Background Screening for Business Transactions

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Reports for general business-transaction due diligence—with specific research strategies and scope—are designed to allow the particular client to assess financial and reputational risks, capitalize on opportunities and/or establish regulatory compliance associated with investments, IPOs, partnerships, buyouts, joint ventures, mergers and acquisitions, non-profit considerations, vendors and other third-party engagements.

Asset Encumbrance Strategies

Business Background / Credit Underwriting Strategies

Board of Directors Strategy

The Scherzer Difference

The Scherzer Difference

Scherzer International (SI) has been providing specialized background screening reports since 1993. Our global clients include commercial and investment banks, private equity funds, and many of the largest law and public accounting firms in the world. With a distinct portfolio of scalable, purpose-specific reports for business transaction due diligence, client acceptance or continuation, employment and regulatory compliance, our services have proven essential for informed decisions and sustainable risk-management.

Scherzer International’s core philosophy is to deliver an outstanding report and client experience to every client we partner with. We distinguish ourselves as an industry leader through the following:

  • Individualized progress updates and alerts of noteworthy information
  • Customized report strategies
  • Swift turnaround times
  • Easy to read reports with executive summaries

Read more about the Scherzer Difference.

A handshake is never enough

Performing due diligence in connection with a business transaction is now routine, whether the transaction involves commercial lending, private equity or venture capital funding, merger or acquisition, setting up a partnership, or evaluating a non-profit.

“Due diligence,” in a broad sense, refers to the level of judgement, care, prudence, determination, and activity that a person would reasonably be expected to do under circumstances. Depending on the risk involved, the process will often include some level of background screening on the company and/or its principals to obtain the intelligence necessary for an informed business decision.

Character is the first C of credit

Character, capital, capacity, conditions and collateral are the basics of extending credit. Funding a new venture or granting a loan is never only about cash flow. Qualitative elements are the first step in a business relationship and go in front of any quantitative data. A borrower’s character is of primary consideration, as it measures his/her trustworthiness in repaying the obligation. A comprehensive background check provides an objective character assessment by examining the borrower’s personal and professional track record.

Looking at the people involved

Whether a background check is performed internally or outsourced to a third-party, its elements and focus will depend on the risk involved to determine the potential borrower’s credit worthiness. Background checks are rarely performed on large publicly-traded companies, but Scherzer’s experience shows that most specialty lenders and investors dealing with privately held companies conduct searches on the key members of management and often the entity itself. Most financial services companies outsource the process, and some pass the cost of the background report to the borrower. Commercial banks also perform background checks as part of the underwriting process, but limit the screening to the borrower and guarantor, and the bank absorbs the cost of the diligence. While the cost of the background report is always a factor, it is less so when the risk of default is perceived to be greater than the norm.

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Background screening elements

Below is a list of elements commonly examined by Scherzer in connection with background checks for commercial transactions and the information they provide.

Address History and Social Security Number Trace

This is typically a starting point of any background check. Address histories based on the subject’s name and/or Social Security number are obtained from at least two public record aggregators and compared for identification information. This element also provides an indication of the jurisdictions that should be searched, in addition to the main jurisdiction of residence. (“Jurisdiction” generally refers to the power of a court to adjudicate cases and issue orders, and to the territory within which a court or government agency may exercise its authority.)

As a general rule, Scherzer recommends searches in all jurisdictions of residence reported more than once within a 10-year scope, and in the current jurisdiction of employment. Searches typically are not recommended in the jurisdictions of addresses that are P.O. boxes, military bases or vacation homes.

Corporate Records

Obtained from the Secretary of State or the equivalent registering entity, these records provide information regarding the company’s incorporation/registration date, identification number, status, names and titles of officers (if available) and registered agent, and significant history, such as name changes. For individuals, these records reveal officer/director affiliations with private companies.

Public Company Affiliation Records

Obtained from the Securities and Exchange Commission’s (SEC) proxy statements, this element provides the subject’s affiliations, background details, history with the company, positions on other boards, conflicts of interest, and compensation.

Fictitious Business Name Statements

This element uncovers or confirms assumed or d.b.a. names, and provides registrant names, and dates of registration and expiration. (A fictitious business name allows an individual or company to legally conduct business under a name at minimal cost, without having to create an entirely new business entity. Notably, fictitious names are not required to be distinguishable from the records of any other previously registered name.)

Business Information Report

Obtained from a national business data source, the report typically provides limited payment history, public records such as tax liens, judgments, bankruptcies and lawsuits, titles of officers, and background information.

Media Sources

This element discloses significant litigation and criminal activity, financial problems, reputational issues, regulatory actions, and other noteworthy information, both positive and negative. (To ensure comprehensive results, the databases searched include national and international publications, specialized and regional libraries, and various record repositories as applicable to the subject and specific purpose of the transaction. Follow-up may also be required with the official record keeper’s venue when noteworthy records are located.)

Company Website

This element confirms or provides the company’s website address. The website is reviewed to ensure that it is not fraudulent, and to obtain background details.

Civil Litigation Records – State Level

This element provides insight into the subject’s state-level litigation history with a focus on fraud, financial issues, contracts and other significant lawsuits.

Civil Litigation Records – Federal Level

This element reveals litigation history on the federal level, with a focus on lawsuits involving securities, fraud, racketeering, financial issues, regulatory authorities, contracts, and other significant causes. (The U.S. district courts are the trial courts of the federal court system, and have jurisdiction to hear nearly all categories of federal cases. There are 94 federal judicial districts, including at least one district in each state, the District of Columbia and Puerto Rico. Three territories of the U.S. — the Virgin Islands, Guam, and the Northern Mariana Islands — have district courts that hear federal cases.)

Civil Records – National Database

Compiled by private aggregators, these databases provide limited information from various sources including municipal, county and federal courts, county recorder’s index, tax assessor’s filings, judgments, liens and miscellaneous records from 50 states. However, the millions of records gathered for these databases differ widely because of variations in reporting standards and requirements for individual states and local jurisdictions. Many indices are incomplete, sporadic in coverage, outdated or inconsistently updated and provide limited or no identifying information, making common name “hits” often difficult to identify with a subject. Thus, although a “hit” may appear in this database, it may be among such a large number of “hits” that it is not practical to sort through them or even if reviewed and potentially identified to a subject, can only be used as an indicator that there may be a record. Similarly, if there is no “hit,” this does not mean that the subject has no record. Follow up with the official record keepers’ venue is nearly always required to ensure accurate and comprehensive results.

Criminal Records (Felony) – State Level

This element reveals state-level felony records. A felony is an offense that carries a possible penalty of incarceration in a state prison, a fine in excess of $1,000, or both. Examples of felony cases include violent crimes such as murder, rape, robbery, and assault; property crimes such as burglary, larceny/theft, fraud and forgery; drug-related such as trafficking, and public-order related such as those involving weapons and significant driving violations. Notably, under the doctrine of respondeat superior, a company may be held criminally liable for the illegal acts of its directors, officers, employees, and agents.

Criminal Records (Misdemeanor)

This element reveals involvement in any misdemeanor crimes, i.e., those generally punishable by incarceration for a year or less in a county or local jail. Some crimes can be either felonies or misdemeanors based on additional elements or aggravating characteristics, and typically include offenses such as domestic violence, offenses with priors, assault with force that is likely to cause great bodily injury, and certain drug charges. California and several other states have alternative felony/misdemeanor crime classifications, known as “wobblers” which provide that a crime can be charged as a felony or a misdemeanor based on the circumstances; a “wobbler” also can be charged as a felony but reduced to a misdemeanor by the sentencing court pursuant to a statute.

Criminal Records – Federal Level

This element reveals involvement in federal crimes. Examples of federal crimes include securities, bank, mail and insurance frauds, money laundering, racketeering, bribery, environmental schemes, and acts committed in one state with flight to another state. For companies, the most common cases are filed by regulatory authorities, but other charges also may be brought at this level depending on the severity of the crime and adequacy of the civil and administrative enforcement actions, among other considerations. As in other court levels, under the doctrine of respondeat superior, a company may be held criminally liable for the illegal acts of its directors, officers, employees, and agents.

Criminal Records – National Database

Compiled by private aggregators, these databases provide limited information from various sources including county and federal courts, state criminal record repositories, sex offender registries, prison systems and proprietary data collections from 50 states. However, the millions of records gathered for these databases differ widely because of variations in reporting standards and requirements for individual states and local jurisdictions. Many of the indices are incomplete, sporadic in coverage, outdated or inconsistently updated and provide limited or no identifying information, making common name “hits” often difficult to identify with a subject. Thus, although a “hit” may appear in this type of database, it may be among such a large number of “hits” that it is not practical to sort through them or even if reviewed and potentially identified to a subject, can only be used as an indicator that there may be a record. Similarly, if there is no “hit,” this does not mean that the subject has no record. This search nearly always requires follow up with the official record keepers’ venue to ensure accurate and comprehensive results.

Sex Offender Registry Records

This element provides sex offender registry listings from the Dru Sjodin National Sex Offender Public Website (NSOPW). The NSOPW is the only government system that links public state, territory, and tribal sex offender registries from one national search site. The records, however, are limited to the information that each individual jurisdiction may provide.

Bankruptcy Records

This element discloses bankruptcy filings, statewide or nationwide. (Federal courts have exclusive jurisdiction over bankruptcy petitions, most of which are filed under the three main chapters of the U.S. Bankruptcy Code: Chapter 7, Chapter 11, or Chapter 13.)

Tax Lien Records

This element reveals federal, state, and county tax liens. (“Lien” refers to a legal claim to secure a debt, which may encumber real or personal property.)

Judgment Records

This element reveals judgments listing the subject as debtor or creditor. (“Judgment” refers to an obligation or a debt created by the decree of a court.)

Uniform Commercial Code (UCC) Filings (Tax Liens and Judgments)

This element provides information regarding UCC tax liens and judgments listing the individual or company as the debtor.

Uniform Commercial Code (UCC) Filings

This element reveals information from certain financing statements. (Under the provisions of state Universal Commercial Code statutes, when property such as equipment, inventory, and other tangible business assets is used as collateral for a loan, a UCC-1 statement is filed. This process is also called “perfecting the security interest” in the property and means that the borrower may not dispose of the property without paying off the debt.)

County Recorder’s Index

This element provides information regarding filings such as mechanic’s liens, abstracts of judgment, notices of default, trust deeds, etc. The available information typically includes filing dates, creditor and debtor names or parties involved, amount and status.

Consumer Credit Report

Accessed only with a signed authorization by the subject, the report is obtained from one of the three national credit reporting agencies. The report may provide names and addresses that may not have been disclosed, additional identification information, credit history, and FICO score.

Securities Law Violations

This element provides information regarding violations, litigation, disciplinary actions, administrative proceedings, etc., from the Securities & Exchange Commission (the “SEC”). the Financial Industry Regulatory Authority, the Commodity Futures Trading Commission, the National Futures Association, and the State Department of Securities.

Industry-Specific Regulatory Authority Records

This element provides information regarding actions filed by an industry-specific regulator such as the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of Thrift Supervision, the Federal Trade Commission (the “FTC”), the Federal Communications Commission, the Federal Drug Administration, the Federal Aviation Administration, and the Department of Housing and Urban Development. If applicable, records additionally may be obtained from the state attorney general’s office, the inspector general or the Better Business Bureau.

SEC Rule 506(d) “Disqualifying Event” Records

Rule 506(d) was implemented pursuant to Section 926 of the Dodd-Frank Act as an amendment to Rule 506, and effective September 23, 2013, disqualifies offerings involving certain felons and other “bad actors” from Rule 506 exemption (which is considered a “safe harbor” and the most widely used exemption from securities registration) unless remedied through a waiver or “reasonable care” exception. If applicable, this element is included to identify any “disqualifying events,” generally described as: 1) criminal convictions involving certain securities-related acts; 2) court injunctions and restraining orders regarding certain securities-related acts; 3) final bar orders of certain regulators that are based on fraudulent, manipulative, or deceptive conduct; 4) SEC disciplinary orders that suspend or revoke registration, place limitations on activities, or bar associating with any entity or offering of penny stock; 5) SEC cease-and-desist orders related to violations of any scienter-based anti-fraud provision of securities laws or Section 5 of the Securities Act; 6) suspension, expulsion or bar from membership in an SRO; 7) orders stopping or suspending Regulation A exemption; and 8) U.S. Postal Service false representation orders.

Federal Excluded Parties Index

This element identifies individuals and entities that have been excluded from the U.S. General Services Administration’s List of Parties Excluded from the Federal Procurement and Non-Procurement Programs. Inclusion on this list means that the subject is suspended, debarred or otherwise excluded from receiving federal contracts or certain subcontracts, and from certain types of financial and non-financial assistance and benefits.

Office of Foreign Assets Control (OFAC) Records

This element reveals if the subject is named in the records of the U.S. Department of the Treasury which maintain the OFAC, for the administration and enforcement of economic sanction programs against countries and groups of individuals, such as terrorists and narcotics traffickers.

For U.S. companies, the agency’s enforcement applies to banks, insurers, and others in the financial industry that may be involved in covered dealings, which include engaging in transactions prohibited by Congress such as trade with an embargoed country or with a specially designated national (“SDN”). Violations of regulations, which extend to all U.S. citizens, can result in substantial fines and penalties. Criminal penalties can reach up to $20 million and imprisonment up to 30 years; civil fines can range from up to $65,000 to $1,075,000 per violation, depending on the activity at issue.

OFAC has significantly stepped up its enforcement efforts that have resulted in sizable settlement agreements with U.S. entities, and thus companies increasingly are incorporating sanctions compliance language based on OFAC regulations into contracts and agreements in connection with business transaction due diligence.

Contract terms requiring a party to affirm that it is not the subject of any OFAC sanctions status, that no OFAC investigations are in the process, or that it does not engage in transactions with countries like Iran or North Korea, are becoming standard. Some deals also include a provision attesting that a company is not owned by an individual on the list of SDNs, that the company is not based or located in an embargoed country, or to assure that the monies used to make an investment or purchase were not provided by a sanctioned country or individual.

The use of compliance language does not insulate a company from OFAC liability. While such a provision may create a contract-based remedy to recover monetary damages based on a fine or settlement with the agency, the clause cannot eliminate liability. Like any other governmental regulator, OFAC is not bound by private contract and can take action even with such terms in place. 

International Fraud and Politically Exposed Persons (PEPs) Database

This element reveals if the subject is named in the various records and master lists, including those maintained by the U.S. Department of the Treasury Office of Foreign Assets Control of Specially Designated Global Terrorists and Entities with Blocked Persons (this search can be conducted as a separate element), the U.S. Department of Commerce Bureau of Export Administration Denied Persons, the Palestinian Legislative Council, the FBI Fugitives 10 Most Wanted, the Most Wanted Terrorists, the United Nations Sanctions, the World Bank of Debarred Firms, the Commodity Futures Trading Commission Sanctions, the Office of the Comptroller of Currency, Unauthorized Banks, Interpol, the European Union Most Wanted, the HM Treasury, and Politically Exposed Persons (PEPs).

PEPs are of greater significance in the banking and financial industries since therein they are considered high risk and require enhanced due diligence. Although there is no global definition of a PEP, the Financial Action Task Force (FATF), the Patriot Act and the European Union Directive use similar definitions of a PEP, which typically consists of five layers: 1) current or former senior official in the executive, legislative, administrative, military, or judicial branch of a foreign government (elected or not); 2) a senior official of a major foreign political party; 3) a senior executive of a foreign government-owned commercial enterprise, and/or being a corporation, business or other entity formed by or for the benefit of any such individual; 4) an immediate family member of such individual, i.e., a spouse, parents, siblings, children, and spouse’s parents or siblings; and 5)·any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate. The expectations for an organization doing business with PEPs are universally similar: a) identify PEPs among clients, and b) ensure that funds managed on behalf of PEPs are not derived from a corrupt source.

Property Records

This element identifies real estate holdings and transaction histories such as property sale or transfer. Available information may include the date of purchase or transaction, parties on the record, purchase price, estimated market and assessed values, available mortgage information, property profile, and assessor’s maps. (Market values are derived from a data source that employs multiple valuation methodologies recursively for each valuation, and utilizes property comparable values, appraiser emulation artificial intelligence, home price indices and various statistical methods in a neutral network to obtain the final value.

Marketspecific data is available for 98% of all U.S. zip codes and 3,085 counties in 50 states and in the District of Columbia, representing 99% of the population, 97% of all properties or approximately 145 million, more than 50 million active mortgages, and 96% of loanlevel, nonagency mortgage securities.)

Vehicle, Watercraft and Aircraft Registration Records

This element reveals ownership and registration information of vehicles, watercraft, and aircraft in a particular state.

Copyrights, Trademark and Patent Records

This element identifies copyrights, patent, and trademarks registered to the subject. (A company that owns intellectual property can realize its value internally, by using it for its own processes and providing goods and services to customers, or sharing it externally. The latter is achieved through legal means, such as royalty rights. U.S. and international accounting practices place pressure on companies to recognize and value all identifiable intangible assets as part of a transaction (in a merger or acquisition, for example).

Professional License / Certificate / Membership Verification

This element confirms professional license or certificate(s), and/or professional organization membership(s).

Education Verification

This element verifies educational claims. The legitimacy of the institution is also checked to ensure that it is not a diploma mill.

Employment Verification

This element verifies employment claims. The legitimacy of the employer is also checked to ensure that it is not a fraudulent verification service retained by the subject.

Driving Records

Accessed only with a signed authorization by the subject, information includes identification data, history of violations, suspensions, failure to appear in court, and accidents. (Driving records can provide verification of identity for corresponding criminal charges and/or indicate violations such as driving under the influence, committed outside of the jurisdictional scope of the background check.)

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International background screening

Expanding the due diligence process to include international background checks when the principal has a significant foreign history or the company is a non-U.S. entity is essential to sound risk management.

Availability of Information

The scope of the background check, while taking into consideration the risk level of the transaction, will depend on the amount of information that is available in the public domain, and the customs, culture, and laws of each country. What may seem perfectly routine and acceptable in the United States may confuse or offend those in other countries. For example, credit checks are virtually unheard of abroad.

The collection of criminal information can also present logistical challenges. Many countries do not have an organized court system, and records, if available, must be searched on a regional or town-by-town basis, or at multiple agencies (like the police, the court venue and a government agency, for example). Certain countries offer what is known as a “police certificate” which will confirm the information about a subject found in police records. Some countries, such as Poland, have banned the collection of criminal records altogether.

Taking a “reasonable” approach to international background checks is particularly important in emerging markets, where many public records are unavailable or unreliable. The situation is slowly improving, however, as it is now possible to obtain from almost any country business registration information regarding the owners and directors of a corporate entity, with the exception of the secrecy jurisdictions, such as the British Virgin Islands where ownership information remains inaccessible to the public. Most jurisdictions also maintain lists of debarred persons and companies. This is especially common in countries with well-regulated stock markets, such as Hong Kong and Singapore. Singapore also allows access to criminal records, while many emerging market jurisdictions consider an individual’s criminal record to be private.

Civil litigation records too are becoming more available; however, local knowledge and an understanding of the judicial system are critical to obtaining information legally. Searches in China, for example, are especially complex, as the filings can be held at either county, municipal, provincial or state level.

Media searches are possibly the most significant element of any international background check. If these checks are not performed locally, they at least should be conducted in the native language in the international databases available in the United States and the Internet.

Legal Compliance – Privacy Laws

Information privacy or data protection laws prohibit the disclosure or misuse of information maintained about private individuals. Over 80 countries and independent territories have adopted comprehensive data protection laws including nearly every country in Europe and many in Latin America and the Caribbean, Asia, and Africa.

The European Union (the “EU”) is setting the bar for privacy protection of personal data. The EU’s holistic view of personal data, defined as anything that can identify an individual — including a person’s address and image — is seen as the gold standard, differing from the patchwork of laws in the United States and some other countries.

The EU is currently considering stricter, controversial personal privacy measures, such as the right to be forgotten. If approved, a person’s past could be wiped off the Internet and his/her data could no longer be processed or stored.

Other countries are playing catch-up to EU standards, primarily to be able to conduct business with EU members. Countries that currently meet EU standards by reason of their domestic laws or international commitments include Canada, Israel, New Zealand, Switzerland, South Korea, Argentina, and Uruguay.

Global companies that transfer personal information from the EU to the U.S., and specifically that of individuals of the European Economic Area (the “EEA”) which includes 25 member states of the EU plus Iceland, Liechtenstein, and Norway, must have a legal mechanism in place for such transfers. A landmark decision by the Court of Justice of the European Union in Maximillian Schrems vs. Data Protection Commissioner in October 2015 that underpinned the invalidation of the old Safe Harbor privacy regime left hundreds of U.S. multinationals that relied on this privacy framework without a legal means to transfer employees’ and other personal data from the EU to the United States.

The replacement for Safe Harbor did not come until eight months later—the EU-US Privacy Shield (the “Privacy Shield”) finally debuted on July 12, 2016. Designed by the U.S. Department of Commerce and the European Commission (the “EC”), the framework provides robust and enforceable protections for the personal data of EEA individuals, mandating transparency for participating companies, strong U.S. government oversight, and increased cooperation with EU data protection authorities. Companies that choose to participate in the Privacy Shield, but fail to comply with its requirements, are subject to independent recourse mechanisms, enforcement actions by the FTC, or actions under the False Statements Act (for persistent failures to comply).

It is unclear whether the EC plans to revise the Privacy Shield when the General Data Protection Regulation (the “GDPR”) replaces the current directives in May 2018. The Article 29 Working Party raised concerns that the Privacy Shield does not provide an adequate level of protection as required by the GDPR. The GDPR allows for multiple mechanisms, including binding corporate rules, standard contractual clauses, EU adequacy decisions, and a framework like the Privacy Shield for legally transferring data.


Asset searches

Getting bank and investment account records of defaulted borrowers

Asset searches, which may include bank and investment accounts, are not illegal; however, certain actions to obtain this information, such as pre-text calling are illegal. And although there are methods that can be used to obtain financial information covertly, most, if not all, are questionable and often futile. There is no clear way for anyone other than the account holder, a designated representative or a party with a valid court order to obtain account information without violating the law. And getting an account balance may be of limited value since it is transitory, depending on the transactions related to the account which are being processed at any given time.

A long list of potentially applicable federal laws and an even longer list of state laws are directed at protecting the privacy of consumers. For the most part, consumers are defined in the laws and in interpretative decisions as individuals consuming goods or services for personal or household use. For example, the Gramm-Leach-Bliley Act (the “GLBA”) prohibits obtaining customer information from a financial institution under false pretenses and imposes on the institution the obligation to protect customer information. Under the GLBA, a customer is defined as an “individual.” This is essentially the same as the definition of a consumer under the Fair Credit Reporting Act (the “FCRA”). However, in making the distinction between an individual and a business, there is authority that finds sole proprietors, partnerships of five or fewer persons and other small business owners to be consumers.

As a general matter, information concerning a business is governed by the contract between the financial institution and the business customer. This does not mean that the bank or other financial institution can give access to anyone about an account or that pre-text calling to obtain information about a business account would be lawful–it just means that the specific consumer protection regarding these matters would not apply.

Searching for assets in foreign countries brings its own problems, as many countries’ privacy laws are more restrictive than those in the United States. Potential liability under the Foreign Corrupt Practices Act (the “FCPA”) also exists if, for example, a financial institution used a third-party that obtained information about a defaulted borrower’s assets by illegal means, such as bribing a banking or government official. The FCPA holds that “any bribery of a foreign official by an agent of the principal to benefit the principal can be attributed to the principal if the principal knew or should have known that the bribery was going to occur.”

Applicability of the FCRA to Commercial Transactions

The FCRA is a consumer protection statute, and thus applies to reports prepared on a “consumer,” which the FCRA Section 603(c), defines as an “individual.” The “consumer” protection ambit is found in the FCRA’s definition of a “consumer report,” which is: “[a]ny written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for— (A) credit or insurance to be used primarily for personal, family, or household purposes.”

The FTC in its most recent staff report issued in July 2011 and titled “40 Years of Experience with the Fair Credit Reporting Act: An FTC Staff Report with Summary of Interpretations” (the “Staff Report”) indicates that the term “consumer” does not include “artificial entities, such as partnerships, corporations, trusts, estates, cooperatives associations or entities created by statute, such as governmental agencies.”

The Staff Report also adopted interpretations from its staff opinion letters from 2000 and 2001 stating that (1) a report by a consumer reporting agency is a “consumer report” even if it is used for commercial purposes; and (2) an application for business credit does not give rise to a permissible purpose except for a report on an individual who will be personally liable for the debt. The FTC also deleted or modified several interpretations in its 1990 commentary to make them consistent with those views.

In the 2000 opinion letter referenced above that served as the basis for this policy change, the FTC concluded that “a permissible purpose did not exist under the FCRA for a business credit guarantor to obtain a consumer report on an individual who is a principal, owner, or officer of a loan applicant (a sole proprietorship, partnership, or corporation), or who signs a personal guarantee in connection with a commercial credit application by a third party.” The 2001 letter, however, modified the first letter, stating, “it is reasonable to view a business transaction in which an individual has accepted personal liability for the business debt as involving the consumer, thus providing a permissible purpose for the lender to obtain a consumer report under Section 604(a)(3)(A).” As such, an application for business credit gives rise to a permissible purpose only when the report concerns an individual who will be personally liable for the debt.

According to the Staff report, “[e]ven if a business has a permissible purpose to receive a consumer report, a CRA is not required to supply a report to such business because the statute is permissive, not mandatory.”

The FTC’s interpretations are not substantive rules and do not have the force or effect of statutory provisions. They are guidelines intended as a clarification of the FCRA and, like industry guides, are advisory in nature. Some courts have expressly refused to extend any deference to the FTC staff’s advisory opinion letters.

There is much case law interpreting the FCRA–the vast majority of courts and commentators have concluded that the FCRA does not apply where a consumer report is used for commercial or non-consumer purposes. State credit reporting laws, to the extent not preempted by the FCRA, apply the same analysis.

The point is well-established because numerous courts have been making it since just after the FCRA made its debut in 1970, where in Wrigley v. Dun & Bradstreet, Inc., 375 F. Supp. 969, 970-971 (N.D.Ga. 1974), “. . . the court is constrained to the view that both the legislative history of the Act and the official administrative interpretation of the statutory terminology involved compel the conclusion that the Act does not extend coverage to a consumer’s business transactions.”

“Catch-all” Permissible Purpose to Obtain a Consumer Report

A creditor (or anyone) has a permissible purpose under the FCRA to obtain a consumer report if the consumer provides authorization and written instructions for such a report. Section 604(a)(2) expressly provides that “any consumer reporting agency may furnish a consumer report . . . (i)n accordance with the written instructions of the consumer to whom it relates.”

If the consumer report is being furnished in accordance with the written instructions of the consumer to whom it relates pursuant to Section 604(a)(2), the CRA must obtain a consumer’s written consent that qualifies as an instruction by clearly authorizing the issuance of a consumer report on that consumer. The FTC staff has indicated that a clear and specific written statement that contains the following language suffices: “I authorize you to procure a consumer report on me.” However, a statement that contains the following would likely be insufficient: “I understand that where appropriate, credit bureau reports may be obtained.”

Of course, if the information is not a consumer report to begin with, it may be used for any purpose subject to common law civil liability.

Conclusion

Today’s world looks at information differently

This Barron’s article should have raised suspicion in 2001…

“…Some folks on Wall Street think there’s more to how Madoff generates his enviable stream of investment returns than meets the eye. But what few on the Street know is that Madoff also manages $6 billion-to-$7 billion for wealthy individuals. That’s enough to rank Madoff’s operation among the world’s three largest hedge funds. What’s more, these private accounts, have produced compound average annual returns of 15% for more than a decade. Remarkably, some of the larger, billion-dollar Madoff-run funds have never had a down year. When Barron’s asked Madoff how he accomplishes this, he said, ‘it’s a proprietary strategy. I can’t go into it in great detail.’”

Background information must be carefully analyzed and pieced together from various reliable sources to ensure an accurate and comprehensive character assessment of the borrower and the management team. Doing a simple Internet check or reviewing a credit report is rarely enough. And relying on information obtained solely from searches of common databases may not be sufficient in high risk or even moderate risk situations. Such databases cover less than half of U.S. courts, and significant filings, such as criminal records from New York state’s court administration system are likely excluded. Records are also irregularly updated–often over 90 days. Media searches typically are limited to negative information obtained by using algorithms within a single aggregator. Raw data is returned piecemeal from each source, which makes it difficult to see the whole picture.

To ensure the most accurate, comprehensive and up-to-date results, records must be searched through the best method applicable to the particular court: in person, through online direct access to the primary sources, through contracted databases that have been vetted as reliable sources of information, or a combination of all three. Media searches should be performed using individually determined search strings (key words and phrases) as applicable to the particular subject, and with other considerations (such as investment returns when dealing with a hedge fund, for example), focusing on both negative and noteworthy information. After all, everything in the Barron’s article cited above was positive—too positive.

Read more about:

Asset Encumbrance Strategies

Business Background / Credit Underwriting Strategies

Board of Directors Strategy

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