Skipping background checks could be costly

During the decade Mo Zahabi spent working at car dealerships, he was continually shocked by the lack of due diligence in hiring.

"At the last dealership group I worked for, there was somebody who'd been there for 12 years when we found out he'd been in prison at one point," says Zahabi, director of product consulting for VinSolutions, a customer relations management software developer in Mission, Kan. "He was one of the best salespeople I'd worked with, so he really was reformed, but it blows my mind so few dealers do background checks."

Conducting criminal background checks on potential hires is a best practice, yet many dealers skip them, and that's a problem, insurance experts and consultants say. The biggest payouts insurers make to dealers are for losses from misappropriation of cash, parts shortages, and finance and insurance scams, all of which could be mitigated by hiring people with proven clean records, the experts say. The less the risk of fraud at a dealership, the less the dealer pays for insurance. So if it's permissible to run a criminal background check, do it, they say.

"You do not want people on the payroll who have a propensity to have criminal behavior at work," says Adam Robinson, CEO of consultancy Hireology in Chicago. "Criminal background checks are not a place where you want to save $20."

Indeed, in a 2016 report on occupational fraud — defined as fraud committed by a person against the organization for which he or she works — the Association of Certified Fraud Examiners said the median loss for all cases compiled was $150,000, with 23 percent of cases causing losses of $1 million or more.

That's one reason dealer Aaron Zeigler, president of Zeigler Auto Group in Kalamazoo, Mich., spares no expense when it comes to doing criminal background checks and drug tests on all hires at the group's 23 stores. He started the policy in 2010.

"If anybody's had a felony on the record, I'm the only one who can override it to hire them," Zeigler said. "It's amazing the stuff the background checks come up with."

In fact, on just the second criminal background check Zeigler's group performed, it found the applicant's resume was full of lies. "He'd actually been in prison for the past 17 years for murder," Zeigler said.

For Zeigler to hire a person with a felony conviction, he said, the crime would have to be 15 to 20 years old and the person would have to show he or she is reformed. He said it's "pretty rare" for him to hire someone with a criminal record, especially in the F&I department, where money is handled.

Insurance underwriter Risk Theory, of Dallas, asks its dealer clients if they do employee background checks when it's determining their insurance coverage and rates. A background check could include a federal criminal check, a local county criminal check or a drug screening, said Bob Tschippert, senior vice president of Risk Theory. Of the nearly 1,000 dealerships that applied with Risk Theory last year, about 86 percent answered yes to the question, he said.

Tschippert said he is surprised it's not 100 percent given that dealers who don't do background checks pay more for insurance. He declined to say how much more, but added: "An insurance company is there to make a profit. If the loss ratio is there where they can't make a profit, they can either cancel the account or price it to where they can make a profit."

It costs about $20 to $40 to do a federal and county criminal background check on someone, Tschippert said. Yet not doing one can be much more costly. If a dealer suffers high employee turnover from bad hires, it costs thousands to recruit and train new hires, he said.

On top of that, Tschippert said, if an employee steals expensive parts or embezzles money, a forensic accountant could charge the dealer $200 an hour or more to comb through the records, sometimes going back several years, to track the losses.

Dealers also can't presume a veteran employee is a trustworthy employee, experts warn.

One dealer client told Tschippert that buying "employee dishonesty coverage" and doing background checks were not necessary because his employees were like family. That dealer later learned a longtime controller had stolen $125,000 from him, Tschippert said.

In 2012, dealer Danny McKenna discovered two of his veteran employees at McKenna Automotive Group in Norwalk, Calif., were in collusion and had stolen about $600,000 from him over several years. On top of that loss, it cost McKenna close to $1 million to pay for accountants, investigators, lawyers, bank fees, back taxes and reimbursements to employees who should have earned commissions off the money stolen, he says. To avoid prosecution, the former employee and the co-conspirator agreed to repay about $300,000, McKenna said.

Then there was the case of eight former employees of Serra Nissan in Birmingham, Ala., who pleaded guilty to felony charges including conspiracy to fraudulently boost loan approvals and car sales in 2015.

F&I consultant Becky Chernek urges her dealer clients to thoroughly vet all potential hires and employees with background checks, reference checks, behavioral assessment tests and drug testing.

"If they don't, they're going to have constant turnover, which is going to cost them in deals that aren't funded properly," said Chernek, president of Chernek Consulting in Atlanta. "I've seen F&I people steal money from the dealer in down payments and other ways, or capping a deal at a certain amount showing a certain profit was generated that really wasn't or blatantly taking the down payment from customers."

So given the financial risks, why don't all dealers vet?

Hireology's Robinson said some dealers view it as an unnecessary expense until it proves worthwhile. For example, one of his clients, a large dealership group, resisted Hireology's push to do criminal background checks for precisely that reason, he said. But Robinson insisted the group pilot it at one store. The result changed minds.

"The first hire they were about to make under this pilot was a registered sex offender convicted of child pornography distribution and indecent exposure," Robinson said. "Here's a dealership with a day care on-site. They were quickly convinced that criminal background checks were a good policy."

In many cases, dealers don't do checks because they have a high turnover rate and don't want the hassle of running frequent screenings, Tschippert said. "But it's a best practice, and you're protecting your reputation."

Many dealers still have an "old-school mindset," said VinSolutions' Zahabi. "They are very lazy in the hiring process" and don't have a vetting protocol in place, he said. Plus, many don't have a human resources department to handle a process. Still, he said, the justification for criminal background checks is there.

"I don't want somebody with a criminal background in a car taking my kids for a test drive," Zahabi said. "Likewise, if someone committed an act that was fraudulent, would you want them working in your dealership?"