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Background Checks Reveal the Hidden Risks at Asset Managers

More than half of 3,000 background checks of individuals in financial services were flagged with moderate to severe risks.

Investing with a new manager could be riskier than one might expect.  

Of 3,000 background checks of individuals in the financial services industry, more than half were flagged with moderate to severe risks, which range from misrepresentation of job history to involvement in an assault case.

The data, shared exclusively with Institutional Investor by background check and risk intelligence firm Intelligo, reveals that personnel risks are an incredibly common problem for investors looking to put capital to work.

“Past behaviors can predict future behaviors,” Intelligo co-founder Dana Rakovsky said by phone. She said the information aggregated from background checks can change how an investor makes decisions. 

“A client approached us and wanted to do a background check,” Rakovsky recounted. “We found that they were evicted, wrote bad checks, claimed to go to an Ivy League college. There was a list of more than average flags. The client ended up being one of our seed investors.”    

For the report, Intelligo aggregated the background checks on individuals it has undertaken for clients, which include Hamilton Lane and the University of Virginia Investment Management Company, using its internal artificial intelligence program, which is called Clarity. The program aggregates information from court records, social media, regulatory databases, and news articles, among other sources.  

Intelligo then grouped risks into three categories: information flags, which investors should notice but not immediately worry about; yellow flags, which could be adverse; and red flags, which the firm would advise clients to review before making an investment decision. 

The category with the largest number of red flags was financial risk, which includes issues like foreclosures and bankruptcies. “An individual’s personal financial situation speaks volumes about their business integrity,” Intelligo said in the report.  

Professional issues, like concealing or falsifying employment or educational history, were the most common category of flags, making up 35.42 percent of the total. A job missing from LinkedIn history was the most commonly flagged issue in this category. Intelligo noted that this tends to be an “information flag,” which, while notable, could be benign.   

“Omitted positions could easily be explained by the fact that they were a long time ago or are not relevant to one’s current trajectory, which is why the majority of these flags were information-level,” the firm said in the report.  

That said, this behavior could also mean there’s something in an individual’s work history that they want to hide.

“We saw a case where someone didn’t mention a job or deleted it from their LinkedIn,” Rakovsky said. “It turns out that they were a CFO who was involved in some scandal there.”

Reputational risks made up the second-largest category in Intelligo’s study, representing 23.4 percent of the total flags. This category primarily included adverse media, which 86 percent of the time raised yellow or red flags. Other concerns in this category included being listed in a politically exposed person database, a sanctions database, or an offshore leaks database.

The third-largest category was behavioral risks, which comprised 16.6 percent of total flags. The biggest concern in this category was an individual being subject to frequent lawsuits, which made up 8.76 percent of total flags. Other concerns, from involvement in a DWI case, an assault case, or even being on the sex offender registry, were also scanned, with each category coming up with a small percentage of investors involved.

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