DennisBeaverApril 25, 2009 (Original publish date) • By Dennis Beaver

These days the term due diligence is all over the news. Basically, it means looking into someone’s background before handing them your hard-earned money as an investment.

Due diligence also takes place when we visit our local bank and apply for a loan. A relatively small loan — auto for example — might only require a credit check. But what if it’s a million dollars or so? Should the bank dig deeper than simply looking at a credit report? If so, how much deeper? That is the situation Dr. “R” finds herself in today, sending You and the Law this e-mail:

“I am a dentist and have applied for a substantial construction loan from my bank, which has offices throughout Northern California. We are planning on greatly expanding the office, adding dentists and support personnel.

“I understand the need for a thorough credit check on me, but my loan officer has asked that we provide the names of employees who have anything to do with the financial end of the practice. The bank intends to conduct detailed background checks on these employees. Obviously it’s required for the person borrowing the money, but employees as well? Is this commonly done? What would you do if you were in my shoes? Should I tell the bank to forget it and go to another lender?”

In researching an answer, I spoke with loan officers at a number of community banks who agreed to talk on the condition of keeping both their names and that of their institutions confidential. All agreed that background checks — and how deep to probe — is a controversial issue in today’s economy and admitted to occasionally hearing raised voices in loan committee over this very matter.

“You would be surprised at the relatively shallow level of investigation generally performed,” most acknowledged. “It is important to understand the reasons we do not generally dig deeper,” another admitted, but had me swear that I would never reveal his name.

“You have my word on it. So, why don’t you do a more thorough background check?” His answer floored me.

“Because we know that if you look much beyond a credit report, at times you’ll find things about your customer or some of their employees which would scare the pants off of you. This is a huge problem with, interestingly enough, physicians from some third-world countries who have a nasty habit of trying to squeak out of agreements they make, after accepting the benefit from the other side. But, remember, we are in the business of making loans, so it becomes a built-in conflict of interest. No loans, less income for the bank and a reduced bonus for the loan officers. So there is a not-so-subtle message from management at some institutions to just not dig too closely and rely on a credit report alone.”

Gary Maples, who teaches commercial lending at the Graduate School of Banking at Madison, Wis. — himself a former bank president — feels the bank in my reader’s case has legitimate concerns, but might be going about this in the wrong way.

“The bank’s concerns are real. However, the manner in which they are presenting them is over bearing. I suspect that in the not too distant past the bank took a loss on a customer who had an internal fraud. Hence, their board and management have adopted a hard-nosed position,” he told me.

“The better approach is to inquire as to what background checks the dental office is doing on financial employees, suggest that it be done as a matter of good, prudent business practice, even offering to help pay for it. But there is no doubt, we are seeing a great increase of internal fraud across the country, a disturbing sign of the time,” he concluded.

Even if you aren’t applying for a million dollar loan, what if a company needs to hire a temporary receptionist or billing/accounts receivable person? How deep should an employer inquire, in today’s economy?

“Just who is that person you’re about to hire? Who is she really?” asks Southern California based private investigator Riley Parker of Parker and Associates. His firm does nationwide due diligence, pre-employment background checks.

It was a question Dr. “G” had been told to ask by his attorney, before hiring a medical assistant. “You can’t rely on the job application. People sometimes lie, doctor,” his lawyer reminded him, after the young lady physically attacked a co-worker, and then promptly went outside and started to bang her head against the office wall. No joke — she really did.

Had he looked beyond the application, and checked with earlier employers, or paid less than $150 for a pre-employment background investigation, he would have found the lady to have been a fit candidate for the rubber room.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.