Background Check Compliance and Regulation in Finance

For the average employer, background checks are a matter of due diligence to protect their business and the public. In other sectors, vetting has a much more crucial role to play—especially in spaces where there is a high potential for damage if wrongdoing occurs. The financial sector, comprising banks and other finance-related institutions, is one area where background check compliance and regulation are significant concerns.

Failing to meet the requirements placed on your business can mean lawsuits and extensive federal fines—or potentially even criminal action. Many laws may apply to your processes, whether you’re hiring bank tellers, internal auditors, a CFO, or anyone in between. Understanding these requirements is fundamental to building a workflow that complies with the law without dramatically slowing down your hiring pipeline.

What do you need to know?

The importance of background check compliance in finance

To begin, one should understand why there are so many regulations to know. What are some of the reasons that make background checks so crucial?

• The federal government uses sanctions against foreign nations and individuals associated with them as important foreign policy tools. These sanctions are often economic, and financial organizations may not do business with or employ sanctioned individuals.
• The government heavily restricts Politically Exposed Persons (PEPS) or those identified as political figures susceptible to possible bribery. PEPs may use relatives or acquaintances to conduct financial transactions on their behalf, and you must be careful to identify PEP-connected individuals in the hiring process.
• The government forbids financial institutions from hiring individuals with specific convictions or under prosecution for crimes such as bribery, embezzlement, etc.

Further, working in finance generally provides employees with the potential to access sensitive systems. For example, someone with burdensome debts and a history of wrongdoing might try to get a job in a financial organization to misappropriate funds. Proper vetting is about protecting your own organization as much as it is about complying with the law.

Laws governing financial background check regulation

What is the primary legislation you should review with an attorney? The government continuously adjusts and updates its regulations on controlled industries such as finance, so it’s not always easy to keep track. In general, you should understand your obligations under laws such as:

• The Federal Deposit Insurance Act which created a general requirement to conduct criminal history screenings.
• The Securities and Exchange Act, which requires companies to maintain records of those associated with the business who have criminal records.
• The Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, which requires an FBI background check and credit screening for anyone established as a loan originator.
• The Truth in Lending Act
• Non-governmental regulations established by the Financial Industry Regulatory Authority, or FINRA. FINRA regulates exchanges and brokerages with its own rules but remains subordinate to the federal SEC.
• The Bank Secrecy Act, which regulates PEP screening.

Speaking with a lawyer experienced with these regulations can help you understand what applies to your organization.

Untangling conflicts with local “ban the box” laws

Employers may wonder: how can we square these legal requirements with demands to increase fairness in hiring by delaying background checks? The influence of ban the box and fair chance laws on the hiring process in finance can be complicated, too. However, there’s good news: regulations specifically provide exemptions for financial institutions in many states because of the demanding federal regulatory burden.

Not all do, however. Some use vague language, while others aren’t clear about who’s exempt. That could affect whether your job applications comply and how you make conditional job offers. As mentioned, consulting with an attorney to evaluate your hiring process and application materials for suitability is advisable. You should also thoroughly document your hiring process for compliance purposes.

Federal regulation on financial background checks supersedes local regulations such as a ban the box law—but check before you put any procedures into practice.

Stay up to date on regulations in your industry

Background check compliance and regulation are vital in protecting financial institutions from harm and adhering to government restrictions. Untangling it isn’t always easy—but a compliant process is a valuable asset for your business. Want to learn more? Dive into our Compliance FAQs today to learn more about important background check legislation, such as the FCRA and others.