TD Bank to pay $3 billion, face asset cap to resolve US money-laundering probe

By Nivedita Balu, Chris Prentice and Karen Freifeld

TORONTO/NEW YORK (Reuters) -TD Bank became the largest bank in U.S. history to plead guilty to violating a federal law aimed at preventing money laundering, and agreed to pay over $3 billion in penalties to resolve the charges, government authorities said on Thursday.

The plea deal, which includes a rare imposition of an asset cap and other business limitations, arises from multiple government investigations into what authorities described as pervasive issues.

TD Bank shares fell almost 5% on Thursday afternoon.

For years, TD ignored red flags 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 over $400 million in transactions to launder funds on behalf of people selling fentanyl and other deadly drugs.

TD is Canada's second biggest bank and the 10th largest in the U.S.

Two units of the bank pleaded guilty to conspiring to launder money and conspiring to fail to file accurate reports or maintain a compliant anti-money laundering program, the Justice Department said.

"TD Bank chose profits over compliance in order to keep its costs down," U.S. Attorney General Merrick Garland said at a press conference, noting TD was the largest bank to admit to violating the Bank Secrecy Act.

The asset cap, imposed by the Office of the Comptroller of the Currency, is a rare step typically reserved for severe cases. It deals a major blow to TD. The bank has sought to expand further in the U.S., which accounts for about a third of its income.

"We will make the necessary changes to put the bank on a stronger foundation," incoming CEO Ray Chun told investors on a conference call on Thursday. "This is TD's number-one priority, and my number one priority. Make no mistake, we will meet our commitments to our regulators... we will get the job done."

Some critics of the bank thought the plea deal was too lenient. U.S. Senator Elizabeth Warren, a Democrat, said it "lets bad bank executives off the hook for allowing TD Bank to be used as a criminal slush fund."

'MOST CONVENIENT BANK'

TD failed to monitor over $18 trillion in customer activity for about a decade, enabling three money laundering networks to transfer illicit funds through accounts at the bank, U.S. authorities said.

Bank employees "openly joked" about the lack of compliance on multiple occasions, Garland told reporters. Employees said TD's motto - America's most convenient bank - also made it attractive to criminals, authorities said.

TD Bank's issues were known at every level of the bank, authorities said. In some cases, TD did not flag suspicious activity until law enforcement raised attention to it. At times, tellers accepted gift cards as bribes.

"TD Bank knew of its compliance failures," said Deputy Attorney General Lisa Monaco. "As the light continued blinking red, TD Bank could only see green."

FALLOUT

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 the imposition of independent monitoring 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 "worst case scenario" for TD, said Cormark Securities analyst Lemar Persaud before the deal was announced. The bank had already set aside $3 billion to cover fines.

Persaud drew a parallel with Wells Fargo , whose earnings have been constrained by a $1.95 trillion asset cap since 2018 following a fake accounts scandal. An asset cap would also constrain TD's profits, but to a lesser extent than it did for Wells Fargo, he said.

The probe has led to "significant underperformance" of TD's stock and prompted the retirement of its current CEO Bharat Masrani, Persaud said.

Masrani has been at the helm for nearly a decade and previously led its U.S. operations. He will leave next year.

The lender first revealed it was responding to inquiries from regulators and law enforcement last year, months after it scrapped a $13 billion purchase of regional lender First Horizon.

Investigators have been probing TD's internal controls since agents discovered a Chinese criminal operation bribed employees and brought 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, fired dozens of staff at U.S. branches and named Canadian personal banking head Chun as incoming CEO, distancing the new chief from the scandal.

As part of the resolution, TD has begun remediation and agreed to continue to cooperate in ongoing investigations into individuals.

TD also has clawed back executive compensation, authorities said, nothing the deal marks the first time a company has to look at recovering more funds in the future from employees.

The cleanup effort will take years and require a lot of work and investment, Masrani said in a memo to staff seen by Reuters.

"This is a difficult chapter in our bank's history," Masrani said in a statement. "These failures took place on my watch as CEO, and I apologize to all our stakeholders."

(Reporting by Nivedita Balu in Toronto and Chris Prentice and Karen Freifeld in New York; Additional reporting by Pete Schroeder, Andrew Goudsward and Mike Scarcella in Washington; Editing by Megan Davies, Lananh Nguyen, Mark Potter, Lisa Shumaker and David Gregorio)