Stefanie Marotta Banking Reporter Globe and Mail
Published October 10, 2024Open this photo in gallery:
Surveillance footage included in the plea agreement between the U.S. Department of Justice and TD Bank shows a money launderer, Da Ying Sze, transacting at a New York branch on July 21, 2020 with $372,000 in cash – while the purported owner of the account is seated behind him.Supplied
Toronto-Dominion Bank has pleaded guilty to conspiracy to commit money laundering after a decade of shuffling funds for criminal organizations and ignoring warnings from employees, prompting a suite of rare and crippling penalties from U.S. regulators and law enforcement.
During a news conference Thursday afternoon, the U.S. Department of Justice and three top banking regulators in the U.S. unveiled a scathing indictment of Canada’s second-largest lender, painting a portrait of TD’s willing role in moving money for drug cartels and criminal organizations.
“TD Bank created an environment that allowed financial crime to flourish. By making its services convenient for criminals, it became one,” U.S. Department of Justice Attorney-General Merrick Garland said during the news conference in Washington.
TD is the first bank in the U.S. to plead guilty to conspiracy to commit money laundering. It is also the largest bank in U.S. history to plead guilty to failing to maintain an anti-money-laundering (AML) program that complies with federal regulations.
Top U.S. bank regulators and the Department of Justice imposed more than US$3-billion in fines and a host of non-monetary penalties over gaps in TD’s anti-money-laundering program between January, 2014, and October, 2023 – spanning the duration of chief executive officer Bharat Masrani’s tenure.
Once praised for its perseverance and success in expanding into the highly competitive U.S. market, TD has struggled with investor confidence since the money-laundering issues first surfaced more than a year ago. With Mr. Masrani’s legacy marred by the revelations and the board of directors under scrutiny for their failure to prevent the criminal activity, the fallout will continue to carve deep scars into the bank’s future operations and share price.
The anti-money laundering gaps first surfaced in light of TD’s cancelled US$13.4-billion takeover of Tennessee-based First Horizon Corp., dominating headlines, quarterly earnings conference calls and investor meetings. On Thursday, the Department of Justice and regulators revealed in detail how the U.S.’s tenth biggest lender became mired in money laundering schemes and drug cartel activity.Open this photo in gallery:
“By making its services convenient for criminals, TD Bank became one,” U.S. Attorney General Merrick B. Garland said Thursday.Alex Lupul/The Canadian Press
TD allowed three money-laundering networks to shuffle more than US$670-million through bank accounts, and at least one of those schemes involved five of the lender’s employees. The Justice Department has also prosecuted two dozen individuals that were involved in money laundering, and has charged two TD employees for their involvement in one of these schemes.
But the scope of the employees who knew about and had flagged the anti-money laundering failures was much wider, according to internal messages that suggest the problems at the bank were well-known to employees.
“You guys really need to shut this down LOL,” a TD branch manager in the U.S. e-mailed another manager in August, 2020. The employee was referring to Da Ying Sze, known as David, who pleaded guilty in 2022 to laundering hundreds of millions of dollars in cash – much of which was moved through TD accounts.
In a separate case, five TD employees conspired with criminal organizations to create and maintain accounts that were used to launder US$39-million, which included drug proceeds, to Colombia.
Prosecutors said TD employees joked about the bank’s role in money laundering.
On TD’s internal instant messaging platform, a compliance employee asked a colleague why “all the really awful ones bank here lol.”
“Because … we are convenient,” the employee replied, referencing the bank’s U.S. slogan, “America’s Most Convenient Bank.”
The Department of Justice did not identify the employees.
Meanwhile, over the past 11 years, regulators, a TD internal audit, and third-party consultants repeatedly warned executives about issues with the bank’s transaction monitoring program, according to court documents.
The bank had previously set aside $4-billion to cover financial penalties from three different regulators and the U.S. Department of Justice, but analysts and investors had been concerned about the long-term damages from non-monetary penalties, including a cap on the bank’s asset growth.
“TD Bank chose profits over compliance, in order to keep its costs down,” Mr. Garland said. “That decision is now costing the bank billions of dollars in criminal and civil penalties.”U.S. Attorney General Merrick B. Garland announced Thursday that TD Bank will pay approximately US$3-billion in a historic settlement with U.S. authorities who said Thursday that the financial institution’s lax practices allowed significant money laundering over multiple years.
TD faces major restructuring demands that will reshape its business in the U.S., its largest growth market.
The Office of the Comptroller of Currency’s non-monetary penalties include an asset cap, restrictions on opening branches and launching new products without approval, a requirement for the board to have dividend payments certified, a third-party assessment of the bank’s compliance and AML program, comprehensive corrective action and a suspicious activity review.
The cap on assets is one of the strictest penalties. It limits a bank’s ability to expand its balance sheet, a key factor in how lenders make money. It applied to the bank’s U.S. retail banking division only, which means that its capital markets unit TD Securities can continue to expand.
An asset cap, which is rarely applied by regulators, was considered a worst-case scenario and an unlikely penalty by analysts and investors. U.S. regulators imposed a cap on Wells Fargo & Co. in 2018 limiting its balance sheet to US$1.95-trillion in assets, which was seen as a severe penalty.
The consent order also prohibits the bank from opening new branches or new business lines without approval. During TD’s investor day last year, it said that it planned to open 150 U.S. retail branches by 2027 after the regulatory investigation derailed its US$13.4-billion acquisition of Tennessee-based First Horizon Corp.
“The bank’s blatant risk management failures attracted illicit actors and are egregious and unacceptable,” OCC acting comptroller of the currency Michael J. Hsu said in a statement.
The Federal Reserve Board is requiring TD to relocate its U.S. AML and compliance program to the country to be overseen by U.S. regulators. It must also ensure that adequate resources are spent on fixing the AML issues before paying any dividends or making capital distributions, and conduct an independent review of the bank’s board of directors and management.
The Financial Crimes Enforcement Network (FinCEN) will oversee an independent review of TD’s AML program, and conduct an accountability review to assess employee involvement in the failure to flag issues related to money laundering.
The long list of requirements and restrictions is prompting TD to make dramatic pivots in its U.S. business. To mitigate the asset cap’s hit to the bank’s future growth, TD plans to reduce its more niche businesses that have lower return on investment, including its commercial auto lending portfolio and selling portions of its residential jumbo mortgage book. It will also rejig its U.S. investment portfolio.
Over the past year, the bank has been investing in its AML and compliance programs by hiring 40 new leaders and more than 700 AML specialists from financial institutions, consulting firms and regulatory agencies. It has also implemented new standards, processes and controls, and technology and data platforms to rebuild its risk program.
“We’ve taken full responsibility for these significant failures, and I’ve taken responsibility as this happened on my watch as CEO,” Mr. Masrani said during a conference call Thursday.
In response to an analyst question about whether the bank expects any action from Canadian regulators, Mr. Masrani said that the issue is specific to U.S. authorities.
Also Thursday, Canada’s banking regulator thanked U.S. authorities for engagement on the matter.
“The information disclosed by Toronto-Dominion Bank’s U.S. regulators is serious,” Office of the Superintendent of Financial Institutions head Peter Routledge said in a statement.
With a report from Globe and Mail reporter Tim Kiladze
