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Compliance

Your Must-Have Guide to FDIC Background Check Requirements

  • November 21, 2023
  • Christy Clifton
  • Approx. Read Time: 9 Minutes

The office of the Federal Deposit Insurance Corporation (FDIC) was created by the Banking Act of 1933 to maintain stability and public confidence in the U.S. banking system. The agency has many responsibilities, including FDIC background check requirements, which affect who financial institutions hire, and how those potential employees are screened for risk.

Learn more about the FDIC, financial services background checks, and why compliance with FDIC regulations when hiring is so important.

 

Top takeaways:
  • The FDIC is an independent agency commonly known by consumers for protecting their bank deposits at insured institutions.
  • The FDIC requires financial institutions to conduct detailed background checks when hiring.
  • Pre-employment background checks apply when hiring employees, contractors, or consultants.
  • The FDIC has issued multiple updates in recent years that affect ‌the agency’s restrictions regarding employment qualifications.
  • Consequences for FDIC noncompliance include civil monetary penalties, corrective action, and increased scrutiny.
  • FDIC background check requirements can be challenging on a case-by-case basis, but developing global policies can help manage that complexity.
  • A trusted background screening partner provides the expertise and tools you need to run thorough and compliant background checks.

 

Table of Contents
  • What Is the FDIC?
  • FDIC Background Check Requirements for Financial Institutions
  • Who Must Complete an FDIC Background Check?
  • How Has FDIC Guidance Changed in Recent Years?
  • What Are the Consequences of FDIC Background Check Noncompliance?
  • 3 Tips for FDIC Background Screening Compliance
  • Elevate Financial Background Screening Processes

 

 

What Is the FDIC?

The FDIC is an independent agency commonly known by consumers for protecting their bank deposits at insured institutions. The FDIC promotes financial stability by helping to maintain a sound banking system for institutions and the public.

Additionally, the FDIC monitors banking practices, regulates consumer protection laws, and supervises banks for compliance. The agency’s activities help protect consumers from fraudulent or abusive activities within financial institutions while reducing the risks of those incidents.

The agency also provides valuable public resources, such as information on how to open a bank account, bank safety tips, and detailed guidance on all aspects of banking regulations. While the FDIC was created by an act of Congress, its funding comes from premiums collected as part of deposit insurance coverage.

 

FDIC Background Check Requirements for Financial Institutions

The FDIC requires financial institutions to conduct detailed background checks when hiring. These requirements are designed to protect customers from financial fraud and abuse, as well as protect the institution from potential legal liabilities and reputational damage.

The FDIC has extensive guidelines for conducting background checks. These address areas such as protecting the confidentiality of customer data and employee records (as outlined in the Fair Credit Reporting Act), how certain criminal offenses should be weighted, and how to conduct a risk-based approach. Additionally, everyone involved in the process must follow applicable laws and regulations relating to data security and privacy protection.

 

Section 19 Requirements

The FDIC has provided guidance on the most effective pre-employment screening process for financial institutions to follow, including fingerprinting for all people subject to FDIC background checks. This guidance stems from Section 19 of the Federal Deposit Insurance Act (FDI Act), which governs who can and can’t be employed at an FDIC-affiliated institution (including consultants, in some instances).

Section 19 bars people convicted of crimes of dishonesty, a breach of trust, or money laundering from involvement with FDIC-insured institutions. Also barred are people who agree to enter a pretrial diversion or similar program in the course of being prosecuted. Banks can’t hire a candidate with a history of identity theft, for example, because operating within the organization necessarily involves handling sensitive consumer data. There are exceptions, including for offenses that have been expunged or sealed.

The FDIC’s website has a searchable database of people who are barred from financial services employment because of applicable convictions. Start there as a first step of a comprehensive background check.

 

Other Common Elements of Background Checks

Background checks include a review of the applicant’s criminal record, credit report, and educational and employment history. All of this information must be gathered under applicable federal laws regarding consumer privacy and nondiscrimination.

Certain offenses revealed by a background check automatically disqualify candidates from working at FDIC-insured institutions. However, individuals and organizations (on an individual’s behalf) may submit an application with the FDIC to dispute their placement on the agency’s exclusion list.

 

Who Must Complete an FDIC Background Check?

Generally, banks and financial institutions insured by the FDIC are required to run pre-employment background checks before bringing on employees, contractors, or consultants — anyone who has an impact on the institution’s operations.

FDIC background checks requirements apply not just at the time of hire, but also whenever people change their job title or role within the organization.

Not all financial institutions are bound by FDIC regulations. Credit unions, for example, are insured by the National Credit Union Administration (NCUA) and follow that organization’s rules and regulations.

 

How Has FDIC Guidance Changed in Recent Years?

The FDIC has issued multiple updates in recent years that affect ‌the agency’s restrictions regarding employment qualifications and its enforcement posture, particularly under Section 19.

In 2020, for example, the FDIC approved a final rule that expanded what is considered a de minimis offense — an offense that doesn’t require further agency review. Convictions normally considered to be an offense of record under Section 19 are excluded if they’ve been expunged or sealed. The final rule also eliminated the waiting period for a single covered de minimis offense and reduced the waiting period for a second covered offense, among other changes.

At the end of 2022, the latest Fair Hiring in Banking Act included amendments to Section 19, including guidance on FDIC review of Section 19 applications and conditions in which criminal offenses are excluded from Section 19 consideration. These include certain older offenses, as well as some previously deemed dishonesty-related offenses.

 

What Are the Consequences of FDIC Background Check Noncompliance?

FDIC bank background check requirements come with a variety of possible penalties for noncompliance. These include civil monetary penalties, corrective action, and increased scrutiny.

 

Financial Penalties

Civil monetary penalties are fines imposed by the FDIC for failure to follow its regulations and policies. These can reach millions of dollars depending on the severity of the violation. Knowingly violating Section 19 can result in up to $1 million for each day of violation, imprisonment of up to five years, or both.

 

Required Changes to Internal Processes

FDIC-insured institutions that engage in risky behavior (such as failing to follow FDIC background check requirements) can risk suspension or termination of insurance. Within a cease-and-desist order, the FDIC may require a bank “to take affirmative action to correct the conditions resulting from any such violation or practice.”

In response, the institution may need to implement specific changes to protect customers’ interests, such as internal audits of the background screening process or additional training programs for recruiters and hiring managers.

 

Loss of Reputation and Trust

Increased regulatory and public scrutiny are other possible consequences of failing to meet FDIC background check requirements. FDIC regulations are in place to safeguard the financial industry’s integrity and security. Falling short of these standards erodes confidence among customers and investors. Noncompliance may signal a lack of commitment to due diligence, regulatory adherence, and ethical practices, all of which are paramount in the financial sector.

Financial institutions must proactively monitor changes in agency guidance and regularly review their internal auditing processes so they remain in compliance and avoid negative consequences. By following these best practices, financial institutions can ensure that they meet FDIC regulations and any other legal requirements — all while protecting customers from fraud and abuse.

 

3 Tips for FDIC Background Screening Compliance

FDIC background check requirements can be challenging to handle on a case-by-case basis, but developing global policies can help manage that complexity.

Here are three tips for improving background screening processes at FDIC-insured institutions.

 

1. Set Exclusion Criteria by Role

Setting exclusion criteria by role is a critical aspect of making hiring decisions based on background check reports. That’s especially important in highly regulated industries such as financial services, which face oversight from the FDIC and many other regulatory bodies.

Begin by thoroughly understanding the specific criminal background check and employment verification requirements mandated by the FDIC and other relevant agencies. Regulations may vary depending on the roles within your institution, so tailor your exclusion criteria accordingly.

Recognize that not all roles within a bank or financial institution have the same level of risk or access to sensitive information. Develop role-specific exclusion criteria that consider the responsibilities and access associated with each position. For instance, candidates applying for roles with direct financial oversight or access to customer financial data may have stricter criteria than support staff or workers in nonfinancial roles.

While setting exclusion criteria, consider relevant factors such as criminal history, credit check history (if applicable), and professional qualifications. For instance, certain financial crimes or convictions related to dishonesty or fraud may be immediate disqualifiers for roles involving financial transactions.

It’s crucial to apply exclusion criteria consistently and fairly across the candidate pool within the same role category. Deviating from established criteria can lead to potential legal and compliance issues. Make sure that HR teams and hiring managers are versed in these criteria and consistently adhere to them during the screening and decision-making processes.

In cases where candidates are flagged on background checks, it’s essential to conduct an individualized assessment. This involves giving the candidate an opportunity to explain the circumstances and how they have rehabilitated since then.

Document the entire process — from establishing exclusion criteria to assessing individual cases. Maintaining thorough records helps demonstrate compliance with regulatory requirements and ensures transparency in hiring decisions.

 

2. Take an Ongoing Approach to Screening

FDIC guidelines recommend continued screening “for specific positions, as circumstances change, or for a comprehensive review of departmental staff over a period of time.” As organizations implement an ongoing approach to employee background screening, they must also respect individual privacy and trust. This requires a delicate balance between maintaining the highest standards of integrity and safeguarding individual rights.

To start, establish transparent and clearly communicated background screening policies. Make sure that all employees are aware of these policies, including the frequency and scope of ongoing screenings. Transparent communication builds trust by setting expectations and demonstrating your commitment to maintaining a fair, safe, and compliant workplace.

Apply background screening consistently across all employees within the same role category. Avoid selective screenings or disparate treatment, as this can erode trust and lead to allegations of discrimination. Consistency in applying background checks underscores fairness and equity in the workplace.

Periodically review your background screening policies and criteria to ensure they remain aligned with changing regulatory requirements and industry best practices. This demonstrates a commitment to keeping the process fair and current. As regulations or policies change, you might also need to update training for key staff, especially those conducting background checks.

 

3. Accept Applications, Not Resumes

When recruiting candidates in the financial services industry, it’s a good practice to ask for completed applications over open-ended resumes.

Applications allow employers to control and standardize the information they collect from candidates. This uniformity ensures that essential details, such as work history, education, and references, are consistently provided in a format that facilitates easy comparison among candidates. For financial institutions adhering to FDIC requirements, maintaining standardized records during the hiring process is critical for regulatory compliance.

Application forms provide a clear and structured way to request each candidate’s consent for background checks. In many jurisdictions, including the U.S., proceeding with background screenings requires obtaining explicit consent from individuals. Job applications typically include a section where candidates can provide their consent, showing that they understand what they’re agreeing to and giving employers documented proof.

By standardizing this process, employers improve record-keeping and reduce their risk, which is especially helpful should there be regulatory or legal scrutiny down the line.

 

Elevate Financial Background Screening Processes

Complying with FDIC background check requirements is a critical component of building trust with regulators and applicants. The importance of background checks is likely to grow, given the increasing need for transparency and accountability in the financial sector. Financial services institutions must continue to meet FDIC requirements even as they look to streamline how background checks are conducted.

Partnering with a trusted background screening provider can help your institution navigate this complex legal landscape with confidence. Cisive’s background screening solutions provide the expertise and tools you need to run thorough and compliant background checks, helping your institution uphold the highest standards internally and externally. Speak with a background check expert today to learn more!

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