Bank investors' worry after Wells Fargo AML action: Who's next?

Michael Nagle/Bloomberg

A new enforcement action over Wells Fargo's anti-money-laundering guardrails has investors worried about whether other banks will be next.

The regulators' action on Thursday against Wells Fargo didn't include fines and lacked some of the teeth of most enforcement actions. But analysts worry Wells won't be the only bank facing scrutiny from the U.S. government, whose regulators are more closely eyeing whether the industry is doing enough to prevent money laundering.

And it comes months after severe lapses in those protections hobbled Canada's TD Bank, whose vast U.S. branch footprint reportedly proved easy for drug traffickers to exploit as they sought to launder cash. The bank may have to pay some $3 billion in fines, and its plans for a U.S. expansion were shelved.

Lawyers, analysts and consultants expect more penalties against banks, from small community banks to larger institutions. But which companies will be subject to those penalties remains unclear, as does whether regulators will merely scold them or more forcefully crack down against worse offenders.

"There is an uneasiness," said Ed MIlls, a policy analyst at the firm Raymond James. "There is always an expectation that, when you see a regulatory action with one large bank, that usually forces an examination of other similar-sized institutions."

Bank investors are "trying to wrap their heads around the level of severity," said Scott Siefers, an analyst at Piper Sandler who covers Wells Fargo and other larger banks.

"At this point, I would say no one really knows," Siefers said. "It's just out there as a discussion point and a concern."

The Office of the Comptroller of the Currency, which flagged deficiencies at Wells Fargo in Thursday's enforcement action, declined to comment further.

If banks are in for a new round of crackdowns, observers point to the series of AML-related punishments that regulators placed on them about a decade ago. U.S. regulators clamped down on London-based HSBC, JPMorgan Chase, Citigroup and several other banks at the time.

For its part, Wells Fargo got hit with an AML consent order from the OCC in 2015 and was finally released from it in January 2021.

Fixing the problems the OCC flagged was an early coup in CEO Charlie Scharf's efforts to improve Wells Fargo's standing with regulators. Though the new enforcement action is a setback, analysts said it's merely a written agreement and doesn't carry the same legal weight as the 2015 order from the OCC.

The industry's overhauls took years, but analysts and consultants say the earlier crackdowns forced a massive improvement in money-laundering protections. Banks hired new teams, built data systems and put better safeguards in place for catching and reporting suspicious activity.

The problem is that multinational criminal rings innovated too, finding new ways to sneak past bank safeguards. The war in Ukraine has also escalated the risk that banks may be running afoul of U.S. sanctions against Russian individuals and companies.

Banks are throwing a "ton of money at these problems," said Sarah Beth Felix, a bank AML consultant and CEO of Palmera Consulting. But they still struggle to find the right talent and keep up with an always-evolving set of threats, she said.

"If you don't know what your threats are, then you can't really find all of the suspicious activity that's related to your bank, no matter how big or how small," Felix said.

Adding to the challenge is that government agencies also struggle to define what effective prevention looks like, she said, noting the frequent yet unfruitful chatter of the need to move beyond "checkbox exercises."

"No one ever says the next part, which is: then what do we look for? I think that's what we're seeing in this Wells Fargo order," Felix said.

The order requires the bank to boost training for front-line employees and back-room officials who act as extra layers of defense, and it requires improvements in its databases. It also requires that Wells Fargo temporarily get formal non-objections from OCC officials before they expand into certain products and markets that present higher risks of violating AML or sanctions rules.

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The restrictions pale in comparison to the asset cap that Wells Fargo has been operating under since 2018, and they're also tamer than regulators' directives during the last AML crackdown. Regulators prevented some banks with AML issues from merging, temporarily weighing on their ambitious growth plans.

AML issues were once again reportedly to blame in TD's failed merger with Tennessee-based First Horizon, with the Wall Street Journal reporting that AML concerns with TD helped kill the $13.4 billion deal.

While many hoped AML issues were in the past, TD's problems may have put it back in focus for regulators, said Edward Jones analyst Kyle Sanders.

"If the regulators find something at one company, that'll trigger an industrywide sweep," Sanders said.