Toronto-Dominion Bank must overhaul its US operations after major penalties for AML compliance failures
Toronto-Dominion Bank is facing significant consequences in the United States after being fined approximately US$3bn for failing to properly monitor activities linked to money laundering.
According to Financial Post, the bank is also facing a cap on its asset expansion in the US. TD had already set aside over US$3bn in anticipation of the fine, but the asset growth restriction came as a surprise to some analysts.
“This would represent a negative surprise to our base case review, especially given TD’s high level of regulatory cooperation, significant anti-money laundering investments and recent CEO succession announcement,” Canaccord Genuity Group Inc. analyst Matthew Lee said in a note.
Jefferies Securities Inc. analyst John Aiken echoed similar sentiments, noting that the market had become “increasingly comfortable with the thought that there would not be any growth restrictions placed on TD,” making the recent development a “negative surprise.”
TD Bank declined to comment on the situation but is scheduled to host a conference call with investors. The Wall Street Journal reports that the talks surrounding the investigation into TD’s anti-money laundering (AML) issues have dominated Bay Street this year.
The bank’s last quarterly results showed a rare loss due to the US$2.6bn it had to set aside for potential fines from the AML probe, in addition to US$450m earmarked in April.
TD Bank's CEO, Bharat Masrani, has accepted full responsibility for the AML failures that the institution faces. Masrani, who recently announced his decision to step down, will be succeeded by Raymond Chun, head of Canadian personal banking, in April.
The cap on TD’s US assets limits its subsidiaries to a maximum of US$434bn in total assets. However, as noted by Matthew Lee, this cap may not be a “deal breaker” for TD, given its room for loan book growth and other areas of business.
Financial Post reports that retail banking in the US represents 35 percent of TD's total earnings, and the bank’s diversified revenue streams provide some resilience against these new restrictions.
Fitch Ratings Inc. analysts have noted that TD is unlikely to pursue mergers or acquisitions in the coming months due to these AML issues but do not foresee the bank making a ‘hasty retreat’ from the US market.
TD remains the only one of Canada’s Big Six banks on which Fitch has placed a negative outlook, according to Financial Post.
Peter Routledge, Canada’s Superintendent of Financial Institutions, emphasized the severity of the situation in a statement, noting that deficiencies in an institution’s AML regime pose prudential risks.
“As we move forward, I would like to thank US authorities including our colleagues at the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Financial Crimes Enforcement Network (FinCEN) for their sustained and continuing engagement in this matter,” Routledge said.
In response to the findings, TD has overhauled its US AML leadership team, introduced stricter oversight, and invested in new technology to detect and prevent financial crime.
As part of the remediation plan, TD has appointed 40 new leaders and added over 700 AML specialists to bolster its compliance efforts.
“We have taken full responsibility for the failures of our US AML program and are making the investments, changes, and enhancements required to deliver on our commitments,” Masrani said in a statement.
TD has also committed to cooperating with regulators and prosecutors to address its deficiencies and prevent future incidents.
The bank’s US subsidiaries will operate under formal oversight through a Monitorship, as reported by Financial Post, ensuring that the AML remediation progresses according to expectations.
The cap on assets and increased scrutiny of new products and services are expected to create additional challenges for TD as it navigates this chapter of its US operations.
However, the bank has expressed confidence in its ability to meet its financial obligations and maintain its operations, serving its 10 million US customers while rebuilding trust with regulators.
