The Ethical Investigator

It’s always nice to be able to know who has loaned people money. It helps in asset searches, of course, but we also like to call bankers in after-fraud investigations. Now getting to the identity of those lenders is about to get harder.

Secured creditors have to put their customers on the public record. Such lending on real estate is called a mortgage, and on other kinds of property a “UCC-9” security agreement (known long ago as a chattel mortgage).

Who’s loaned money to whom is useful information if you’re a lender’s competitor, but it’s also great information in an asset search. You often need to contact other creditors to swap information, or else in litigation to figure out whether the person you are investigating may have perpetrated a fraud. What they told their lenders can be critically important.

Lenders have in the past tried to file under trade names (also known as DBA’s, for “doing business as,”) but those are also a matter of public record if not always findable on line. You can make up a name on a financing statement, but that gets awkward when it’s time to go to court and enforce a security interest.

The Company Corporation in Delaware thinks it has come up with a good solution that it’s recently started marketing: under UCC Article 9, lenders can submit the name of an authorized representative and have them listed in place of the lender, just the way people forming Delaware corporations can hide their identity by hiring an incorporator and registered agent. CSC offers that kind of service for Delaware corporations, and now says it’s the first to go into cloaking the identities of UCC creditors.

Now, instead of looking up who loaned money to a debtor, fact finders may have to determine who the representative of the lender is and then send in questions via that representative to uncover the identity of the lender. Who will answer? It could be the lender, but the lender won’t be under any obligation to respond. Or, depending on the agreement between the representative and the lender, you could be forced to deal with an intermediary representative instead of going right to the bank or finance company in question.

Just one more reason that data dumps by computer – never enough in conducting any kind of thorough investigation – fall short of the mark. Now even a search for a lender that used to be findable by computer or by an entry-level clerk may need the hand of someone experienced enough to be able to ask the right questions in the right way just to get the right person to come to the phone. 

Anita Collins, an elderly woman working as an accounts payable clerk for the New York Archdiocese, was recently arrested for embezzling funds from the church.  That’s bad news for the archdiocese.  But the real black eye for the church is that the entire experience could have easily been prevented.  Had the church run a simple criminal background check on Collins, they would have seen that she had a felony conviction for stealing funds from her previous job, and had pled guilty to a misdemeanor when charged with criminal forgery and grand larceny.  In fact, she was still on probation for the felony conviction when she was hired by the archdiocese.  Given her criminal past, putting her in a position where she had direct access to church funds would fall under the category of poor management decisions. 

What this situation teaches us is not just that the archdiocese should have run a criminal background check on the woman—that’s obvious.  The real lesson here is the importance of timing.  Collins was hired shortly before the archdiocese instituted a policy requiring background checks for all new hires.  The church had chosen to make background checks retroactive for existing employees who worked with minors, but they made no such allowance for employees with access to church funds.  As the archdiocese spokesman explained, “It was just a happenstance of timing that [Collins] was hired just almost immediately before the program was instituted.” 

Clearly, the church should have made background checks retroactive for a broader pool of existing employees.  A reasonably prudent policy would have required a background check for new and existing employees entrusted with financial responsibilities.  In other businesses, background checks may also be in order for employees with access to trade secrets, or with access to other employees’ confidential personal or medical information. 

Now, you’re thinking, I have a background policy in place and all new employees that have these posts are rigorously scrutinized.  Well, good. But does that same level of scrutiny also apply to internal promotions whose new posts now give them access to funds or sensitive information?  Sure, a background check on an internal candidate may seem unnecessary.  After all, she’s been working for you for a while, and you believe that you don’t have to confirm that she is trustworthy, reliable, a good team player—clearly you think so or else you wouldn’t be promoting her.  Or maybe it feels invasive to conduct a criminal background check at this point.  Perhaps you assume that you know her so well that suspecting that she’s been lying or withholding information all this time is a betrayal of sorts. 

 But due diligence requires that we take a step back and look at a situation anew.  If this person had been an external candidate for this position, she would have been subject to a much more rigorous vetting process.  An internal promotion is not a time to get lazy, or to assume that because there have been no red flags up to now everything will remain fine in the future.  Or to be afraid of what you’ll find out.  It’s so easy for companies to give themselves an out when it comes to due diligence.  Don’t do it.  Make it company policy that everyone, be they an internal promotion or external hire, who has access to funds, trade secrets, confidential information, and/or minors is subject to thorough due diligence, including a criminal background search.  That’s the only way you can have peace of mind that you've done all you can to protect your organization’s best interests.  

You have an opening in your company.  You get a slew of resumes for the position, you interview a number of candidates, and then you finally narrow it down to two people: One has experience that’s right on the mark, but during the interview you had glimpses of an attitude that might not mesh with your corporate culture.  The other person is lacking a number of important skills, but it seems that she makes up for her shortcomings with an energy and attitude you admire.  She seems like a real go-getter who will be a good fit among your staff.  So what do you do?

We’ve seen this debate played out in the blogosphere repeatedly (here’s one example, and another), and usually folks tout character over skills.  The reasoning?  Skills can be taught, but character cannot.  But if you’re the person doing the hiring, how do you make sure that your impression that someone has a good character is right?  Or if you’re an attorney who’s looking for a reliable witness, how do you make sure you pick one whose credibility won’t be ruined by proof of a less than upstanding character?

Is this as simple as confirming that the candidate’s resume is accurate?  Determining that someone must have good character because they didn’t lie on their resume is setting the bar pretty darn low.  So do you just resort to Googling the candidate or witness?  Checking their Facebook page or Twitter feed?  We’ve pointed out more than once that assuming everything you need to know about someone can be found on the Internet is just not true.  You don’t get a full picture of someone just because you saw their listing on LinkedIn or scrolled through their pictures on Facebook—expect perhaps that they have yet to master the social networking site’s privacy settings. 

So is this instead an “I know it when I see it” sort of assessment—where you base your decision primarily on your “gut,” your “instinct,” or some sort of “hunch” about the candidate’s character?  Maybe you’re a great judge of character with a wonderful track record who can trust your instinct without reservation.  But for most people, that’s rarely the case, especially those who are new to hiring or who don’t have a lot of experience selecting witnesses for a case. 

The truth of the matter is that being a good judge of character is sort of like being funny: everyone thinks they are but we all know that’s not always true.  I don’t mean to suggest that instinct isn’t valuable—sometimes it’s all we’ve got and more often than not it’s worth heeding a “bad feeling” about someone.  But we’re talking about pretty high stakes here, and it would be good to base an important decision on more than a hunch. 

This is where a good investigator is invaluable.  Every worthwhile investigator will look beyond the Internet and do various in-depth database searches.  But those who really know what they’re doing know that that’s not enough.  They know that ultimately they have to get on the phone and start interviewing people.  They will talk to those old employers, track down ex-colleagues, and get the skinny from friends, classmates and co-workers.  Sure this might generate some gossip, and some of it may or may not be true.  But combined with smart and thorough database searches, this approach will provide a much clearer picture of your candidate’s character, helping you make a genuinely informed decision.  

An enraging story by the Associated Press spells it out: computers used by background checkers mix up two people with the same name. Blameless woman gets tagged with a criminal record that isn’t hers, can’t get work and ends up homeless.

We’ve written about the danger in relying on the “intelligence” of computers here, and the limitations of Google here. The message in these as well as the AP story about the ruined lives of background checks gone wrong are the same: there is no substitute for having an intelligent person conduct your research.

We saw such a problem earlier this year: a client called and said he wanted to hire (let’s call him) Robert M. Johnson for a high-paying job. Robert M. Johnson is an accomplished professional with a great resume and wonderful references. How then to explain the criminal record for fraud turned up by one of the databases? Robert M. Johnson the candidate said, “I’ve never been convicted of any crime. You’ve got the wrong person.”

Turned out he was right and the database was wrong. How could we tell?

1. We looked up the criminal case in question. While the AP story is correct that more and more criminal records are on line, the cases themselves – the critical documents – often are not and in any case need careful reading. We looked at the sentencing report in this case and found that the criminal Robert M. Johnson was sentenced to serve his time in a particular southern state to be close to “home and family.”

2. We then found that the Robert M. Johnson up for the job had no ties whatsoever to this southern state. His parents didn’t live there, he had never lived there, his Social Security number was not issued there, and he was working in Connecticut while the criminal Robert Johnson was committing his crimes down south.

This seems like simple work, but the databases were incapable of making the mundane connections that distinguished two very different men with the same common name. Why would this be?

To start with, not all databases come up with the same information. One may know where a person has worked for the last ten years, while another will have no information about employment. Still, the employment-light database will do a great job associating a person with companies he may own or on whose boards he serves. Both kinds of information are vital, but no machine can yet put them together to draw a complete picture.

Complete pictures come when the human mind gets involved, and even then, databases can only take you so far. We’ve written here about that too, and how interviewing is sometimes the only way to get the information you’re looking for.

But interviews or not, automated searching is like letting a robot build a car and then having another robot inspect the thing. The robots are certainly useful and lower the cost of the vehicle, but would you drive that car before a person had looked it over? 

It happens all the time.  A divorce lawyer calls us and says his client is thinking of suing her husband for divorce, but knows very little about the family’s finances. What are the sources of income? Where is the money invested? Does the husband have anything hidden in companies she doesn’t know about?

After years of telling clients to tell us “everything you know about your husband’s money, investments and habits that could help us to find assets,” we came up (at the suggestion of a client) with a better idea: a checklist to help clients under stress ask themselves all the right questions before we begin an asset search.

Here is that list. It’s been very helpful not only in a couple of recent divorce cases, but also in other kinds of asset searches.

The questions are to be asked about the person being searched, not the client being interviewed.

1)      What are their full names? Have they ever used any other names? Single names? Other married names?  Variations of their current names? (E.g. using their middle name or initials instead of their first, etc.?)

2)      When were they born?

3)      Where were they born?

4)      Where do they live? What are the addresses? Do they own property there? Keep in mind this includes real estate, as well as cars, boats, planes, etc. And real estate is more than just homes: It also includes land and commercial buildings.

5)      What phone numbers are associated with them? Home? Office? Mobiles?  

6)      Where do they vacation? Do they own property there? What are the addresses? What are the phone numbers for those properties?

7)      Where do they like to travel? How frequently do they go there? Might they own property there?

8)      Where do they bank?

9)      Do they have investments? Stock? Bonds? Property? Other businesses?

10)   Do they have any paid insurance policies with cash value?

11)    Do they have any annuities that you know of?

12)    Where do they currently work? What is the address there? What is their position?

13)    Do they have any ownership interest where they work?

14)    Do they or have they had any partners? What are their full names? Where do they live? What are their addresses?

15)    Have they had any previous jobs? What was the address there? What was their position?

16)    Have they had any ownership interest where they previously worked?

17)    Do they currently own any companies? What are their names? What do they do? What are their addresses? What phone numbers are associated with them?

18)    Have they previously owned any companies?

19)    If they own companies or have owned companies in the past, what were they named? Are there any naming conventions they’ve relied on? For example, initials of names? City names? Variations on the same name? (St. Mark Co., St. Mark Associates, St. Mark Partnerships, etc.). Can you guess what they may name a new company?

20)    What did the companies do? What are their addresses? What phone numbers are associated with them?