TSB books provision for potential legal action by the RBNZ over alleged non-compliance with anti-money laundering and countering the financing of terrorism requirements

By Gareth Vaughan

The Reserve Bank says it's "finalising enforcement action against TSB" over alleged non-compliance with the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act).

For its part TSB says it's "actively remediating" problems with its programme to comply with the AML/CFT Act that were identified by the Reserve Bank. TSB says civil legal proceedings could stem from discussions with its regulator, and it has made a provision to cover a potential liability.

Should the case go to court, it will be the first time the Reserve Bank has ever taken a bank to court. And nor has the regulator ever taken a bank director to court.

Interest.co.nz reported last December that TSB was working on its anti-money laundering programme after areas requiring improvement were identified. A dedicated programme of work was established to undertake remediation, TSB said at the time. This followed TSB copping a formal AML/CFT Act warning from the Reserve Bank nearly four years ago.

Now the bank has shed more light on the issue. In its annual report, out on Thursday, TSB says it's continuing to actively remediate the AML/CFT issues identified by the Reserve Bank and is providing regular updates to the regulator on its progress.

"Further to this, the Bank is now in constructive discussions with the Reserve Bank regarding the alleged breaches and the civil proceedings that may result from them. The Bank is fully co-operating with the Reserve Bank," TSB says.

"A provision in respect of a prospective liability has been made. Given the ongoing nature of the discussions with the Reserve Bank, further detail on this will be disclosed upon completion. The alleged breaches relate to the Bank’s obligations under its risk assessment and compliance programme. It is not alleged that any money laundering has occurred through the Bank."

Under the AML/CFT Act the maximum pecuniary penalty for a civil liability is $200,000 for an individual, and $2 million for a body corporate or partnership.

'Neither customers nor their money have been put at risk'

Interest.co.nz asked TSB a series of questions. These included; What the specific areas where improvement is needed and is being made are, what's the value of the provision TSB has booked for this issue, by when does TSB anticipate knowing whether the bank will face civil proceedings from the Reserve Bank, and how long have the AML/CFT programme issues been in existence, and when and how did TSB become aware of them?

In response a statement from a TSB spokeswoman, quoting chairman John Kelly and CEO Donna Cooper, says the AML/CFT issues relate to TSB's internal policies, procedures and controls. Neither customers nor their money have been put at risk, TSB says, reiterating that it's not alleged that any money laundering has occurred through TSB.

“TSB acknowledges that it has needed to address some areas of its AML/CFT compliance and confirms that a significant programme of work has been in place for some time to achieve this. Growing TSB’s risk maturity is the Bank’s number one priority and the Board has supported additional investment to enable that. We are treating the issue seriously and are committed to co-operating with the Reserve Bank to ensure we make significant improvements to address the issues,” says Kelly.

"TSB is involved in constructive discussions with the Reserve Bank on this issue and as a result, is not in a position to provide any further detail at this stage."

Reserve Bank 'finalising enforcement action against TSB'

Interest.co.nz also asked a Reserve Bank spokesman some questions. These included; What are the areas of concern with TSB's AML/CFT programme, how and when were these issues discovered, and how long has there been a problem? We also asked whether the Reserve Bank is taking legal action against TSB, and if so, what penalties it would be seeking.

The Reserve Bank spokesman notes the regulator issued a formal warning to TSB in November 2016 in relation to failures to review and update its risk assessment under section 59 of the AML/CFT Act.

"Following an on-site inspection in 2019, the Reserve Bank is currently finalising enforcement action against TSB for alleged compliance failures relating to its AML/CFT programme and risk assessment required under the AML/CFT Act 2009. The potential action relates to alleged compliance failures under the AML/CFT Act, rather than any concerns relating to the soundness of TSB," the Reserve Bank spokesman says.

In its 2016 formal warning the Reserve Bank said: "The Reserve Bank has reasonable grounds to believe that between 30 June 2013 and 9 June 2016, TSB Bank was not reviewing and keeping up to date its AML/CFT risk assessment as required under section 59 of the Act, despite being advised it was required to do so by the Reserve Bank following an on-site review in 2013. TSB Bank has accepted the Reserve Bank’s findings, and has taken immediate steps to review its risk assessment and amend any deficiencies, to ensure it meets the requirements of the Act."

Cooper, who took the reins at TSB in July 2018, says TSB is increasing its investment in resources and expertise "to advance the Bank’s maturity with reporting, control testing and assurance."

“This programme is our biggest priority. We are implementing effective solutions to address these issues, and will continually challenge ourselves to improve, so we keep delivering great outcomes for our customers and communities,” Cooper says.

Annual profit tumbles as impairments spike

Meanwhile, TSB's March year net profit after tax fell $14.2 million, or 32%, to $30.8 million from $45 million in the 2019 March year. The drop came primarily due to an increase in expected loan impairments due to the economic impacts of COVID-19. The bank's credit impairments surged $19.9 million year-on-year to $20.4 million.

Net operating income rose 2%, or $2.7 million, to $164.5 million. Operating expenses rose 8%, or $7.7 million, to $102.7 million. Net interest income was up $4.5 million, or 3%, to $142.6 million. TSB's gross loans increased $353.7 million, or 6%, to $6.1 billion. Deposits rose $3.27.5 million, or 0.5%, to $7.4 billion. Total assets rose $360.2 million, or 5%, to $8.179 billion.

TSB's return on equity dropped to 4.53% from 6.90%, and its common equity tier one capital ratio was slightly lower, year-on-year, at 14.32% versus 14.57%.

 Cooper says after a strong first half of the financial year, TSB was tracking for an annual result in line with 2019.

"However, an increase in expected loan impairments due to the economic impacts of COVID-19 have significantly impacted the full year result. Our operating environment has changed rapidly and significantly and has had a clear impact on the Bank’s financial performance. Having said that, TSB’s funding and liquidity positions remain strong and our capital levels are well above those required of us by our regulator," Cooper says.

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