In August after graduation, we were hanging out after supper at Olsen's Pure Oil (later acquired by Union 76) station, organizing our nightly crooze. A sharply-dressed guy (who wears a suit and tie in August?) stopped by looking for, it turned out 3 or 4 of us, by name. Seems the guy was Army CID doing a background check on Fred, who had enlisted right after graduation. Putting it all in sepia-toned slo-mo replay, the CID guy was very thorough - he asked each of us for additonal references on Fred, and probably got 10 or so. Fred got his security clearance.
There seems to be only two ways employers handle background checks - in-house or hired out to a law firm or PI agency. I 'spose they are thorough enough, but can easily be spoofed. A former boss or co-worker can defame you and you will never know or have any recourse if you should happen to find out - say, via reference-checking agencies you can hire to check your own.
We have long known that reference-checking is prone to many kinds of abuses, which falsely cost people jobs. It's no wonder that a counter-abuse is available.