WASHINGTON - More than two dozen financial services firms are set to launch a database company to help their peers root out money launderers, terrorists, and other lawbreakers.
But whether the effort is a good example of the industry getting ahead of regulators to police itself or could be hampered by privacy and other policy issues remains unclear.
Regulatory DataCorp International, whose principal organizer was Goldman Sachs Group, plans to market a proprietary database culling information from hundreds of public sources such as police records worldwide. The partners include Citigroup Inc., Merrill Lynch & Co., and UBS Paine Webber, Inc.
The firm aims to sell its services to banks, securities firms, and other financial services providers that could face heavy damage to their reputation as well as regulatory penalties if dirty money is found to have moved through them.
Privacy advocates immediately began raising questions about where the company would draw its information, how accurate it would be, and whether it would be used fairly.
Chris Hoofnagle, a legislative counsel for the Electronic Privacy Information Center here, said the proposed service is comparable to the notoriously inaccurate credit-reporting databases. And he noted that the legal right to see and correct those files would not apply to Regulatory DataCorp.
"There is a lot of risk here," Mr. Hoofnagle said. "When you are marked as suspicious in a database, it is very difficult to fix that information. It is difficult enough if you have inaccurate information on your credit report - and we're now talking about private databases that have no similar access and correction rights."
Regulatory DataCorp officials did not comment for this story, but a source familiar with the company said that "from the earliest days of planning, the founders understood that privacy concerns were among the most important things they had to deal with and worked with experts across the field to address these questions."
"One of the important things that Regulatory DataCorp was formed to help get a handle on is identity fraud, which is a consumer issue," the source said.
A copy of Goldman's confidential "offering statement" obtained by American Banker indicates that among several advisory boards the company plans to form, one will deal with issues of "information and privacy."
The advisory board will consist of "attorneys and privacy experts to review information reliability and suitability, confidentiality procedures as well as assist in the identification of additional sources of information and updates to current information," the offering statement said.
The establishment of the company was reported first by The Washington Post on Thursday.
Regulatory DataCorp said in the statement that it expects to break even by its second year of operations and to be turning a profit of $4.7 million by its third year.
The document indicates that the firm intended to recruit about 20 founding partners. For an investment of $575,000, founders would receive a 3% ownership stake in the company. Goldman would retain a 25% stake in recognition of its efforts to create the company, and would buy an additional 3% share. The remaining 12% of the stock was to be held in reserve for the management team and future investors.
The company's offerings will be built around what is being called the Global Regulatory Information Database, for Grid, which combines public-record databases from hundreds of law enforcement as well as information gleaned from news reports. Sources said that Thomson Financial (which, like American Banker is owned by Thomson Corp.) is a possible supplier of information to the new company.
According to the offering statement, the Grid system "will enable clients to screen account names and transactions to identify potential risk, as well as provide updated monitoring/surveillance - all on an automated, ongoing basis."
The company plans to charge at least 27 cents per name or as much as $1, depending on the service level the client requests. The average charge is expected to be 50 to 70 cents a name. Institutions with an ownership stake are offered up to a million free inquiries a year.
The company's board of directors will include at least three men with impressive law enforcement, and regulatory credentials. Former FBI Director, Judge William H. Webster, now a senior partner with Milbank, Tweed, Hadley & McCloy; A.B. Culvahouse, former counsel to President Reagan and now chairman of O'Melveny & Meyers; and Harry J. Weiss, former director of the Securities and Exchange Commission's division of enforcement and now a partner with Wilmer Cutler & Pickering, have all agreed to serve on the board.
None of the three returned calls requesting comment for this story.
