Due diligence in unfamiliar fields

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Due diligence in unfamiliar fields

How transferable are skills? Nobody is quite sure, which can make for some interesting problems when trying to hire a professional. On the one hand you would like to hire someone who has done that specific job before. On the other hand, the job may be sufficiently generic that some of the details do not really matter. As an example, if you hire a chauffeur, does it really matter that he has primarily driven black cars, while yours is blue? We rather think not.

This issue was recently brought home to us when a person whom one might have thought of as a very sophisticated international investigator did a background check, and found that the subject of the background check had lied about their credentials.

The victim of this background check claimed to have been in the securities industry, dealing in commodities. However, this alleged experience – at least from the perspective of having been licensed – was 15 years in the past. On the not-unreasonable (albeit incorrect) assumption that commodities are part of the securities industry, the investigator called the SEC looking for information on the subject’s licenses. None were to be found.

Eventually realizing the mistake, the investigator finally called the commodity exchanges and found that the subject was not, in fact a commodities broker, but merely an affiliated person, which certainly sounds like some sort unlicensed peripheral position, and a commodities trading advisor, which sounds a step beneath salesman. The conclusion was that the subject never had a securities license as claimed, and had never been a commodities broker. Since the subject had never claimed to have been a commodities broker, we can only deduce that the investigator had confused a trading advisor with a broker.

The commodities and securities industries, while logically related, are, in fact, licensed and regulated by different bodies. The Securities and Exchange Commission (SEC), a governmental body, regulates the securities industry. The National Association of Securities Dealers (NASD), a membership organization overseen by its member firms, licenses securities dealers and salesmen. The Commodity Futures Trading Commission (CFTC), a governmental body, regulates the commodities industry, and the member exchanges grant affiliate status to members once they have passed an exam and a background check.

The commodities business is a field that has a great deal of specific nomenclature, and an associated person is, in fact, an Associated Person, which is a licensed position. A Commodities Trading Advisor is also a licensed position. Although the subject never claimed to be a Commodities Broker (yet another specific licensed title), the fact of being an Associated Person and a Commodities Trading Advisor would mean that the subject had, in fact, been licensed and in good standing for some period of time.

Undoing the harm took the better part of a week, but required looking in the right places, which included speaking with the subject’s previous supervisors for third-party confirmation.

How did what should have been a straightforward investigation go astray?

1) The investigator lacked industry specific knowledge, including detailed knowledge of the financial products and service industry.

2) The investigator did not call the subject and ask why they could not find any of the information that should have been (and was) there.

Background checks in some industries require specific knowledge of the industry. Doctors, lawyers, programmers, securities professionals, etc, belong to very technical fields, and the investigator needs to be aware of the industry nomenclature, terms of art, licensing requirements, and industry practices. Without specific knowledge, common-sense deductions may turn out to be wrong: To an American, a person claiming to be a British surgeon being called Mr. Smythe by all who know him, rather than Dr. Smythe, is suspicious. If you are aware of this custom – more of an affectation – you will know that is not actually a clue.

Calling on an industry expert makes sense if you don’t know the field. And remember that, most of the time, background checks are not surreptitious. If something seems odd you can ask the subject about it, and verify what they tell you. This can prevent professional embarrassment, and reduce harm to the innocent.

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