More penalties likely for TD Bank following laundering allegations

TD Bank Group could be hit with more severe penalties than previously expected, says a banking analyst, after a report that the investigation it faces in the U.S. is tied to laundering illicit fentanyl profits.

National Bank analyst Gabriel Dechaine said in a note that the worst-case scenario of the U.S. investigations TD faces needs reassessing after the Wall Street Journal reported the link on Thursday. The newspaper said the U.S. Justice Department investigation is focused on how Chinese drug traffickers allegedly used TD to launder at least $653 million US, and bribed TD employees to do so.

TD did not directly confirm the report, but said its antimoney laundering defences had been deficient.

“Criminals relentlessly target financial institutions to launder money and TD has a responsibility and an obligation to thwart their illegal activity,” chief executive Bharat Masrani said in a statement on Friday.

“I regret that there were serious instances where the bank’s AML program fell short and did not effectively monitor, detect, report or respond.

“This is unacceptable and not in line with our values.”

The bank said an overhaul of its program is well underway, with more than $500 million already spent in program remediation and platform enhancements.

The severity of the allegations means TD could not only face fines well above the $500 million to $1 billion that many investors have anticipated, but also more severe regulator-imposed limitations on its business activities, said Dechaine.

“We believe investors need to put greater weight on worst-case scenarios for the stock,” he said in a note.

The cumulative fines could easily hit $2 billion, while regulators could put in place restrictions, including limits on its balance sheet growth, that could affect bank operations for years, said Dechaine.

In a worst-case scenario, the issue could erode TD’s future earnings potential by more than $1 billion, he said. Dechaine has dropped his price target for the bank’s TSX-listed shares by almost nine per cent to $84.

The link to drug trafficking comes the same week TD announced it had taken an initial provision of $450 million US in connection to the ongoing U.S. regulatory inquiry into its antimoney laundering compliance program.