After an incredible decade-long surge to launch its domestic operations into the top-tier of America’s “big banks” with respect to market capitalization, Toronto-Dominion (TD) Bank is currently reeling after a series of eye-opening revelations recently identified numerous anti-money laundering (AML) related shortcomings for the multinational financial services staple that have placed both its own customers, as well as the greater U.S. financial system, at risk.
Back in 2012, Canada-based TD Bank decided to make a significant investment into expanding their United States market with a series of acquisitions worth nearly $20 billion collectively. TD began its initial expansion in America’s lucrative northeastern market until building up enough momentum to expand into the mecca of finance, New York City. They were aggressive in their approach, with the purchases of high-value real estate in major metropolitan cities and in other key geographic locations leading to TD’s signature green being plastered all along America’s east coast. While quite bold initially, the concerted efforts taken by the bank’s executives and board ultimately paid off as they now hold over 1150 stores in the U.S. while raking in over $4 billion annually from their retail operations alone. Much like other major domestic financial institutions, key acquisitions have paved the way for the bank to build its American footprint. However, it is perhaps the one acquisition that did not take place that holds the greatest bearing for the firm today.
TD was on its way to becoming an even bigger player in the U.S. marketplace in 2022 powered by a rumored acquisition of Tennessee-based regional bank First Horizon Corporation (FHN) for a whopping $13.4 billion. As the deal transpired however, TD’s takeover was ultimately blocked by the U.S. Department of Justice amid an ongoing DOJ money laundering investigation into potentially-illicit activities taking place at TD’s American operations. While TD allegedly had knowledge of the investigation prior to initiating the acquisition, this information was reportedly not disclosed to First Horizon until much later in the process which created further headwinds. The DOJ’s failure to ultimately clear the Canadian lender due to serious concerns over how the bank handled suspicious transactions ultimately proved to be the catalyst for the collapse of the acquisition in May of 2023 – the largest such voided acquisition in American history. Unfortunately it appears that TD suffers from much of the same “big bank arrogance” that many of its counterparts in the American financial sector have succumbed to, prioritizing their bottom-line and continued growth over their regulatory duties and the protection of their clients. While details of the specific compliance-related shortcomings identified at the time had remained scarce, many have speculated that the eye-opening developments the firm announced earlier this year were the primary cause of the deal’s failure.
In May, Global Radar reported on TD’s announcement of a decision to set aside nearly a half-billion dollars to brace for potential regulatory penalties that were expected to be levied by multiple U.S. financial regulators, this after it was revealed that the bank had allegedly emerged as the institution of choice to launder funds tied to the international fentanyl trade. Following this announcement, TD’s Chief Executive Officer Bharat Masrani moved swiftly to fire more than a dozen company staff members believed to be directly correlated with the repeated failures to effectively monitor, detect, and report suspicious activities coming through their respective domains. This group included several chief officers tasked with overseeing the bank’s anti-money laundering division, along with others operating in the firm’s domestic branches who violated TD’s code of conduct.
While at the time the firm had set aside an estimated $450 million to cover their expected regulatory expenses, analysts expected that this aforementioned dollar total would ultimately not reflect the grand total of both financial and non-monetary penalties that the lender would face when these respective investigations were concluded, hinting at the true scope of the shortcomings in AML/CFT defenses for Canada’s second largest bank by market capitalization. Fast forward to August and the initial $450 million figure has grown substantially to the tune of $2.6 billion. All told, the ongoing DOJ probe in to TD Bank’s internal controls led to the discovery of the rampant and unimpeded abuse of the bank’s financial services by Chinese-backed crime groups and drug traffickers to launder the proceeds of a growing number of U.S. fentanyl sales. Federal agents monitoring TD’s New York and New Jersey operations ultimately discovered a paper trail leading from TD to multiple Chinese syndicates, as well as evidence that TD Bank employees were bribed to look the other way, allowing for the proceeds from the drug trade to be washed through the U.S. financial system. The current U.S. regulatory investigations into these illegal activities have revealed that the bank was used to launder at least $650 million from 2016 through 2021.1
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has long warned domestic financial institutions of the increasing threats posed by networks of Chinese money-laundering organizations. Chinese gangs and Mexican drug cartels have formed an unexpected partnership over recent years to help expand the respective reach of their destabilizing activities, laundering money and moving product into the United States. In these operations, Chinese operatives supply their Mexican counterparts with precursor chemicals in order to produce the illicit fentanyl that is ultimately sold to U.S. citizens, further spurring the opioid epidemic. To date these activities have proved quite successful for both parties, with American authorities and lawmakers each having a very difficult time trying to limit these exploits.
While bank representatives expect to resolve these matters by year end, the news of these rumored developments have ultimately sent company shares into a freefall and the financial ramifications on TD’s return on equity are expected to be felt for some time. At nearly $3 billion in collective penalties, the fines facing TD could prove to be amongst the largest ever for a Canadian lender, though many expect the non-monetary penalties facing the firm to be equally as severe. As part of a press conference last week in which they reported their first quarterly loss in over two decades, TD officials also announced the firm’s plans to sell part of its 12.3% stake in U.S. brokerage Charles Schwab to help offset the impact of the upcoming fines.1
“We recognize the seriousness of our U.S. AML program deficiencies and the work required to meet our obligations and responsibilities is of paramount importance,” the CEO, Bharat Masrani, added in a press release.2 There is an argument to be made that TD should have seen the writing on the wall and “recognized the seriousness” of these issues years ago. Instead of practicing proper due diligence and investing in their compliance program/personnel, TD decided to just wing it and ride their wave of success as long as they could. In the past, big banks could simply absorb the penalties as the cost of doing business while keeping compliance department costs down. TD is learning the hard way that this may no longer be the case. As if these failures were not already expensive enough, TD has now been forced to play catch up with mass hiring of regulatory compliance personnel in an effort to get regulators off their back and prove their culture has and will continue to change. If they had only placed a premium on performing their respective duties in regards to building up their personnel and anti-money laundering program alongside during their upward trend, they could have avoided this expensive mess altogether.
All told, the regulatory downfall of TD Bank is a case that needs to be studied – particularly by other banks. With over $3 billion in penalties so far and likely more to follow, this is a tale of what not to do when it comes to regulatory compliance. This case also highlights the importance of a quality Know-Your-Customer (KYC) and sanctions screening system for any modern financial institution hoping to prevent money laundering violations and subsequent compliance penalties. If customers are not properly vetted during the onboarding process, financial institutions will be held directly responsible for allowing criminals to use their services – which is now also translating onto personal liability for those involved. This is exactly what is happening to TD Bank. It is critical that financial service providers do everything within their power to avoid making negative headlines, and comprehensive screening solutions have proven to be the most effective means of identifying and eliminating possible threats.
Citations
- Balu, Nivedita, and Arasu Kannnagi Basil. “TD Bank Swings to Quarterly Loss after $2.6 Billion Hit Tied to US Probe | Reuters.” Reuters, Thomson Reuters, 22 Aug. 2024.
- Hollerith, David. “TD Bank’s Rough Year Just Got Even Rougher.” Yahoo! Finance, Yahoo!, 22 Aug. 2024.
