Federal bank regulators and law enforcement authorities failed to take advantage of legislation that would open up the financial secrets of the underground economy, General Accounting Office officials testified yesterday.

GAO spokesman William J. Anderson told a House banking subcommittee that the government failed to utilize a law passed in 1970 that requires banks to report large cash transactions and demands disclosure of foreign bank accounts and shipments of cash in and out of the country.

The Treasury Department and Comptroller of the Currency were slow to implement the law and lax in enforcing it, Anderson complained. He also complained that law enforcement officials failed to utilize what information they did obtain.

"We gave them a shotgun and they used it like a peashooter," Anderson, director of GAO's general government division told the sub-committee chaired by Rep. Joseph Minish (D-N.J.).

"What a lost opportunity there was before the word got out," he added. By now, he said, drug smugglers and other underground operators are finding ways to circumvent the regulations.

Unless it is utilized better, Congress ought to repeal the law, known as the Bank Secrecy Act, Anderson recommended. The law requires anyone depositing $10,000 in cash to fill out a federal reporting form, which the bank or other financial institution passes on to the government. Anyone taking $5,000 in cash in or out of the country and any U.S. citizen with a foreign bank account also must report.

"The way to get to the hear of this large underground economy is to strengthen enforcement of the Bank Secrecy Act," responded Rep. Leo Zeferetti (D-N.Y.), chairman of a House narcotics committee.

U.S. Customs Service officials recently told The Washington Post that drug smugglers "are afraid of these two pieces of paper," because the reports make it possible to trace the huge amounts of cash used in international drug deals.

The cash transaction reports have become a major weapon in Operation Greenback, a federal investigative task force in Miami that has broken up several drug smuggling operations by tracing the money.

Anderson said one loophole in the reporting law is that it does not cover money market mutual funds, savings plans that pay higher interest than banks and savings and loan associations. One Miami man convicted on drug charges deposited $35 million in cash in a money market fund and was caught after a suspicious broker called authorities.