I have applied to 3 different PD's on the Personal History Statement they ask you what other agnecies you have applied with.  On an initial background check, they check with the Civil Service Agnecy. They provide them with the names of all the deprtments you have ever taken a Civil Service Test For.  Further, the new agancy will also contact the other PD's and ask them why you were disqualified.   
In my case an officer accidently handed me my file to hold on to while he made some copies.  I took a quick glimpse and noticed notes from the old department I had applied with.  They stated that I was a poly reject.  They also had witten all the scenarios they had run by me while going through the oral interview board.

To answer your question they find out about other departments you have applied to through the Civil Service Commission.

Taz

Netnin,

It seems I may have been misled as to what exactly the Civil Service Commission does.  The reason I reached this conclusion is that when asked in the History Statement if I had ever applied for other departments, I only wrote down one other place.  When I glimpsed at my folder they had contacted the one place I had mentioned and they had also written down the name of of a third PD that I had applied with (I did not provide this information to them).  
The only thing I had done with this third department was take their civil service test.  I had later withdrawn my applicaton because I did not want to get burned as a reject by two departments.  If they did not get this information from the Civil Service, then there surely must be a place where it is collected. Another option is that they may have contacted departments in the area ( But that's like shooting a bullet into the open and not having a target).

Also, While I was waiting for my turn to take a physical at the current department. I overheard a phone conversation between a personnel officer and someone who had called in (Probably a background investigator).  The personnel officer told the person on the other line to hold a minute and he walked over to a file cabinet, pulled a file and then gave the person on other line infomation about an applicant.  He told him how many times the applicant had admited to using marijuana and last date used, other information regarding the applicant, and finally the reason why the applicant had been DQ.

This of course is only one humble man's opinion....

Taz