US regulator orders Wells Fargo to overhaul its efforts to combat illicit funds

By Niket Nishant, Nupur Anand and Chris Prentice

(Reuters) -Wells Fargo shares slid on Thursday after a U.S. banking regulator found its safeguards against money laundering and other illegal transactions were too lax and restricted its ability to expand in risky businesses.

The California-based bank, which has been under intense scrutiny since a 2016 fake accounts scandal, saw its stock close down 4%, paring a 6.5% loss after the Office of the Comptroller of the Currency announced the action earlier in the day.

The regulator said Wells Fargo was working to fix the problems and did not fine the bank. But it imposed a requirement that Wells Fargo seek permission before expanding into certain medium or high-risk areas, without naming them.

"We have been working to address a substantial portion of what's required in the formal agreement, and we are committed to completing the work with the same sense of urgency as our other regulatory commitments," the bank said in a statement .

The regulator said the lender's controls were deficient in identifying and preventing money laundering and sanctions evasion including measures to learn about customers and flag potentially suspicious transactions. Neither the OCC nor the lender gave details.

The bank was ordered to strengthen these along with other internal controls, due diligence procedures and currency transaction reporting.

Federal law requires financial institutions to monitor for suspicious activity in an effort to prevent illicit funds from flowing through the U.S.

"The bank has been going through a clean-up process for years," said Chris Marinac, director of research at Janney Montgomery Scott. "The latest move by the OCC shows that it is still very much under investigation and I would expect that to continue."

The fake accounts scandal in 2016 prompted heightened scrutiny and led to billions of dollars in penalties and several shareholder lawsuits against the bank.

CEO Charlie Scharf has sought to improve compliance since he took over in 2019. But the bank continues to operate under a Federal Reserve restriction that prevents it from increasing assets beyond $1.95 trillion until regulators deem it has fixed its problems.

"There was a false optimism earlier this year... that the asset cap would be removed soon, but these latest developments show that the bank still has work to do," Marinac added.

Brian Mulberry, portfolio manager at Zacks Investment Management, which owns Wells Fargo stock, said the news was a hit to Wells Fargo's reputation. "It could be a further setback when it comes to removing the asset cap as these developments show that they are still under a lot of scrutiny," he said.

However, RBC Capital Markets analyst Gerard Cassidy wrote in a note that, despite the negative aspects of Thursday's news, "We do not believe the agreement will impact the prospects for lifting the asset cap,” which was directed at consumer banking problems not money laundering.

(Reporting by Niket Nishant in Bengaluru and Chris Prentice and Nupur Anand in New York; Editing by Krishna Chandra Eluri, Shinjini Ganguli, Lananh Nguyen and Cynthia Osterman)