By Nivedita Balu, Chris Prentice and Karen Freifeld
TORONTO/NEW YORK (Reuters) -TD Bank (TO:) became the largest bank in U.S. history to plead guilty to violating a federal law aimed at preventing money laundering, agreeing to pay more than $3 billion in fines to resolve the charges, the government says. The authorities said this on Thursday.
The plea deal, which includes a rare imposition of an asset limit and other business restrictions, follows multiple government investigations into what authorities described as deep issues.
Shares of TD Bank fell nearly 5% Thursday afternoon.
For years, TD ignored warning signs from high-risk customers and created a “convenient” environment for bad actors to exploit, the government said.
In one example, authorities said TD Bank facilitated more than $400 million in transactions to launder money on behalf of people selling fentanyl and other deadly drugs.
TD is the second largest bank in Canada and the 10th largest in the US
Two units of the bank have pleaded guilty to conspiracy to commit money laundering and conspiracy to fail to file accurate reports or maintain a compliant anti-money laundering program, the Justice Department said.
“TD Bank chose profits over compliance to keep costs down,” U.S. Attorney General Merrick Garland said at a news conference, noting that TD was the largest bank to admit violating the Bank Secrecy Act.
The asset limit, imposed by the Office of the Comptroller of the Coin, is a rare step usually reserved for serious cases. It’s a big blow for TD. The bank has sought to expand further in the US, which accounts for about a third of its revenue.
“We will make the necessary changes to put the bank on a stronger foundation,” new CEO Ray Chun told investors on a conference call Thursday. “This is TD’s number one priority, and my number one priority. Make no mistake, we will honor our obligations to our regulators… we will get the job done.”
Some critics of the bank said the settlement was too lenient. U.S. Sen. Elizabeth Warren, a Democrat, said it “releases bad bank executives for allowing TD Bank to be used as a criminal slush fund.”
‘MOST CONVENIENT BANK’
TD failed to monitor more than $18 trillion in customer activity for a decade, allowing three money laundering networks to transfer illicit funds through accounts at the bank, US authorities said.
Bank employees “openly joked” several times about the lack of compliance, Garland told reporters. Employees said TD’s motto — America’s Most Convenient Bank — also made it attractive to criminals, authorities said.
TD Bank’s problems were known at every level of the bank, authorities said. In some cases, TD only identified suspicious activities when the police drew their attention to it. Sometimes tellers accepted gift cards as bribes.
“TD Bank was aware of its compliance failures,” said Deputy Attorney General Lisa Monaco. “As the light continued to flash red, all TD Bank could see was green.”
FALL-OUT
The bank will pay a $1.4 billion fine to the DOJ, a record $1.3 billion to the Treasury Department’s Financial Crimes Enforcement Network, $450 million to the OCC and another $123.5 million to the Federal Reserve .
The deal also includes imposing independent oversight for four years and prevents TD from opening a new branch or entering a new market without the OCC’s approval.
An asset cap is a “worst case scenario” for TD, Cormark Securities analyst Lemar Persaud said before the deal was announced. The bank had already set aside $3 billion to cover fines.
Persaud drew a parallel with Wells Fargo, whose revenues have been restricted by a $1.95 trillion asset cap since 2018 due to a counterfeit accounts scandal. An asset ceiling would also limit TD’s profits, but less so than for Wells Fargo, he said.
The investigation has led to “significant underperformance” of TD’s shares and led to the departure of current CEO Bharat Masrani, Persaud said.
Masrani has been at the helm for almost a decade and previously led the US operations. He’ll leave next year.
The lender first revealed last year that it was responding to inquiries from regulators and law enforcement agencies, months after it scrapped a $13 billion purchase of regional lender First Horizon (NYSE:).
Investigators have been scrutinizing TD’s internal controls since agents discovered that a Chinese criminal operation had bribed employees and moved large bags of cash into branches to launder millions of dollars in fentanyl sales through TD branches in New York and New Jersey, authorities said .
TD has spent millions to strengthen its compliance programs, laid off dozens of employees at U.S. branches and appointed Canadian head of personal banking Chun as its new CEO, keeping the new chief at arm’s length from the scandal.
As part of the resolution, TD has initiated reinstatement and has agreed to continue to cooperate with ongoing investigations into individuals.
TD has also clawed back executive pay, authorities said. The deal doesn’t mark the first time a company has had to look at clawing back more money in the future from employees.
The cleanup will take years and require a lot of work and investment, Masrani said in a memo to Reuters staff.
“This is a difficult chapter in the history of our bank,” Masrani said in a statement. “These failures occurred under my watch as CEO, and I apologize to all of our stakeholders.”
