TD Bank Reserves Nearly $3 Billion for AML Fines, Forced to Reduce Stake in Charles Schwab

TD Bank announced on Wednesday that it is setting aside almost $3 billion to cover fines related to its failures in anti-money laundering (AML) controls in the United States. As part of this financial maneuver, the bank, Canada’s second-largest lender, has also been compelled to sell a portion of its stake in Charles Schwab Corp to fund these penalties.

The federal investigations in the U.S. involve serious allegations, including that Chinese fentanyl traffickers laundered at least $650 million through TD Bank between 2016 and 2021. In a separate case, prosecutors are pursuing charges against the bank for an employee who allegedly accepted bribes to facilitate money laundering for a Colombian drug cartel.

In anticipation of a global resolution to these AML probes by the end of the year—expected to include both monetary and non-monetary penalties—TD Bank has now reserved a total of more than $3 billion. This includes a $450 million provision made in April.

“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,” said TD Bank CEO Bharat Masrani in a statement.

The additional $2.6 billion provision announced today reflects the bank’s current estimate of the total fines it faces for its AML failures. “The bank expects that a global resolution will be finalized by calendar year-end,” TD Bank stated.

As part of its strategy to cover these costs, TD Bank has announced the sale of 40.5 million shares of Charles Schwab, reducing its ownership in the U.S. brokerage firm from 12.3% to 10.1%.

This new multi-billion-dollar provision marks a significant escalation in the severity of the federal cases mounting against TD Bank. Earlier this year, the bank appeared to downplay the situation with an attitude akin to, “crisis, what crisis?” This latest development, however, represents a humbling and self-inflicted chapter for the bank.

The board is likely hoping that this provision will satisfy prosecutors, clear the way for hiring a new CEO, and eventually allow the bank to pursue acquisitions in the U.S. Whether this strategy will prove effective with U.S. federal authorities remains to be seen, though the bank appears confident it is close to reaching a deal.

Insiders suggest that much of this crisis could have been avoided if the board had taken the situation more seriously from the start. Meanwhile, TD Bank has been forced to rebuild its Financial Crime Compliance (FCC) teams and strengthen its AML defenses through a series of hires and firings. Since disclosing the probes last year, the bank has invested $500 million to enhance its AML program and risk controls, brought in several key executives, and launched staff training initiatives.

Sources indicate that the bank has struggled to recruit a new CEO amid the ongoing AML investigations, but the board now hopes that resolving these probes will pave the way for fresh leadership at the C-Suite level.

The announcement of this substantial provision marks a notable departure from the bank’s stance in late spring. In April, TD Bank had set aside $450 million in connection with the AML probes in New Jersey and Florida, though it noted that this amount was tied to discussions with just one of three regulators and could ultimately be higher.

By May, the bank had already embarked on a comprehensive overhaul of its U.S. and global AML program, following multiple regulatory investigations into its compliance practices.

These latest announcements come after the market’s close and follow a tumultuous year for TD Bank. In 2022, the bank’s landmark $13.4 billion deal to acquire U.S. bank First Horizon Corp fell apart when it became clear that local regulators would not approve the deal due to the extent of AML failings at TD’s branches.

TD Bank, which serves over 10 million customers and operates nearly 1,200 branches along the U.S. East Coast, later admitted that it was under investigation by the U.S. Department of Justice, in addition to financial regulators and the Treasury Department, over allegations of bribery and corruption at several U.S. branches that facilitated money laundering for Colombian drug cartels.

Despite expectations of finalizing these investigations by year-end, analysts have warned that TD Bank could face years of restrictions on both organic growth and acquisitions in the U.S., where it has built a significant retail presence.

“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,” commented Jefferies analyst John Aiken.

“TD Bank is not out of the woods yet,” added Sean Parker, a senior adviser with the consultancy firm AML Shop in Toronto. U.S. regulators, including FinCEN (the Treasury Department’s Financial Crimes Enforcement Network) and the Department of Justice, will likely “test” the bank to ensure that a genuine culture shift towards compliance has taken place, Parker noted.

TD Bank’s capital ratio, a key measure of financial health, is expected to take a 35 basis points hit in the fourth fiscal quarter due to operational risk, but will gain a 54 basis points boost from the sale of Schwab shares, according to the bank. TD Bank’s capital ratio, or CET1 ratio, stood at 12.8% as of July 31, 2024, well above the Canadian banking regulator’s requirements.

By fLEXI tEAM