TD Bank is expecting its pre-tax net interest income to fall by up to $225mn in the 2025 fiscal year, after it became the first bank in the US to plead guilty to money-laundering charges and agreed to pay over $3bn in penalties to the Department of Justice and financial regulators last week.
The Office for Comptroller of the Currency — a US bank regulator — implemented a $434bn asset cap as part of the penalty agreement, which also includes a limit on the bank’s business functions and total consolidated assets.
It is unclear when the cap will be lifted, and the upper asset limit could be lowered further if TD Bank, which is headquartered in Canada, fails to comply with requirements, the OCC said.
The asset cap, imposed following two decades of TD’s strategic expansion in the US, puts a lid on the bank’s growth until it complies with remedial actions specified by regulators.
TD Bank’s penalties follow multiple investigations into the bank’s failure to monitor approximately $18.3tn worth of customer activity between January 2018 and April 2024, which enabled three money-laundering networks to launder more than $670mn through the bank. Authorities started to probe the bank’s internal controls after it was discovered employees were bribed and allowed criminals to bring large bags of cash into branches to launder millions of dollars.
The bank also faces business restrictions, such as limits on opening new branches and limits on dividend payments.
TD Bank is the second-largest bank in Canada by assets, according to the Top 1000 World Banks 2024, and the sixth largest in North America, holding $1.97tn in assets as of July.
TD Bank to reduce US assets by 10%
TD Bank’s guilty plea is part of a co-ordinated resolution with the Federal Reserve Board, the OCC and the Financial Crimes Enforcement Network.
The total assets of TD’s two US banking subsidiaries — TD Bank, NA and TD Bank USA, NA — will be capped at their reported September 30 2024 level of $434bn.
These subsidiaries will also be subject to more stringent approval processes for new products, services and branches.
The limitations do not apply to TD Securities or any of the bank’s Canadian or other global businesses, which account for at least 70 per cent of the bank’s revenue.
The enforcement actions limit capital distributions and restrict business activities to ensure there are sufficient resources for remediation, says William Scott Grob, director of research and analysis, Association of Certified Anti-Money Laundering Specialists.
“These measures reinforce the need for business leaders to prioritise Bank Secrecy Act [and] anti-money-laundering compliance over growth initiatives when the organisation is not in compliance with US regulations,” he tells The Banker.
“US regulators are once again signalling to the anti-financial-crime community that substantial fines may be imposed when there is a lack of focus on the effectiveness of BSA [and] AML [rules].”
TD Bank must comply with the asset restrictions from March 31 2025 — the first full calendar quarter following the date of the OCC’s consent order. The asset cap will remain indefinitely unless the OCC removes it.
If the bank does not comply with the OCC’s requirements, the regulator may require the bank to reduce its total consolidated assets further by up to 7 per cent.
For each successive year the bank is non-compliant with the order, the OCC may require the bank to reduce its total consolidated assets by up to an additional 7 per cent per year.
Alongside other measures, the imposition of an asset cap will “ensure that the bank focuses on building proper controls commensurate with its risk profile”, said Michael Hsu, acting comptroller of the currency, in a statement.
TD Bank made its first “real entrance” into US retail banking with the acquisition of BankNorth in 2005.
Since then, the US has been a key market for TD Bank in its market growth. TD solidified its US retail presence by acquiring Commerce Bank in 2007 and South Financial Group in 2010.
In 2022, TD Bank announced plans to acquire First Horizon for $13.5bn. The acquisition was designed to expand TD’s footprint across southern US states until the deal was terminated last year as regulators were reportedly worried about the bank’s anti-money-laundering practices.
Now, the bank plans to reduce its US assets by 10 per cent, which includes “managing down or selling certain loan portfolios”, TD Bank’s chief executive, Leo Salom, said in a call with investors last week.
Salom added that the 2025 fiscal year will be a “transition year for US retail” as the bank undertakes a balance sheet restructuring to comply with and maintain a buffer to the asset cap.
What’s the scale of impact?
The settlement, however, does not immediately affect TD Bank’s rating outlook, Fitch Ratings said, which allocated a “negative” rating to the bank in May.
“The impact of the announced settlement’s monetary penalties and remediation is absorbable in the context of the bank’s strong capital and liquidity. The potential longer-term impact on the US franchise will be a key focus for our ratings,” says Maria-Gabriella Khoury, senior director at Fitch Ratings.
Morningstar said that TD Bank’s retail segment growth is likely to be hampered by the asset cap, although the bank’s “scale and diverse business model” should enable it to pivot and focus on the strength of the rest of its franchise.
“We expect TD to shift its growth focus toward Canada and TD Securities,” said Morningstar in a statement.
Meanwhile, the OCC’s actions have been criticised as failing to charge individual banking supervisors and executives at the bank, and are therefore set to have minimal effect in deterring such behaviour in the future, said Dennis Kelleher, chief executive of non-profit Better Markets, in a statement last week.
“In this case, TD Bank prioritised profits over doing the right thing, and we applaud the regulators and prosecutors for applying appropriately severe punishments,” Kelleher said.
“However, the fact that none of the bank’s supervisors or executives were named in [Thursday’s] actions is a big failure. The illegal conduct at TD Bank happened because bank executives and supervisors failed repeatedly and year after year for more than 10 years. While prosecutors said they charged more than two-dozen individuals, including two bank insiders who accepted bribes, that is not enough,” he added.
How will TD Bank get back into US regulators’ good books?
It is unclear when TD Bank will be able to resume its US expansion given the asset cap, as AML remediation efforts will “remain a multi-year effort” for TD Bank, according to Morningstar.
Wells Fargo, the US’s fourth-largest bank, is still dealing with its 2018 $1.95tn asset cap, highlighting how it may take years to get back in the good graces of regulators.
Almost a decade following the 2016 scandal, which involved the creation of millions of fraudulent accounts on behalf of clients, Wells Fargo still expects it will take “multiple years” to address the numerous regulatory actions it is subject to, it said in a filing in August.
Moreover, it is unclear what exact measures TD Bank will have to take in the coming years to fully win back regulators’ confidence.
While the bank said last week it has already “implemented new technology solutions with stronger detection capabilities”, some struggle to believe more technology investments will be sufficient to fully address the issues it is facing.
“Given its size, TD Bank has certainly made significant investments in advanced anti-money-laundering regulatory compliance technologies,” Mariola Marzouk, co-founder of Vortex Risk, told The Banker.
“Current AML practices and red flags are ineffective in detecting actual money laundering as they are designed mainly to assist with compliance, rather than to combat money laundering.”
Ultimately, the numerous cases of banks’ serious non-compliance cases raise concerns about the efficacy of the three lines of defence framework, a widely adopted governance model, according to a financial crime executive.
The model assigns distinct responsibilities within a bank for operational management (known as the first line of defence), risk management and compliance (the second line), and internal audit (the third line).
“Risk managers within a bank should be independent in the organisation but are often powerless as they are effectively on the payroll of the organisation,” the financial crime executive added.
“Bank tellers being bribed by criminals into taking funds could happen in any bank. But why a major bank can be hit so hard could be a failure in their second-line controls, which should pick up the behaviour of customers and employees”, said Graham Bailey, chief operating officer for Quantifind.
In a statement last week, Lisa Monaco, deputy attorney-general, said bank compliance officials across the US should review the charges “as a case study of what not to do”.
“And every bank CEO and board member should be doing the same. Because if the business case for compliance wasn’t clear before — it should be now,” Monaco said.
Source: thebanker.com
