TD expects penalties from regulatory and law enforcement probes over anti-money laundering lapses

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Toronto-Dominion Bank TD-T expects to face fines or other penalties stemming from probes by regulators and law enforcement agencies, including a U.S. federal department, related to its anti-money laundering practices, the financial institution has disclosed.

In its fiscal third-quarter earnings report released Thursday, TD said that the inquiries were “both generally and in connection with specific clients, counterparties or incidents in the U.S.” It also said that some of the concerns are related to an investigation by the United States Department of Justice – a rare occurrence for a Canadian bank.

In May, TD abandoned its US$13.4-billion takeover of Tennessee-based First Horizon Corp. after challenges securing regulatory approvals delayed the deal’s closing timeline indefinitely. Media reports citing unnamed sources said the regulators’ concerns stemmed from issues with TD’s anti-money laundering processes.

In its earnings filing, TD said that it is working with authorities and enhancing its anti-money laundering compliance program.

“While the ultimate outcomes of these inquiries and investigations are unknown at this time, the Bank anticipates monetary and/or non-monetary penalties to be imposed,” the bank said in the report.

TD declined a request for comment.

Analysts pressed TD’s senior executives for details on its quarterly conference call Thursday, seeking more information on the range of the expected cost of the penalties, the timeframe in which the bank expects to resolve the issues and whether the inquiries prevent TD from being able acquire companies in the U.S.

TD chief executive officer Bharat Masrani said that he could not comment on regulatory matters, but that the bank will update shareholders once it knows how much the penalties will cost.

“We are working hard to enhance our programs,” Mr. Masrani said on the call.

During TD’s investor day in June, the CEO said there are rules that prevent the lender from answering questions about the issues that derailed the deal.

“The issue we are dealing with has nothing to do with our good-faith dealings with customers,” Mr. Masrani said at the time. “We are working with our regulators to put this matter behind us and I’m confident that in time, we will.”

The issues were not disclosed in its results for the second quarter, which ended Apr. 30 – before the deal was terminated. At the time, TD said that the loss of the First Horizon takeover would cause the lender to miss its target range for growth in earnings per share over the medium term of 7 per cent to 10 per cent.

Walking away from the deal left TD with a bevy of excess capital, as Canada’s banking regulator has been hiking minimum capital levels higher. But the issues raised questions about TD’s ability to continue its U.S. growth strategy as its rivals are expanding their operations.

Bank of Montreal completed its $17.1-billion acquisition of California-based Bank of the West earlier this year after regulatory approvals delayed the deal. Royal Bank of Canada is scooping up HSBC Bank Canada for $13.5-billion, pending regulatory approvals.

TD reported reported lower third-quarter profit Thursday that missed analysts’ expectations, as higher costs and provisions for potentially bad loans dragged on earnings.