DFS’s Key Personnel Vetting Guidance

Background Investigations | Risk And Compliance | Third Party Due Diligence

By Heemin Yang

New York’s banks have more work to do. The Department of Financial Services (DFS) has issued a final guidance emphasizing the need for regular and rigorous character and fitness assessments of key personnel in banks and non-depository financial institutions. This guidance underscores the growing importance of due diligence in the financial sector.

The newly outlined comprehensive evaluation required of these financial institutions targets individuals who occupy critical roles such as executives and those with significant influence over key operations. At the core of this guidance is the recognition that the people steering financial entities play a crucial role in determining the sector’s health and resilience.

By instituting a systematic vetting process, DFS seeks to mitigate the risks associated with individuals who may lack the ethical fortitude or integrity required to navigate the complexities of the industry. The move also aligns with the evolving expectations of stakeholders who increasingly demand transparency, accountability, and ethical leadership within the financial industry.

The required regularity and rigor in the vetting process signals a departure from one-time assessments, emphasizing an ongoing commitment to monitoring and reassessing key personnel throughout their tenures. A box-checking exercise would no longer suffice as the guidance calls for a more robust and comprehensive investigation of potential misconduct, conflicts of interest, and lapses in ethical judgment.

DFS’s move raises practical challenges for regulated institutions. Implementing thorough character and fitness assessments requires dedicated resources, sophisticated methodologies, and attentiveness to continued monitoring.

During and shortly after the pandemic, when there was heavy competition for attractive employees, institutions tended to rely less on thorough background checks. As financial institutions navigate this new landscape, they have an opportunity to redefine success by strengthening their due diligence process and identifying potential risks before they cause irreversible harm.

To support banks in this new regulatory environment, Forward Risk has introduced Directors and Officers Due Diligence Services (DODDS) to support banks which have been required by DFS to conduct enhanced background checks of their directors and key officers.

Staffed with researchers and investigators with years of experience in investigative due diligence and in providing services to the full range of financial institution clients, DODDS will provide upgraded background checks at the point of onboarding and thereafter, as now required by DFS.

DODDS will provide intelligence from all data sources in the public domain including traditional media, social media, litigation records, financial distress indicators, assets, regulatory sanctions and the dark web.

With their vast due diligence experience, the DODDS team can examine a bank’s existing Process for background checks and recommend changes to satisfy the new requirements.

Forward Risk Co-Founder Brendan Foo, who will lead the practice, noted that “Forward Risk is acclaimed for its creative investigations of directors and senior officers. This past year we conducted intense background checks on some 100 proposed and serving directors and officers, often in proxy contests. Our team’s expertise will help banks not only satisfy their regulatory requirements but also reduce their risk of fraud and other reputational embarrassments.”

Ernest Brod, Forward Risk’s Deputy Chairman, who has overseen some 10,000 due diligence assignments in his three-decade career, advises companies to repeat their background checks of directors and key officers at scheduled intervals during the period of their relationship. Last year, Mr. Brod told the Wall Street Journal, “companies think, ‘Well we’ve done our due diligence—we did that when we hired people’ meanwhile, time goes on and things change…so it’s really useful to go back and make sure that everything is OK with the people that you’re working with.” Mr. Brod will provide oversight for DODDS.