TD penalties expected to be higher on alleged money laundering link: analyst

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 multiple 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 US$653 million, and bribed TD employees to do so.

TD did not comment directly on the report, but said its anti-money laundering defences had been deficient.

“Criminals constantly seek to use banks to launder money. Regrettably, our U.S. (anti-money laundering) program did not effectively thwart these activities. This is unacceptable, and we must and we will do better,” said spokeswoman Elizabeth Goldenshtein in a statement.

She said the bank continues to co-operate with law enforcement and regulators, and that a comprehensive effort is underway to strengthen its anti-money laundering program.

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

“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, and he has dropped his price target for the bank’s TSX-listed shares by almost 9% to $84. 

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

The bank said on Tuesday its discussions with three U.S. regulators and the Department of Justice are ongoing, and it anticipates additional financial penalties.

Separately, Canada’s financial-crime watchdog Fintrac levied a $9.2-million penalty against the bank on Thursday for non-compliance with money laundering and terrorist financing measures.

TD Bank’s stock price was down more than 4% in midday trading Friday to $75.85 on the Toronto Stock Exchange.