Private Detectives and Employee Privacy

Most companies are able to handle the workload necessary to check out a job applicant's resum —all that's required are some perceptive interview questions and a few phone calls. But conducting the types of background checks necessary to thoroughly investigate a potential employee can be far more time-consuming. Because relatively few companies find it cost-effective to maintain their own internal force of investigators and detectives, most rely to one degree or another on the private detective industry.

According to the United States Department of Labor's Bureau of Labor Statistics (BLS), approximately 39,000 people were working as private investigators in 2000. Roughly one-third worked for detective agencies, another third worked as store detectives, and the balance worked for a variety of employers, including hotels and law firms.

The requirements for becoming a private detective vary widely from state to state, although most jurisdictions require aspiring detectives to demonstrate investigative experience, provide evidence of relevant course work, and pass a licensing test. According to the BLS, the most stringent jurisdiction is California, where investigators need the equivalent of three years of experience, must pass a background check, and must receive a qualifying score on a two-hour written examination.

By contrast, in a handful of states—Alabama, Alaska, Colorado, Idaho, Mississippi, and South Dakota—there are no licensing requirements: All that the aspiring PI needs is fifty dollars' worth of business cards, a telephone, a ginned-up ID in a cheap plastic case, and a trench coat.

Over the last two decades, the nature of the private investigation business has undergone dramatic changes: Sam Spade, the trenchcoat-wearing, cigarette-smoking, love-'em-and-leave-'em private eye, whose bread and butter came largely from spying on errant spouses, has largely been replaced by the business-suited, Scotch-sipping, computer-toting security consultant, whose natural environment is more boardroom than barroom. Despite the tragic consequences this might have for American literature, it's been a phenomenal boost for the private detective industry: Multinational corporations tend to pay better than bitter soon-to-be-ex-spouses. In fact, Fortune estimated that the 2001 revenues for the private detective industry in the United States would be around $4.6 billion.

In particular, the merger mania of the 1980s accelerated the maturation of the investigative industry. The beginning of the shift can be traced with some precision to 1982, when Drexel Burnham Lambert helped spearhead a $25.6 million debenture offering for a company called Flight Transportation Corp. Just a few weeks later, the FBI knocked on Drexel's door and cordially informed it that the FBI had discovered that Flight Transportation was a sham corporation and had shut it down. Not surprisingly, offering debentures for a sham corporation, even unwittingly, makes the Securities and Exchange Commission a little annoyed. Drexel decided it needed some investigative help to prevent future debenture offerings from crashing and burning, so it went out and hired Jules Kroll to vet its business relationships.

A lawyer by training and described as a large man with a personality to match, Kroll has proven adept at publicizing his numerous successful investigations on behalf of various Wall Street firms. Like Alan Pinkerton a century before him, Kroll has successfully attracted large numbers of corporate clients by offering strict ethical standards and producing quick results. When ABC, for instance, approached various private detective firms and asked them to illegally bug a room, Kroll's was the only one that refused to do so. ^[5]

Even before the attacks of 9/11, which may have boosted the revenues of the private detective industry by as much as 20 percent, Kroll's was prospering. In 1999, the company reported that it took in $300 million in revenues. But even those kinds of earnings leave a lot of room in a nearly $5 billion industry for competitors. Pinkerton's, the best-known name in U.S. private detective firms, remains a significant player in the industry, taking in around $1 billion per year; Washington-based I.G.I. and New York-based Decision Strategies/Fairfax are also very well known in the corporate investigation field. And competition is coming not just from other private detective firms; not surprisingly, businesses in related fields have been eyeing the growth potential for private investigators and have begun setting up their own security divisions. In an April 1997 article, "The Detectives," Business 2.0 reporter Kim Clark noted that several of the major accounting firms, including Coopers & Lybrand, Deloitte & Touche, and KPMG Peat Marwick, were busy hiring investigators to help them tap into the private investigation revenue stream. ^[6]

The other major force that is driving the private detective industry is globalization. In an era of rapid transportation and nearly instantaneous communication, it's safe to say that no economy is an island; the flapping of the exchange rate in Brazil can cause a hurricane in Europe. In a world where deals can be consummated across borders nearly as easily as across the street, it is becoming particularly important for businesses to hire investigators to help them check on the people with whom they're dealing.

Reflecting the increasingly international flavor of the investigative industry, Pinkerton's was acquired in 1999 by the Swedish security company Securitas. The following year, Securitas also acquired the United States' second-largest security firm, Burns International. Currently, Securitas claims to be the leader in the two largest security markets, Europe and the United States. The company employs over 200,000 people and has annual world-wide revenues in excess of $5 billion.

The purchase of the two largest U.S. security firms by a foreign corporation raises some interesting security and corporate intelligence issues, most of which appear to have gone unexamined. It's worth asking, for instance, how we'd feel if Pinkerton's and Burns International had been purchased by a Russian or Chinese company. Global politics aside, the salient fact for employees is that businesses are spending steadily larger sums of money on private detective services, and a significant portion of those expenditures are going to pay for increasingly detailed and invasive background checks of both prospective and existing employees.

^[5]Kim Clark, "The Detectives," Business 2.0 (April 1997).

^[6]Also cited in Clark's article was the accounting firm Arthur Andersen, which was then actively pursuing a piece of the private investigator market. Thanks to the recent Enron debacle, however, the now-defunct accounting firm has instead turned into a major source of income for corporate investigators.