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.
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.
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.)
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.
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.)
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.
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.
Market‐specific 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 loan‐level, non‐agency 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).
This element verifies educational claims. The legitimacy of the institution is also checked to ensure that it is not a diploma mill.
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.
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.)