Op risk data: TD Bank takes US reg pill in purported drug-related AML fails

Toronto-Dominion Bank made April’s largest op risk loss with an initial provision of US$450 million against investigations by US regulators over failures to detect alleged drug-money laundering – a loss some reports suggest could grow with the investigations.

The provision relates to anticipated penalties from investigations by the US Department of Justice and a further three unnamed US regulators into TD’s Bank Secrecy Act and anti-money laundering (AML) programme.

The Canadian bank first disclosed it was subject to regulatory investigations into its BSA/AML compliance programme in August 2023. This month, it announced the new provision, and acknowledged that its AML programme was unable to effectively monitor, detect, report and respond to suspicious activity, but that the bank was working to remedy these issues.

April’s second-largest loss comes from Commonwealth Financial Network, which was ordered to pay $93.3 million by the US Securities and Exchange Commission (SEC) for its failure to disclose cheaper investment options to customers between July 2014 and December 2018.

The firm had a revenue-sharing agreement with its clearing broker that gave it a financial incentive to choose more expensive investments for its clients. It failed to fully disclose this conflict of interest to clients, and did not inform them of less expensive investment alternatives. It also had inadequate policies and procedures to prevent these disclosure failures – both internally to compliance staff and externally to clients.

Commonwealth gained approximately $137.5 million in revenue-sharing payments over this time, and was ordered to disgorge any payments over the amount it would have received, had it invested in appropriate lower-cost investment alternatives. It was also ordered to pay prejudgement interest and a civil penalty.

In third place, Zurich Insurance Group was ordered to pay a total of $80.3 million to three former employees who claimed that they had been wrongfully terminated over time theft allegations.

The employees worked in Zurich’s workers’ compensation division and, from January 2015, their manager at the time used ‘off-the-record’ paid time off (PTO) as an incentive for high-performing employees. This was not put into the official PTO system so workers’ official vacation allowance would not decrease. However, when the manager was dismissed in October 2017, his replacement prompted an internal investigation into PTO usage. In December 2017, the three employees were fired for alleged time theft before they had the opportunity to submit their responses to the lead investigator.

Red Rock Secured made the month’s fourth-largest loss when a US court ordered it to pay $76.4 million to the SEC and the Commodity Futures Trading Commission over an extortionate coin investment scheme that targeted retirement accounts.

From at least January 2017 to June 2022, Red Rock offered to sell securities held in investors’ savings and retirement accounts and reinvest them in gold and silver coins at falsely inflated prices. Red Rock used scare tactics in its marketing to investors, telling clients that their existing securities holdings faced imminent and serious losses, and that the only way to protect against these was by converting their securities into the coins, which it sold at disproportionate markups. Red Rock’s chief executive and two of its senior account executives were also fined for their role in the scheme.

Rounding out April’s top five losses is Senvest Management, which was fined $6.5 million by the SEC over widespread record-keeping failures and staff use of unauthorised messaging applications as part of the regulator’s ever-widening WhatsApp probe.

Senvest employees had communicated about business matters ‘off-channel’ via private messages and on other unapproved messaging platforms from January 2019 to December 2021. Despite internal and regulatory requirements, the firm did not preserve records of these communications. Failures involved employees at various levels of authority, and Senvest staff exchanged thousands of messages relating to the firm’s business with other employees, with fund investors and with other financial industry participants. The SEC also noted that, between January 2019 and January 2021, Senvest failed to detect in a timely manner certain employees trading in securities, including those owned by Senvest-managed funds, in personal accounts without pre-clearance.

In focus: 14-year post-buyout pain in Deutsche’s Postbank arm

When Deutsche Bank issued its 2010 Postbank takeover offer – completed in 2012 – few could have anticipated that, 14 years later, the acquisition would still be giving it headaches. Yet, to date, it has paid and provisioned for almost €1.35 billion ($1.45 billion) against litigation arising from the offer.

In September 2008, Deutsche acquired almost 30% of Postbank – just under the threshold that would have forced the acquiring bank to make a formal takeover offer to shareholders – at €57.25 per share.

But the 2008 financial crisis saw the Postbank share price tumble, and Deutsche delayed its acquisition plans, instead gradually increasing its stake in Postbank over the next couple of years. Then, on October 7, 2010, Deutsche made a voluntary takeover offer of €25 per Postbank share, which was accepted for 48.2 million shares. By 2012, the acquiring bank had paid over €6 billion for around 94% of its target.

In November 2010 – soon after the voluntary offer was made – a former Postbank shareholder sued Deutsche Bank, alleging that, despite the bank’s minority stake, agreements between the two banks gave it de facto control over Postbank from its September 2008 share purchase, and that the bank should therefore have made a takeover offer at that point. Multiple lawsuits ensued, claiming that Deutsche should have offered shareholders the share price of €57.25 from September 2008.

In 2017, a regional court in Cologne ruled in favour of a shareholder class action, ordering Deutsche to pay class members arrears of €32.25 per share, which was the difference between the two contested share prices. At that point, the bank had to pay a total of €48 million to the group – but if all shareholders were to be awarded the same amount, the costs would increase to billions of euros.

Despite repeated and emphatic opposition from Deutsche Bank, litigation of the case is ongoing. The outlook for the bank also took a turn for the worse when, in April 2024, a regional court in Cologne indicated it might find valid elements of the shareholders’ claims. While Deutsche expressed its surprise at the court’s assessment, and disputed the interpretations, it simultaneously announced a provision of €1.3 billion to be made in Q2 2024 for the litigation. The amount reflects the full amount of the claims, including cumulative interest, according to the bank.

The impact of this provision would be significant – indeed, the bank has said it would impact its Q2 2024 and full-year results, and its Common Equity Tier 1 capital ratio would take a hit of 20 basis points, coming in at 13.25% as of March 31, 2024. Three days after the announcement, its shares were down 9%.

The litigation is just one of numerous headaches that the Postbank takeover is causing Deutsche. While the two banks merged in 2018, it took until mid-2023 to complete the technology integration of the two banks. Teething problems with this process prompted German financial regulator Bafin to issue a warning in September 2023 about the volume of complaints it was receiving from Postbank customers. Some were locked out of their accounts for weeks. Other named issues included: disruptions to online and mobile banking; limited availability of telephone customer services long processing times; issues with account opening and closing, management and settlement; and with the repayment of savings deposits. Bafin later sent a special representative to monitor how Deutsche was remediating these issues. As a result, some of the bank’s top managers had bonus cuts.

The problematic integration had other knock-on effects. Trying to reduce costs during the remediation process resulted in Postbank employees going on strike and demanding a 15.5% pay rise in a weeks-long pay dispute. At least three failed rounds of negotiations later, it was reported on May 2, 2024, that Deutsche had reached a pay deal with the workers’ unions, giving employees an 11.5% two-step pay rise and promising to rule out job redundancies until December 2027.

Editing by Louise Marshall

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