The Zhitong Finance App learned that Bank of America (BAC.US), one of Wall Street's major financial giants, was fined US$1.21 billion by US regulators for extensive flaws in identifying potential money laundering and other illegal activities. The bank said that this major penalty will drag down profits in the third quarter.
On the eve of the earnings report, they were heavily penalized. Bank of America's profit data and repurchases can be described as facing a double test. Bank of America (Bank of America) was fined about US$1.21 billion on October 13 due to anti-money laundering and sanctions compliance flaws. Regulators say it missed reporting suspicious transactions of more than $5 billion. The company confirmed that in the third quarter, $1.2 billion of non-taxable deductible expenses will be included, earnings per share will be reduced by about $0.17, and stock prices will fall 2.7% after the market. The full quarterly report will be released on October 14 at around 7 p.m. Beijing time. Currently, early disclosure is the impact of the penalty.
More importantly, this type of major fine directly reduces profits and retained capital. Subsequent historical transaction backtracking, system rectification, and independent review may also continue to raise costs, extending the impact of this compliance storm to future profits and capital allocations. As a result, market concerns are shifting from a one-time loss to whether Bank of America can maintain a quarterly stock repurchase rhythm of about 6 billion US dollars while completing the rectification.
Earlier, management predicted that investment bank fees fell by about 10% to 20% year on year in the third quarter, and transaction revenue remained roughly flat rather than growing as expected by analysts, which means that the current compliance shock may have slightly compounded revenue pressure on some businesses.
The US Treasury Department said that this is the third largest fine in the department's history because the Bank of America did not report more than 5 billion US dollars of suspicious activity to the government, of which 1 billion US dollars involved national security and other priority illegal financial risks.
Treasury Secretary Scott Bessent said in a statement: “Financial institutions are on the front line of protecting our economy and national security. When a bank of this size fails to meet anti-money laundering and sanctions obligations, the consequences go far beyond its own scope, exposing the entire US financial system to significant illegal financial risks.”
According to the Treasury Department, the Bank of America “prioritizes revenue” when building a compliance system and relies too much on inquiries from external parties such as law enforcement agencies and other financial institutions rather than its own internal controls.
The consent order requires Bank of America to hire an independent third party to review historical transactions, identify suspicious activity undetected at the time, and report it to the US Financial Crimes Enforcement Network (FinCEN).
A Bank of America spokesperson said in a statement: “Compliance work to prevent financial crime is very important, and we have a responsibility to do it well. We've invested billions of dollars in technology construction and deployed thousands of employees to fight financial crime. The team has made significant progress in addressing issues raised by regulators and is committed to completing the work required.”
The spokesperson added that the third-quarter results released on Wednesday will include $1.2 billion in non-taxable deductions, reducing quarterly net earnings per share by about 17 cents.
Analysts expect adjusted earnings per share of $1.10 per share, based on LSEG's aggregated average expectations, but this figure does not include one-time items such as fines.
Bank of America's stock price closed down 1.1% on the same day and fell 2.7% after the market due to the third-largest fine in history impacting bullish market expectations and basic prospects.
UBS analyst Erica Najarian said in the report that the penalties may further damage investor sentiment and raise concerns about rising fees and whether Bank of America can maintain a quarterly share repurchase scale of about 6 billion US dollars.
Given that the results will be released on Wednesday, she said, “We think the stock is likely to be underperforming when it opens.”
She pointed out that there was no upper limit on the size of assets this time — such regulatory penalties would limit the scale of bank expansion.
Regulators say the compliance system is “flawed and inefficient”
As part of this penalty, the US Monetary Commission (OCC) imposed a civil fine of 750 million US dollars on the Bank of America, the highest in the institution's history. The reason is that Bank of America has failed to address the flaws in its anti-money laundering system. These issues have been pointed out in the regulatory agency's 2024 Cessation of Illegal Conduct Order.
The regulator said Bank of America's compliance system was “flawed and ineffective,” and its transaction monitoring system delayed submission of suspicious activity reports involving multi-billion dollar transactions.
Additionally, Bank of America paid $11.6 million in fines to the US Treasury's Office of Foreign Assets Control (OFAC), involving more than 400 suspected violations of various sanctions regulations. The Treasury Department said that the Bank of America mishandled millions of dollar payments, in violation of sanctions against Russia, Iran and other countries.
A few days ago, American Express was also fined $350 million for similar anti-money laundering flaws.
Fines impact current profits, and rectification affects long-term capital returns
In terms of penalties, the $1.2 billion fine approved by FinCEN allows the deduction of the 750 million US dollars paid to the OCC, plus OFAC about 11.6 million US dollars, for a total of about 1.21 billion US dollars.
The core issue identified by the regulatory authorities is the long-term failure of monitoring, customer due diligence and reporting processes, and excessive reliance on external leads by banks. Transaction monitoring is only truly effective when early warning can be investigated and declarations formed in a timely manner; historical transaction traceability and independent review requirements mean that rectification will not end with payment.
Non-taxable pre-tax deductions mean that fines cannot be buffered by income tax deductions, directly depressing net profit and retained capital; follow-up personnel, technology, and review expenses may raise the cost base. If revenue growth does not cover the additional costs, operating leverage and repurchase space will be under pressure. UBS, a major international bank, is more concerned about whether quarterly repurchases of about $6 billion can continue. Currently, no repurchase cuts have been confirmed. There is no upper limit on asset size this time, and the room for growth has not been directly capped. Market tests mainly focus on cost control, rectification effects, and future return on capital prospects.