U.S. regulators could impose an asset cap on Toronto-Dominion Bank — and shares are falling

Actions of Toronto-Dominion Bank (T.D -4.30%) fell as much as 7% Thursday morning after a bombshell report from The Wall Street Journal said U.S. regulators were preparing to fine the big Canadian lender about $3 billion and put a cap on the assets of its U.S. operations in a deal to settle charges that it failed to properly comply with laws against money laundering. As of 11:00 a.m. ET, shares were trading down 4.7%.

A big punishment

The Wall Street Journal the report, citing unnamed sources, said a settlement could be announced as early as Thursday between TD Bank, the Department of Justice, the Federal Reserve, the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network (FinCEN). TD Bank is expected to plead guilty to criminal charges from the Department of Justice.

Regulators and authorities allege that TD failed to create adequate programs and internal controls to detect and prevent money laundering and that drug cartels took advantage of this. The Wall Street Journal previously reported that the Justice Department was investigating TD after authorities learned that Chinese criminal organizations laundered millions of dollars raised from the sale of fentanyl through the bank’s New York and New Jersey branches, bribing bank employees in the process. The paper also reported that those issues led regulators last year to block TD’s acquisition plan First Horizon and expand its US operations in the South.

right WSJ According to the report, the Justice Department and FinCEN will each assign independent monitors to the bank to ensure it addresses issues with its anti-money laundering program and complies with the agreement with regulators. FinCEN’s monitor could remain in place for four years, according to sources.

This is serious

While the fine is certainly large, the potential cap on assets per US bank business unit indicates the seriousness of the situation. Of TD’s roughly $2 trillion in assets, about $370 billion is in the US. from Wells Fargo After the fake account scandal came to light, the Fed in 2018 imposed a cap on that bank’s assets — and it’s still in place today. This cap undoubtedly cost the bank billions in profits, and its reputation has yet to recover after its revelations. Wells Fargo shares have fallen 11% since then.

Anti-Money Laundering Consent Orders can last at least four or five years and, given the serious nature of TD’s internal problems, could last longer. While the institution may still grow in Canada, it had hoped to grow in the U.S. Until more is known, I would avoid the stock.