U.S banking regulator imposes $450-million fine on TD Bank, prohibits new branches or new business lines without approval

A top U.S. bank regulator has imposed a $450-million fine and several non-monetary penalties on Toronto-Dominion Bank for “egregious and unacceptable” gaps in the lender’s anti-money laundering (AML) compliance program.

 

The Office of the Comptroller of the Currency (OCC) said in a statement Thursday that the bank failed to develop and maintain an AML program that could monitor compliance with federal regulations. TD has set aside $4-billion to cover financial penalties from three different regulators and the U.S. Department of Justice, but analysts and investors have expressed concern over the long-term damages from non-monetary penalties, including a potential cap on the bank’s asset growth.

 

“TD Bank’s persistent prioritization of growth over controls allowed its employees to break the law and facilitate the laundering of hundreds of millions of dollars The bank’s blatant risk management failures attracted illicit actors and are egregious and unacceptable,” said Acting Comptroller of the Currency Michael J. Hsu. “The OCC’s co-ordinated and comprehensive action, including the imposition of an asset cap, will ensure that the bank focuses on building proper controls commensurate with its risk profile.

 

The non-monetary penalties issued by the OCC include an asset cap, restrictions on opening new branches or launching new products, board certification prior to making dividend payments, a third-party assessment of the bank’s compliance and AML program, comprehensive corrective action and a suspicious activity review.

 

The cap on assets is one of the strictest penalties, hindering the bank’s growth avenues. The cap is rarely applied, and analysts and investors thought it was unlikely. The consent order also prohibits the bank from opening new branches or new business lines without approval.

 

The OCC said that the bank had “significant, systemic breakdowns in its transaction monitoring program.” TD processed hundreds of millions of dollars of transactions that were linked to suspicious activity, and failed to take immediate corrective action to address the suspicious activity and the corrective actions. The failure created “potential for significant money laundering, terrorist financing, or other illicit financial transactions.”

 

The deficiencies included internal controls and risk management practices, risk assessments, customer due diligence, customer risk ratings, as well as suspicious activity identification, evaluation, and reporting, among others issues.

 

The bank had a systemic breakdown in its processes to identify and report suspicious activity, and a pattern or practice of non-compliance with the suspicious activity report filing requirement, resulting in numerous violations. The bank also violated currency transaction reporting requirements on numerous occasions.

 

TD told executives on a conference call late Wednesday that it was facing constraints on retail banking growth in the U.S. The shares fell 6 per cent in morning trading on Thursday following media reports about the penalties.

 

TD has already set aside $4-billion to cover financial penalties from three different regulators and the U.S. Department of Justice, but investors have been bracing for details of non-financial penalties that could limit how quickly the bank can keep growing in the United States.

 

An asset cap would prevent TD from expanding its balance sheet by adding new loans, for instance, because loans are considered assets. However, the asset cap will only apply to the U.S. retail banking division, meaning other units, such as TD Securities, will still be able to expand their own balance sheets and lend to large corporate clients.

 

An asset cap also does not prevent TD from making new loans altogether. Bank loans are constantly maturing as mortgages and lines of credit are repaid, for instance, and these repayments free up space to lend.

 

TD said it will hold a conference call Thursday, though the bank did not state what will be discussed.

 

TD has been hampered by the money-laundering scandal since early 2023, when the bank disclosed it may not get regulatory approval for a proposed US$13.4-billion takeover of First Horizon Corp. Over the year and a half since, the bank killed the takeover because it could not get regulators’ blessings; set aside the $4-billion to cover expected financial penalties; and named a new chief executive officer.

 

In September, TD named Raymond Chun, a relatively unknown insider, as its next CEO. Mr. Chun will become chief operating officer effective Nov. 1 and then take over at the bank’s next annual general meeting in April. Mr. Chun is currently the head of Canadian personal banking, which is TD’s most profitable division.

On top of pulling Canada’s second-largest financial institution out of its U.S. regulatory crisis, Mr. Chun will have to restore morale because TD has also suffered from a cultural erosion that stifled financial performance, The Globe and Mail reported in August. Inside the bank, conservatism took hold and dense layers of bureaucracy hindered decision-making. Frustration over this, coupled with a U.S. regulatory crisis that kept snowballing, contributed to a number of respected leaders leaving the bank.

 

When financial institutions fall into the crosshairs of law enforcement, asset caps are typically reserved for the most severe cases. In the U.S., the asset cap imposed on Wells Fargo & Co. in 2018, which limited its balance sheet to US$1.95-trillion in assets, is often held up as one of the more extreme examples.

 

Beyond the growth limitations, asset caps can be difficult for banks because there often are no specific end dates, and lenders have to apply to regulators to get them lifted. Six years on at Wells Fargo, the bank is still limited by its own cap.

 

On Wednesday, the Wall Street Journal reported that TD’s $4-billion in total fines (US$3-billion) will be split between multiple bodies. The Justice Department will receive about US$1.8-billion and FinCEN will get US$1.3-billion.

 

TD has also been spending heavily to fix and upgrade its technology systems that assist with detecting money laundering. Earlier this year the bank said it had already spent $500-million on the initiative, and more is expected, which means TD faces the double whammy of constrained U.S. growth and elevated expenses.

 

 

 

 

This article was first reported by The Globe and Mail