19 November 2006

RBC Back on Prowl in US Following Probes

The Globe and Mail, Andrew Willis, 19 November 2006

Royal Bank of Canada expects to close its first U.S. retail bank purchase in three years with next month's U$456-million acquisition of Atlanta-based Flag Financial Corp.

The long hiatus from deal-making in the United States reflects the bank's move to improve operations at its 270-branch RBC Centura division. But the delay can also be traced to the bank's brush with tough new anti-money laundering provisions contained in the USA Patriot Act.

The past year saw RBC Centura, based in Raleigh, face a probe from North Carolina's Commissioner of Banks and the U.S. Federal Reserve Board.

The two regulators did a joint “informal investigation” into Centura's compliance with the Patriot Act, the Bank Secrecy Act and “other anti-money laundering statutes.”

In a note buried in its annual information form last year, Royal Bank explained, “These compliance issues ... may have an impact on our operations in the United States with respect to expansion and the powers otherwise exercisable as a financial holding company.”

In simple terms, regulators wouldn't let RBC Centura buy more US. banks until it sorted out the compliance problems. A spokeswoman acknowledged the bank had been working with regulators, but she said the decision to stop acquisitions was driven more by the need to improve profitability at RBC Centura than compliance issues.

RBC Centura's acquisition of 17-branch Flag Financial, which was approved by regulators last week, marks a return to U.S. retail expansion for Canada's second-largest bank. “RBC Centura is a well-run firm that has taken exemplary steps to deal with regulatory concerns,” Joseph Smith, commissioner of banks for North Carolina, said in an interview. The state has 45 staff keeping an eye on 90 banking companies, along with savings and loans and other financial institutions.

“RBC Centura has hired a number of strong people to deal with regulatory and supervisory issues,” said Mr. Smith, who recently spoke at a conference on the USA Patriot Act co-sponsored by RBC Centura. He declined to comment on specifics of the recent investigation.

Like many U.S. regional banks, RBC Centura was built rapidly through consolidation of a number of small community banks. Analysts and sources familiar with U.S. banking said these newly acquired branches use different technology and internal audit systems, which leads to internal compliance problems. Many of these banks ran into regulatory problems following passage of the Patriot Act shortly after the Sept. 11 terrorist attacks.

The Patriot Act raised the compliance threshold by strengthening the Bank Secrecy Act, requiring financial institutions, including banks, creditors and even casinos, to inform the U.S. Treasury Department of transactions they find to be out of the ordinary.

The Patriot Act has caused enormous headaches in U.S. financial circles. In one incident, a Florida church had its chequing privileges shut down because a nun with signing authority on the account didn't have an identification card on file.

While RBC Centura solved its regulatory problems by beefing up staff and systems, other banks have been sanctioned. AmSouth Bank of Birmingham, Ala., recently paid a $10-million fine to state and federal regulators over its violations of the Bank Secrecy Act.

RBC Centura's purchase of Flag Financial is expected to close on Dec. 8. This month saw RBC Centura offer to buy 39 branches in Alabama formerly owned by AmSouth. No price was disclosed on that deal.