An Imperfect Past: The Role of Criminal Background Checks in the Finance Industry

Welcome to the April 2019 edition of our newsletter!  In this issue, we’ll examine concerns about a decades-old law that bars people with various criminal records from working in the financial services industry.

Does a Rap Sheet Equal a Bad Rap?  The Debate About Conduct-Based Finance Industry Bans

Although this would be hard to believe given various fraud headlines in recent years, since the 1950’s the financial services industry ahs been barred, by law, from hiring anyone with a criminal conviction for a crime deemed to be a breach of trust or another form of dishonest behavior.  The only means of working in banking with such a record is to obtain a waiver from the Federal Deposit Insurance Corporation – which, in the past decade, has granted slightly more than half of such requests.

The banking industry – having drawn criticism for a lack of diversity among its ranks – has sought to change the law, and in the last year it has had some success, with the FDIC exempting supposedly low-level offenses such as making a fake identification card, various drug-related offenses and theft below a certain dollar amount.  Critics continue to insist that the sweep of the law is overly broad, also noting that there is no statute of limitations, meaning that an offense from when someone was a young adult could affect their hiring prospects decades later.

Financial institutions are required to perform background checks that include criminal histories when considering a new hire, and have reportedly terminated some earlier hires after a past relevant conviction was later discovered.  The FDIC maintains a publicly accessible database of persons prohibited from the banking industry under Section 19 of the Federal Deposit Insurance Act, the relevant statute.  It is somewhat unclear if the agency will provide information about whether an individual with a relevant criminal history has applied for a waiver, but if your client is considering working with an adviser at an FDIC institution and a relevant criminal history is discovered, filing a Freedom of Information Act request with the FDIC would be a key step for any risk assessment.  Unlike FINRA and other self-regulatory groups, as a federal agency the FDIC must provide members of the public with most types of information, aside from certain exclusions.

Standards of conduct change over time, and the age of an offense – and offender – should certainly be taken into consideration when making a decision.  Yet the trust clients place in financial advisors, mortgage brokers and others is also paramount.  FDIC-insured institutions have many incentives to assure their clients that the people they hire can be trusted with client assets, but clients and their other advisers also have every incentive to do their homework and consider a potential adviser’s full background before making any decisions.