Looming penalties: TD Bank sets aside additional US$2.6-billion to cover U.S. regulatory penalties over anti-money laundering controls
Toronto-Dominion Bank is setting aside an additional US$2.6-billion to cover looming penalties in the United States over failures in the bank’s anti-money-laundering program – systemic breaches that have mired the institution in damaging criminal and regulatory probes.
TD is now bracing for a historic fine of more than US$3-billion ($4-billion), including a provision of US$450-million that it earmarked in April, to settle investigations from multiple U.S. regulators.
The total potential fine would deal a landmark blow to Canada’s second-largest bank. TD has the financial resources to absorb it, but the hit is severe enough that the bank was compelled to sell shares it owned in another major financial institution to ensure that its capital reserves stay above a minimum threshold set by Canada’s banking regulator.
It would be the largest penalty that a Canadian bank has paid in the United States, and is believed to be the second-largest U.S. regulatory penalty levied against any bank over similar issues.
The additional provision reflects “the bank’s current estimate of the total fines related to these matters,” TD said in a statement released Wednesday. The bank is expecting “a global resolution, which will include monetary and non-monetary penalties,” and anticipates that it “will be finalized by calendar year end.”
TD will record the provision as part of its fiscal third-quarter results, which will be released on Thursday.
The bank has been wrestling with the fallout from lapses in its anti-money-laundering (AML) controls for well over a year, and is still negotiating with U.S. regulators, including the Office of the Comptroller of the Currency (OCC), the Financial Crimes Enforcement Network (FinCEN) and the U.S. Department of Justice.
“We recognize the seriousness of our U.S. AML program deficiencies, and the work required to meet our obligations and responsibilities is of paramount importance to me, our senior leaders, and our boards,” chief executive officer Bharat Masrani said in a statement.
TD’s AML issues are emblematic of broader problems that have dogged the bank. It has contributed to an exodus of senior TD leaders and raised questions about a perceived erosion in the bank’s prized culture. And it has fuelled speculation that the bank is struggling with its succession plan for Mr. Masrani, the CEO who is shouldering responsibility for most of the bank’s woes.
The bank has already spent at least $500-million on fixing its AML systems, and made a flurry of personnel changes this summer. Chief compliance officer Monica Kowal departed and the bank recruited a respected expert on preventing financial crime, Stuart Davis, to advise chief risk officer Ajai Bambawale.
As the U.S. AML investigations dragged on, shrouded in secrecy, TD’s stock price suffered from uncertainty about how harsh the penalties would be. Over that span, TD has effectively lost the premium valuation that its shares used to command, and its performance has trailed its Big Six bank peers.
The AML issues also wiped out the bank’s most ambitious expansion plan under Mr. Masrani’s 10-year tenure. In May, 2023, the bank called off its proposed US$13.4-billion takeover of Tennessee-based First Horizon Corp. after TD was unable to win timely approvals from U.S. regulators. The deal would have made it the sixth-largest bank in the U.S. by assets and bolstered its presence in fast-growing southeastern U.S. states.
Since then, damaging details have emerged about the extent of the lapses in TD’s controls, and the bank was ensnared in America’s efforts to fight a global drug war. TD featured prominently in an investigation into a criminal ring that laundered US$653-million worth of drug money through financial institutions in New York, New Jersey and Pennsylvania – including several of TD’s branches.
Additionally, separate criminal complaints allege that two former TD employees who worked at branches in New Jersey and Florida accepted bribes and helped to shuttle millions of dollars in drug-trafficking proceeds from the U.S. to Colombia, in some cases through accounts linked to shell companies.
A US$3-billion penalty for the bank would exceed the predictions that most analysts had already incorporated into their financial models, but is lower than the US$4-billion they would have considered a critical threat to the bank’s capital.
It would eclipse a US$2-billion settlement with domestic and U.S. authorities that Denmark’s Danske Bank paid over its dealing with alleged Russian criminals at its branches in Estonia, and US$1.9-billion that British-based HSBC Holdings PLC paid to settle allegations it laundered money for Colombian and Mexican drug cartels.
Only Wells Fargo & Co.’s US$8-billion in settlements over a four-year period, which ended in 2022, would be larger, after regulators alleged that its employees created false accounts for the bank’s clients.
“While the market now has certainty surrounding the amount of the charge, this is offset by the fact that it is larger than expectations and the impact this has on capital,” said John Aiken, an analyst at Jefferies Securities Inc., in a note to clients on Wednesday.
TD said it has sold 40.5 million shares that it owned in The Charles Schwab Corp. to shore up its capital reserves. TD’s stake in Schwab, a leading discount brokerage, falls to 10.1 per cent from 12.3 per cent. The bank agreed not to sell any more of its stake for 45 days, and said Wednesday that it has “no current intention to divest additional shares.”
The bank’s common equity Tier 1 capital ratio – a key measure of its financial resilience – will be 12.8 per cent as of July 31, but is set to drop by a further 35 basis points in the fourth fiscal quarter, which ends Oct. 31. But the sale of Schwab shares will add back 54 basis points of capital, helping fill the hole the provision creates. (100 basis points equal 1 percentage point).
Investors who have been waiting for more clarity on the scope of TD’s punishment over AML issues will take some comfort that the bank believes it knows the upper limit for expected fines and provided a timeline for some form of resolution – though regulators still control the timing of any settlement.
The lingering cloud that still hangs over TD’s future is the fear that it could face constraints on its U.S. business – from non-monetary penalties handed down by regulators – until remediation of its AML problems is fully resolved.
“We still do not know if there will be any restrictions on TD’s future growth in the U.S. and note that the [Schwab] sale does impede future earnings,” Mr. Aiken said.
This article was first reported by The Globe and Mail
