GAO makes a case for sharing data on financial misdeeds

"Better Information Sharing Among Financial Services Regulators Could Improve Protections for Consumers" Government Accounting Office

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A centralized financial industry database listing malefactors convicted of fraud is an idea whose time has come—again. Or not.

Almost three years after a House bill to create such a database failed to become law, Government Accountability Office officials have recommended that bankers, insurance commissioners and securities regulators pool their publicly available enforcement data. But the idea has received only a cool reception.

Although the bill, known as the Financial Services Antifraud Network Act, sailed through the House on a 392-4 vote in 2001, Senate lawmakers never passed a similar bill. And banking and securities regulators "aren't wild about the idea" either, said Richard Hillman, director of GAO's Financial Markets and Community Investment Team. Regulators think they already adequately share information, he said.

But officials at the congressional watchdog agency worry that rogue financiers can float too easily from one financial sector to another because regulators cannot access one another's data.

In a GAO study published last month, congressional auditors reported that enforcement databases for financial industries run on separate and often incompatible information systems. Within a single industry—banking, for example—five separate regulators maintain disjointed databases. A search on one person's banking regulatory history could require five separate queries.

Hillman said regulators opposed to a centralized financial enforcement database argue that it would be too costly and difficult to maintain. But Hillman disagrees. "It's not really cost-prohibitive to do what's being suggested," he said.

Financial regulators also object to GAO's recommendation that consumer complaints and information about ongoing investigations and suspicious activities be reported. The 2001 bill states that such information should be shared "to the extent the regulator determines the disclosure to be appropriate."

Regulators say they are uneasy about transmitting information to the state insurance industry's oversight body, the National Association of Insurance Commissioners. NAIC is not a regulatory agency.

Among regulators, the release of unsubstantiated information, especially about customer complaints and open investigations, raises liability concerns, GAO officials found. Releasing data in an ongoing case could jeopardize investigations and sources of information, regulators told government auditors.

But GAO officials argue that such concerns can be allayed by limiting access privileges to sensitive data.

The case for a centralized database remains strong, according to GAO officials. The absence of a database that lists open cases is a problem, especially when complaints involve hybrid financial products with attributes of both insurance and securities products. Consumers often fail to file complaints with the proper oversight agency.

But other reasons are equally compelling. Only a third of state insurance regulators have legislative authority to access the FBI's nationwide criminal history data, for example.

An insurance regulation bill being drafted may incorporate some of the reforms of the 2001 bill, said a spokeswoman for Rep. Michael Oxley (R-Ohio), chairman of the House Financial Services Committee. The 2001 bill included a provision to give insurance commissioners expanded access to FBI records.

The spokeswoman said Oxley has made no decision about introducing the bill in the House. But in a speech delivered in March before NAIC members, he acknowledged a "need for more effective and coordinated market conduct oversight."

No immediate support for such a regulatory tool appears likely, however. Richard De Lotto, principal analyst in the financial services practice at Gartner Inc., said he sees no evidence of a movement to create a centralized database, only "a great deal of evidence of a need for one."

De Lotto said he is ambivalent about a name-indexed database, describing it as a good but scary idea. "Once a name gets into the database, it never comes back out," he said. Even if someone is later exonerated, "someone will have archived the list on some server."


3 ways fraudsters escape detection

Financial rogues can move from state to state and from one financial industry to another, supplying false information on applications and engaging in unscrupulous activities because information about their histories is not easily available to the public.

Comprehensive background searches on individuals in the financial services industries by regulatory agencies remain difficult and impractical.

The National Association of Insurance Commissioners' status as a nonregulatory entity has been a barrier to releasing regulatory data to the group.

Source: Government Accountability Office

About the Author

David Perera is a special contributor to Defense Systems.


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