ordering process. Providers also typically offer assistance with any part of the adverse action process, and maintain a dedicated consumer request/dispute department to efficiently manage applicant inquiries/disputes within the 30-day timeframe specified by the FCRA.
FDIC Recommendations for Selecting a Background Screening Service Provider
The FDIC recommends institutions conduct thorough due diligence before selecting a background screening service provider, including a review of audited financial statements; the provider’s hiring and employment processes; identity theft safeguards; and, depth and breadth of services.
• Financial Statements and Other Performance Indicators
BIG recommends that institutions look beyond a provider’s financial statements for key performance indicators, and include assessments of quality control processes (e.g., ISO, Six Sigma, etc.) and multiple reference checks in their due diligence.
• Hiring Processes
During the discussion of the provider’s hiring and employment processes, institutions should ask about background checks and drug tests on new hires and existing employees; formal training programs for employees; and, how departments are structured according to skill level, i.e., are customer service representatives considered entry-level personnel, or higher-level personnel?
• Identity Theft Safeguards
In inquiries about the safeguards that a service provider has in place to prevent identity theft, institutions should focus on the security of information assets in both electronic and paper form. The provider should demonstrate comprehensive security measures for IT systems (networks, online reporting systems, information transmission, etc.) as well as its physical premises (restricted access, redundant operating systems, facility monitoring, secure information disposal methods, etc.)
• Depth and Breadth of Services
In terms of services, the FDIC emphasizes the importance of investigating a provider’s depth of criminal and civil searches. BIG also recommends exploring the provider’s willingness to work with its clients on determining the most efficient, reliable and cost-effective approach for these searches. For example, in some states, a criminal or civil search at the county level may be more thorough and expedient than a search at the statewide level. For other states, the opposite may be true. Institutions should ensure the provider is familiar with all public record search methods and how to effectively apply them to meet employers’ screening needs.
In addition, institutions should examine the full range of a provider’s screening capabilities to ensure it offers a depth and breadth of services that will offer an institution maximum protection from risk. A key area of inquiry should be the provider’s ability to offer specialized services that support the banking industry’s unique hiring issues and objectives.
This analysis is provided as a service to our customers. Its contents are designed solely for informational purposes, and should not be inferred or understood as legal advice or binding case law. Persons in need of legal assistance should seek the advice of competent legal counsel. Although care has been taken in this white paper’s preparation, we cannot guarantee the accuracy, currency, or completeness of the information contained within it. Anyone using this information does so at his or her own risk.
For more information, contact Business Information Group (BIG) at 1105 Industrial Hwy., Southampton, PA 18966, or (800) 369-2612.
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