Financial institutions' regulators miss fraud and abuse, report says

Fraud and abuse in United States financial institutions has been a scandal for several years. But the newest scandal appears to center on the government's inability - or reluctance - to snuff out such abuse, according to a congressional study to be released today. The report by the House Committee on Government Operations takes a highly critical view of what it calls the ``inadequate'' way government investigators track down and prosecute fraud.

``Numerous and serious problems remain in establishing an effective federal effort against financial institution misconduct,'' the report says.

Those problems include failing to identify fraudulent activity early on, before it bankrupts the institution; taking halting or zero steps to bring civil and criminal sanctions against fraudulent operators; giving a low priority to financial investigations, in staffing and training; and failing to share information among agencies, which could bolster civil and criminal investigations.

The congressional investigators reserved particular criticism for the Federal Deposit Insurance Corporation, which monitors banks, saying it has ``failed badly'' to meet its schedule of auditing banks. The report says that this allows fraud and abuse problems to go undetected until it's too late and that the bank is tottering on the brink of insolvency.

According to evidence from government regulators, fraud and misconduct were involved in 80 percent of the savings-and-loans that became insolvent between January 1984 and July 1987, and 28 percent of the failed banks. The losses linked to fraud and other misconduct will amount to ``an absolute minimum of $12 billion'' in the thrift industry, and probably $876 million in the banking industry, the report says.

The bailout will eventually be financed by the taxpayer, financial experts say, in the form of higher taxes to close and merge the troubled institutions.

The congressional investigators found several flaws in the governments attempts to catch the fraud:

Civil actions. Aside from the criticism that bank regulators do not conduct enough audits and catch fraudulent activities early on, the report found that all watchdogs were understaffed and underpaid. Moreover, they were inadequately trained to follow complex money trails such investigations entail.

In addition, the report suggested that regulators want to ``go easy'' on the industry. Regulators, in congressional testimony, have countered that much of the fraud problem has been wiped out, and that they reach quicker and better results by working with the institutions than bringing civil sanctions against them.

Criminal actions. The report did note the higher priority being given to financial fraud by the Justice Department. Last year the department, along with prosecutors from the US attorney's office, launced a massive investigation into fraud in the thrift industry, based in Dallas.

But, the report said, criminal investigators from the Federal Bureau of Investigation are not notified about possible criminal conduct that auditors turn up until several months after the institution fails. That gives time to cover up the paper trail.

In addition, many prosecutors in the most troubled areas have too little time or interest in such arcane and difficult cases. In San Francisco, for example, there are over 60 criminal cases that have been prepared by FBI agents, just waiting for a prosecutor to try them, the report claims. Nationwide, there were 7,350 open FBI and federal grand jury investigations, 46 percent of which involved losses of $100,000 or more.

To aid in criminal investigations, the report suggests assigning more FBI agents and prosecutors to financial institution cases, and exempting them from the longstanding policy of frequent relocation so they develop expertise in the area. And it strongly recommends requiring examiners to refer serious criminal misconduct to criminal investigators while the regulators' investigation is still under way.

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