The Toronto-Dominion Bank’s (TD – Free Report) chief operating officer and next CEO Raymond Chun revealed plans to improve anti-money laundering (AML) practices after the company faced a significant penalty of $3.09 billion last year. Chun revealed this during the RBC investor conference on Tuesday.
Chun will succeed Bharat Masrani as CEO in April 2025 and has already unveiled his strategic plans to improve TD’s AML structure.
Last month, the company suspended its medium-term growth targets and initiated a comprehensive strategic review as the bank’s expenses surged, in light of higher spending on staff and its risk and control infrastructure.
AML Issues Faced by TD
Last October, Toronto-Dominion entered into a plea agreement with the U.S. Department of Justice (DOJ) after a multi-agency investigation unveiled shortcomings in its money laundering safeguards, which enabled criminals to funnel millions of dollars tied to illicit fentanyl through the bank’s accounts.
TD was asked by the DOJ and Financial Crimes Enforcement Network (FinCEN) to retain independent compliance monitors to oversee the bank’s remediation. The bank submitted its list of candidates for the monitorship to both the DOJ and FinCEN, and both entities approved using the same monitor.
Remedial Steps Taken by Toronto-Dominion Bank
TD is reducing its U.S. retail assets by roughly 10% by restructuring its balance sheet to adhere to the $434 billion limit set by the Office of the Comptroller of the Currency (OCC).
Further, Toronto-Dominion has strengthened its first- and second-line AML staff and hired in risk and audit areas. These reinforcements have made the bank confident that it can deliver what regulators are looking for, on time, Chun mentioned.
Chun said, “You need to have talent that is commensurate with the size and complexity of a bank like TD. Talent at the most senior levels in AML is absolutely one of the top priorities that we have as an organization.”
The bank has already appointed a new head of U.S. financial crimes and risk management and has reorganized its entire AML team in the United States. Also, Toronto-Dominion aims to integrate external benchmarking in its review.
“The combination of having the right talent and consistently doing external benchmarking will allow us to make sure that we are providing the appropriate resource funding and support, to make sure that we’re staying relevant,” Chun added.
The bank remains fully committed to its U.S. business, dispelling any market exit considerations. TD aims to come out with a “renewed focus” around optimizing its return on equity in the U.S., which is likely to imply the bank is considering offloading some of its loan portfolios and repositioning its bond holdings. The process is anticipated to be completed by the end of the fiscal year 2025.
Consideration Over TD’s Stake in Charles Schwab
Toronto-Dominion is also mulling over its ownership stake in The Charles Schwab Corp. (SCHW – Free Report) as part of the review. The bank sold 40.5 million shares of SCHW last August, reducing its stake to 10.1% from 12.3%, in order to set aside the amount to meet expected AML probe penalties.
“If you think about the Schwab investment, that is part of the capital-allocation review that we are doing as part of the strategic review,” Chun said.
Chun clarified Toronto-Dominion’s ownership of Schwab shares is distinct from its agreement with the firm to make sweep-deposit accounts available to Schwab clients.
“Regardless of what we decide to do with the Schwab investment, the deposit agreement would continue on a go-forward basis,” Chun mentioned.
TD acquired a 13.5% stake in SCHW in 2020 in an all-stock deal to sell its interest in online brokerage TD Ameritrade Holding Corp. to Schwab.
Toronto-Dominion’s Zacks Rank & Price Performance
Over the past six months, TD shares have lost 2.3% against the industry’s 4.8% growth.
Image Source: Zacks Investment Research
Currently, TD carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Legal Hassles Faced by Other Banks
Last month, Deutsche Bank’s (DB – Free Report) broker-dealer subsidiary, Deutsche Bank Securities Inc., was hit with a $4 million penalty by the Securities and Exchange Commission (SEC).
The fine was levied due to DB’s failure to promptly file certain Suspicious Activity Reports as mandated by the Bank Secrecy Act (BSA). These rules are issued by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network.
Similarly, Bank of America Corp. (BAC – Free Report) received a cease-and-desist order from the OCC, addressing the deficiencies under BSA and sanctions compliance programs.
The order mandates BAC to apply thorough remedial measures to improve its BSA/AML and sanctions compliance programs. These include appointing an independent consultant to evaluate the effectiveness of these programs and conduct lookback reviews to ensure that all suspicious activities are adequately reported.
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