Risk Headlines

TD Bank’s Systemic AML Failures - $450M Set Aside for Penalties - source wsj.com

Key Points:

The TD Bank money laundering scandal reveals significant failures in the bank's AML compliance program that enabled drug traffickers to exploit the bank to launder massive profits. This has exposed TD to severe legal and financial risks, disrupted its U.S. expansion plans, and will likely result in hefty penalties and reputational damage.

• TD Bank is under DOJ investigation for alleged ties to money laundering of fentanyl profits by Chinese crime groups

• Probe has already derailed TD's $13.4B acquisition of First Horizon due to regulators' AML concerns

• TD facing three other AML investigations in U.S., set aside $450M and expects more penalties

• TD's AML controls failed to detect criminals using the bank to launder hundreds of millions

The Bank’s risk culture and internal oversight requires immediate transformation, such compliance failures can directly imperil banks' core strategic objectives if left unchecked.

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JP Morgan and Bank of America Suffer $4.5 billion in Losses As ‘Unrecoverable Debt ‘ Soars - source dailyhodl.com

Key Points:

JPMorgan Chase and Bank of America reported $4.5 billion in unrecoverable debt losses in Q1, nearly double the previous year.  The significant rise in unrecoverable debt, particularly in credit card portfolios, suggests potential vulnerabilities for certain borrower segments and the importance of robust credit risk management practices.  Banks are tightening lending standards across most loan types.  Despite losses, JPMorgan Chase and Bank of America maintain strong balance sheets and profitability.

A.I. Risk / Technology Risk

What Is An AI Anyway? Mustafa Suleyman AI Leader - Ted Talk - source youtube.com

Key Points:

The rapid advancement of AI into digital companions will be transformative for individuals, organizations and society, presenting immense opportunities and complex risks that firms must navigate strategically.

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CFTC Commissioner Articulating Agenda for Regulating AI - source cftc.org

Key Points:

The CFTC is taking significant steps to develop AI guidance and regulation, including a Request for Comment, commissioner-led policy development, and the appointment of a chief AI officer. The CFTC will work toward a principles-based regulatory framework to assess AI risks and ensure responsible use. It will set heightened penalties for intentional misuse of AI technologies in fraud or market manipulation and create an interagency task force to evaluate and harmonize AI guidance, supervision, and regulation across financial markets. As the CFTC continues to develop its multi-faceted approach to AI guidance and regulation, it is crucial for firms to stay informed and actively engage with regulators.

Regulatory News - Fines, Losses, & Rules

SEC Charges Audit Firm With Massive Fraud - More Than 1,500 SEC Filings Impacted - source sec.gov

Key Points:

BF Borgers CPA firm was charged with massive fraud, fabricating audit documentation and workpapers, and failing to comply with PCAOB audit standards. BF Borgers CPA PC agreed to pay a $12 million civil penalty and accept permanent suspensions from appearing and practicing before the Commission as accountants, effective immediately.

This case represents a catastrophic failure in the audit process due to the unethical and fraudulent actions of the BF Borgers CPA firm. The widespread nature of the fraud, affecting over 1,500 SEC filings from Jan 2021-Jun 2023, raises concerns about the reliability of the firm's audited financials. Auditors serve as the third/fourth line of defense in the risk management framework; upholding audit integrity is paramount to ensure reliable financial and operational reporting. The SEC and the PCAOB are aggressively rooting out audit misconduct, and this should be a clear warning to all Audit Firms.

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CFTC Hires First Chief Artificial Intelligence Officer - source cftc.org

Key Points:

Dr. Ted Kaouk has been appointed as the first Chief Artificial Intelligence Officer at the Commodity Futures Trading Commission (CFTC); he has a rich background in data strategy and AI .  He will now lead the development of the agency's enterprise data and artificial intelligence strategy. This role aims to enhance the CFTC's capabilities in oversight, surveillance, and enforcement within the derivatives markets through advanced data analytics and AI.

Risk Data to Geek Out On

Public Company Accounting Oversight Board Spotlights On Root Cause Analysis - source pcaobus.com

Key Points:

The PCAOB emphasizes the critical role of thorough, multifaceted root cause analysis (RCA) in driving sustained improvements in audit quality. RCA done well has the potential to meaningfully reduce financial reporting risk for firms. However, the maturity and robustness of RCA varies widely across audit firms today. Many firms have significant room for improvement in this area, and their clients should factor this into auditor assessments and retention decisions. By digging deep to uncover the true drivers of negative quality events and designing targeted remedial actions, RCA can generate meaningful improvements that stick, not just band-aid fixes.

Moreover, the principles of RCA are not limited to the audit context alone. Similar RCA principles could also be adapted to drive enhancements in firms' internal risk management and control testing.

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Thank you for reading,

Naeem

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