Myth versus reality. Five misconceptions about background checks in business

In today’s fast paced business world, news travel fast and a reputation built in years can be ruined in hours. Knowing and trusting your people, clients and partners is key to keeping your business safe and upright, as it allows making informed decisions and timely identifying potential risks. That is why background checks have proven to be vital in fraud prevention in various contexts, including employment, financial transactions, as well as client relations and business partnerships. But what are the most frequent misconceptions about them?

By Alexandru Nae, Senior Manager, Alexandra Nisipeanu, Senior Associate, and Alina Badea, Senior Associate, Financial Advisory, Forensic Services, Deloitte Romania

1. Background checks are only done prior to hiring  

Background checks are indeed most common during the recruitment and onboarding processes, but there are actually several instances when they can and should be conducted. For example, employees should be re-screened when they are promoted, when they transition to a different role within the organization or when they are rehired.

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On the other hand, failing to timely identify potential new links to sanctioned third-parties or politically exposed individuals while concluding business deals can result in significant reputational damage. As such, an essential step in the due diligence process is the third-party integrity due diligence screening, which can be performed on both individuals and companies, on multiple targets at a time, and focuses on aspects related to a specific situation.Basically, such a check is crucial while trying to obtain accurate information regarding the background and reputation of potential business partners during acquisitions or mergers, while investigating companies or individuals that are suspected of wrongdoings or even during clients’ and new vendors’ acceptance processes. This type of background screening can also be very helpful before investment decisions, for instance before the initial public offering.

2. Background checks are only needed by large companies

Another common misconception is that only large companies need to conduct background checks on their current or future employees. In fact, smaller and medium-sized businesses should place just as much importance on recruiting the right employees as larger ones do, as general risks remain quite the same regardless of their size, and the risk of revenue loss is actually higher for smaller companies.

The cost of an unsuitable hire can be staggering, with consequences including reduced productivity levels, low organizational morale and reputational damage. According to a 2023 research conducted by career platform Zippia, the average cost of an unsuitable hire is 30% of their annual salary, and a single unsuitable hire costs American companies an average of $14,900, and can amount to as much as $240,000 in certain cases.

3. Background checks are only looking into criminal records

In general terms, pre-employment screening is the process of verification of the personal, professional and educational history of a candidate, in order to confirm their validity and suitability for a specific position. It starts from verifying basic documentation provided by the applicant, such as identity papers, work permit (if applicable), CV and LinkedIn profile, academic records, professional licenses and certifications and employment history. Secondly, the check will look into official legal records and publicly available or subscripted databases, including national business registries, litigation databases or global compliance database aggregators for sanctions and political affiliations.

On the other hand, when it comes to entities with which a company is about to do business, third-party integrity due diligence is an extensive review of multiple available public information, paid databases or information obtained from the target-entity itself, and it goes through a wide range of resources and clues, from media allegations found in reputable news outlets linking the target to fraud, money laundering, terrorism and other unlawful activities, to possible sanctions issued by a government or an international organization. The check also implies the identification of shareholders, of the ultimate beneficial owners and corporate affiliations, the analysis of their financial results, their criminal and civil litigation records, while also keeping an eye on regulatory aspects.

4. Breaching privacy cannot be avoided when conducting background checks

Privacy can and should be protected when conducting background checks. In fact, privacy protection is a fundamental principle in background screening. In the European Union, several laws and regulations govern data protection and privacy, and they are relevant to conducting background checks and handling personal information. The most notable one is the General Data Protection Regulation (GDPR), strengthened by the local legislation.

As such, although they involve collection of personal information, background checks can be conducted in full compliance to data privacy principles, by obtaining explicit consent from the subject, by collecting and using onlynecessary information, implementing robust security measures, and by ensuring that third-party vendors involved in checks also follow privacy regulations and best practices in the field.

5. Background checks can be performed by anyone

Background checks can and must comply with all applicable laws and regulations and they have to take into consideration both the complexity and the scope of the research and the available resources. The professional in charge with running this process must have a strong understanding of the complexities and limitations of public record information and applicable law, an extensive knowledge and experience in different jurisdictions, as well as an ability to efficiently collect and analyze information, using specialized tools, backed by their own research and investigation skills.

For that reason, although open-source information can be accessed by anyone, a successful approach is based both on the access to a series of databases, which offer the necessary information with respect to individuals and companies, and on the strong abilities of the researcher. It is highly recommended that the background check is performed by well-trained professionals, who can effectively assist in identifying and addressing any potential risks, thus avoiding costly mistakes, sanctions and reputational damage.

Prevention is the key for safeguarding your business and reputation from potential hidden risks

Regulatory changes worldwide are increasing operational complexity and the cost of compliance. As such, background checks become a valuable tool for businesses to demonstrate a high level of integrity into their practices, helping to safeguard the interests of all parties involved.