Are TD's anti-money-laundering problems worse than we think?

Morningstar says deficiencies may be more costly, take longer to fix

Are TD's anti-money-laundering problems worse than we think?
Steve Randall

Deficiencies in TD Banking Group’s anti-money-laundering program, which sparked multi-agency investigations in the U.S. has escalated in recent weeks.

A little over a month ago, TD Bank Group took an initial provision of $450 million after discussion with one of regulators investigating its Bank Secrecy Act/AML program. That was never expected to be the final cost of settling the regulators’ claims, but earlier this week Jefferies analysts were talking in terms of US$4 billion, doubling their previous estimations.

Now, a Morningstar DBRS Research commentary suggests things could take longer for TD to fix and be more costly than previously expected.

“Additional shortcomings in TD's anti-money laundering program, controls, and operational risk management practices have surfaced. These new developments have increased our concerns that these AML deficiencies will take longer to cure and could have a larger and more adverse impact on the Bank's franchise and earnings power,” the commentary stated.

This new outlook reflects several revelations including media reports linking TD with a U.S. $653 million fentanyl drug money-laundering case.

The banking group has spent in the region of $500 million so far to bolster its AML program, but the commentary highlights the expectation that more investment will be needed to remedy issues, that additional financial penalties will be imposed, and that there could be non-financial penalties.

This could all have a negative impact on the TD franchise, its earning power, and credit rating.

“Regulators are in the process of conducting in-depth investigations, which may reveal other related and/or nonrelated issues. We will closely monitor ongoing updates and the final outcomes of the regulatory and law enforcement investigations, including the magnitude of total fines and clarity on any restrictions imposed on the Bank's U.S. retail operations,” said Carl De Souza, Senior Vice President and Sector Lead, North American Financial Institution Ratings.