The Decibel - Fallout from the TD Bank money laundering scandal

Episode Date: January 22, 2025

It’s been over three months since the U.S. Department of Justice announced that TD Bank had pleaded guilty to conspiracy to commit money laundering. After paying a US$3-billion fine, Canada’s second largest bank is now shaking up its senior-most ranks of leadership.Stefanie Marotta is The Globe and Mail’s banking reporter. She explains what prompted the early departure of TD’s CEO, how this money laundering scandal could affect TD customers and what the ripple effects might be for the entire Canadian banking industry.Questions? Comments? Ideas? Email us at [e-mail]

So Stephanie, you're on the banking beat and you've been covering the anti-money laundering scandal at TD Bank for many months now. How quickly do you think you can recap it? Oh boy. I used to run the 100 meter hurdle dash, so let's see if I can outpace myself here. Alright, let's do it again. Alright, challenge is on. In October, the US Department of Justice and banking regulators said that TD pled

guilty to conspiracy to commit money laundering. That's major. This was one of the wildest press conferences I've ever covered in my career. TD Bank created an environment that allowed financial crime to flourish. By making its services convenient for criminals, it became one. Today, TD Bank became the largest bank in US history to plead guilty to Bank Secrecy Act program failures and the first bank in history to plead guilty to conspiracy to commit money laundering. The DOJ and regulators

handed down a suite of severe penalties on the bank that are going to have a long-standing impact on its future performance. And so how did US investigators know that this was like a systemic issue at TD, like not just a few bad actors, but this actually went further? So the DOJ's lead prosecutor read internal emails from employees discussing the AML gaps. These employee conversations show that people inside the bank were aware that these issues were

going on for as long as they were. So I'll read you some of these messages. In one case, a compliance employee asked a colleague why all the really bad ones bank here lol. The other employee replied, because we're convenient. The other employee was referring to the bank's US slogan, America's most convenient bank. In another example, a TD branch manager emailed another manager saying,

you guys really need to shut this down, LOL. The employee was referring to a man in the US who pled guilty in 2022 to laundering hundreds of millions of dollars in cash, much of which was moved through TD accounts. Wow, okay. So there's like some, it sounds like there's a bit of a, not exactly a paper trail, but

we can look at these emails and then see kind of the fact that this was going on and people knew about it. Mm-hmm, exactly. Today on the show, The Globe's banking reporter Stephanie Morata is here to explain why TD Bank's anti-money laundering problems are back in the news, and how fallout from this scandal could affect its customers, its shareholders, and possibly the Canadian banking system more broadly. I'm Manika Raman-Wilms and this is The Decibel from The Globe and Mail.

Stephanie, welcome back to the show. Thanks for having me. So, TD Bank made some major announcements last Friday, Friday, January 17th. And note the plural there. That's announcements plural. But Stephanie, what was the biggest news from the day? Well these changes at TD are unprecedented. CEO Bart Masrani is stepping down almost three months earlier than expected.

And board chair Alan McGibbon is leaving his role less than a year into the job. Okay so that this sounds like a big move here but what is exactly is the reasoning behind the departure of these two men like is it just symbolic because they're kind of at the top there or did they actually play a part in the anti money laundering issues? Well this is a really interesting question because Barrett Masrani used to be the head of risk and the head of the bank's US Division. So if anyone had the experience and expertise to prevent this from happening it was him. In the case of Alan, before he became board chair, he chaired the audit committee which is responsible for

overseeing the bank's compliance and AML procedures. So he was the person on the board tasked with catching and stopping these gaps. Okay, so that's interesting context there, Stephanie. Let's go back to the idea of there were a number of announcements last Friday. So beyond these leadership shakeups, what else did TD announce? Well, at the board level, they removed five long-standing board members and said that they were stepping down. They also added four new members to the team, two of which have more US and compliance experience.

TD also slashed pay for more than 40 executives, some of which are former staff. In the case of Barrett, his pay was cut 89%. So in 2024, he'll get paid $1.5 million, and that's down from more than $13 million in 2023. Wow, that's very significant for the CEO then. Huge pay cut. TD also reduced the amount of time

that a board director can sit on the board. So the term duration is 10 years, but a board member can then apply for an extension. So previously, a board member could apply for a five-year extension. Now they can only apply for a two-year extension. So TD is trying to shrink the amount of time that one person can sit on the board.

Okay. How unusual, would you say, is all of this? Like, I guess going back to the leadership shakeups, which seem to be the most significant things here, is it normal for a bank to have both the CEO and the chair of the board leave at the exact same time? That's rare, and the way that this is happening is rare. So Barrett was initially supposed to stick around

until the fall to help incoming CEO Raymond Chun get up to speed. But investor pressure pushed TD to accelerate the CEO transition and put Ray in a spot where he can now take lead of the ship and move things forward. On Allen, bank chairs typically stick around for extensive 10 years. Prior to Allen, Brian Levitt chaired TD's board

for 15 years. So it speaks volumes that TD had to remove its most senior leaders in this way. Huh. So as you've said, Stephanie, this is unprecedented. What do these changes signal to you? For a long time, TD has been trying to reassure people that the issue is manageable.

But since the DOJ's revelations in October, shareholders and critics have been pushing for sweeping changes. So TD's trying to signal to regulators, investors, and its customers that it is holding leaders accountable for the pain that its AML failures have caused. But TD's announcement really only goes so far. For example, Barrett is retiring.

He was not fired. There's a big difference there. Canadian banking culture is very different from that in the US or other markets. It's rare to see a Canadian bank executive fall on the sword for issues that happened under their leadership. And so when you say there's a big difference between retiring

and being fired, what exactly would be the difference there? When an executive is fired, it's a way of saying they're being held accountable for this directly. This happened under their leadership. Typically in Canadian banks, people are allowed to just retire and kind of set off into the sunset. This also has some compensation components to it as well, where if you're fired, you're

not entitled to certain compensations. I want to come back to something you mentioned earlier that investor pressure was behind this leadership change. So for people who are unfamiliar with how this relationship between banks and their investors work could you just explain I guess how generally, so not necessarily in this case, but generally how people who own a share of the bank can actually express their concerns to the bank? That's a great question and this is very obfuscated from most people's view. All publicly traded companies are required to disclose information to their investors. This happens through a variety of different forums. So you have quarterly earnings reports

and conference calls with analysts, you have annual shareholder meetings and periodic communications with investor groups. Now I'm talking larger wealth managers, not so much your average everyday retail investor sending in an email to the bank. Now, over the past year, TD's shareholders have used these opportunities to put pressure on the bank to act more quickly. Okay. And I guess I wonder about timing a little bit here too, Stephanie. So if the bank admitted guilt in October of last year, like you mentioned off the top,

why didn't TD make these leadership changes earlier? This is a question that an analyst posed to TD in a recent quarterly conference call. The US investigation had been underway for more than a year. So the analyst asked, you've been aware of this for some time, why weren't you using that time to put together a clear strategic overhaul plan to present to investors and help us understand

what your future growth potential looks like? For the bank's part, they were locked in discussions with US regulators, and they were waiting to see just how punitive the penalties would be. But the bulk of the frustration lies in how TD has communicated about these issues with investors and the public largely. Investors and journalists have had a hard time getting answers

from the bank. And do we know why that is? Why is it so difficult to get answers? Well in part it's a regulatory investigation and the bank's not at liberty to talk about an ongoing legal matter until it's resolved. So you know their hands were tied. But there are other questions that people have. So for example a couple of years ago TD hosted an investor day where they talked about some of their growth metrics and what they expect to happen with their profits

in the years ahead. And a big part of that was their US business. So some people have questions around why they were discussing these types of things if there was an investigation underway that could have cribbed some of that growth. We'll be back in a minute. Okay, so it's been over three months now since U.S. authorities unveiled their investigation into money laundering at TD and then slapped them with substantial penalties. So this includes the bank having to pay regulators $3 billion U.S. dollars. What's been the impact of those measures on TD?

Well, that $3 billion U.S. figure, that's a lot by enforcement standards, but banks make a lot of money. So that's not really going to impact TD in the long run. But there are other penalties that were doled out by regulators that are much more extensive and severe and will have a longer impact than just that fine. One of the most scathing penalties is an asset cap on TD's US retail business, which limits the bank's ability to grow. So TD's US unit makes up a large chunk of the bank's profit. So this is going to

have an enduring impact on its earnings in the year ahead. So this is something we talked about before when we had you on the show how TD was trying to rapidly, I guess is, trying to rapidly expand into the US. So this asset cap sounds like it's kind of curtailing that effort then. That's right. So they've got two big businesses in the US. One is their retail bank. The other is their capital markets unit. The capital markets unit is free to go forward as it has planned.

That retail bank, it's a behemoth. An asset cap really is a worst case scenario for a retail bank. So TD had planned on opening more than 150 banks in the US. Those plans are on hold, unlikely to happen. The other component to this is that they're going to have to crib how much they're able to lend to customers. And that's a big way that banks pull in revenue. Wow.

Do we know how they get rid of, or can they get rid of that asset cap? Is there any, I guess, option for them to kind of get beyond that? The duration of the asset cap is indefinite at this point. It's really up to regulators to assess and say okay TD you have Achieved all of the requirements and expectations that we have on you We are now ready to remove the asset cap in the case of some of the other US banks that asset cap has lasted for a while

Meaning number of years it sounds several years All right, so TD has to figure out a new plan, basically, that doesn't involve rapid expansion into the U.S. I can't imagine, Stephanie, that this has been good for TD's share price, their bottom line. How is their share price fair as a result of all this? TD stock has taken a hit as a result of these AML breaches, so shareholders didn't see the returns that they expected to up until this point.

Now that's one part of it. The other part of this is forward-looking. So bank stocks are the kind of stocks that you hold on to for a while. When an investor invests in a bank stock they typically do it with a long-term view and they'll consider the guidance that the bank provides to assess its potential growth. A large part of the investment thesis or the case for investing in TD in the first place has been based on its investing in TD in the first place has been based on its potential to grow in the US. With that asset cap, those earnings expectations have pretty much gone out the window.

So maybe you wouldn't have invested in TD if not for their previously anticipated US potential. And without that there, doesn't look so attractive then. Right. Of course a lot of people in Canada bank with TD, right? It's the second biggest bank in this country. I guess I wonder, are TD customers, are they going to be affected by these US penalties? All of Canada's banks will tell you that they prioritize excellent customer service, but this is a major part of TD's brand. So do you remember the commercials with the comfy green chairs and the lovely senior gentlemen

talking about how convenient and helpful TD is? Oh yeah, the big green oversized chair, yeah, which looks like a lovely armchair. It looks very comfortable, yeah. Totally cozy up with a book of it. When you think of TD, they want you to think of great customer service. But since the bank can't grow in its US retail business, it's going into growth mode in Canada. The bank could start competing more aggressively for business.

In some respects, this is a good thing for customers and employees. The bank will be paying more attention to you. But this also means that there will be more pressure on employees to sell. And for the customer-facing staff who are already burnt out by the pandemic, and now on top of this, the reputational and morale damage of this AML saga, this added pressure could further hit morale and would be felt by customers interacting with the bank. Outside of the penalties, this really

is one of the most critical challenges that TD faces. OK, so it actually could come down to customer service and the way customers are treated at the bank. I mean, there's not a direct correlation there, but there could be something maybe that people are affected by in that sense. That's right.

OK, in our last few minutes here, Stephanie, let's look forward here a little bit and look to the future of what's going on at TD. After the current CEO, Ms. Rani, leaves, who is coming into the role? Raymond Chen steps into the CEO role in just under two weeks. Now, he spent the bulk of his career in various areas of TD's Canadian business.

So he knows this side of the business very well. But he's missing a key component of the job spec for a TD CEO. And that's experience in the US business. But on the other hand, this means that he was relatively unconnected to the issues in the US. And if you think about it, it would

have been very difficult to explain why TD promoted a CEO who spent time in the US while these issues were ongoing. So in some way, because he's not connected to that, he's kind of untouched maybe by some of these issues then. That's right. And then when might we learn more about the anti-money laundering issues inside the bank?

So the DOJ in October said that the investigation is ongoing and we could see more cases of AML breaches come up. But really the next thing on the schedule is TD's annual shareholder meeting in April. This is a forum for shareholders to ask TD leaders questions and hold them accountable. It's also a time when board members come up for re-election and there are a lot of questions swirling around whether Alan and the other long-standing board members would have been re-elected at all. They certainly would have gotten a lot of questions about the matter if those directors had stuck around. And so at the shareholder meeting, as you say, where a lot of questions will be asked, who will be there to respond?

So Raymond Chun will firmly be planted in the CEO seat at that point. So he will be up there on stage taking investor questions. Alan will still be there as chair of the board. The bank said that it's launching a succession search to find a new chair. So Alan will be around until that happens. Okay, just very lastly here then Stephanie. This scandal will obviously have lasting changes inside of TD, but I guess I wonder about beyond that bank. Like, if we look at the landscape in Canada, could this affect the other big Canadian banks

at all? It certainly has all the banks on high alert. No one wants to end up in TD's position right now. Some analysts have wondered whether we could see the other banks reshape their boards by adding directors with more U.S. and compliance experience in the way that TD has. And Canada's banking regulator is also increasing its oversight of AML and of bank boards. So pressure is mounting for banks to take more accountability on financial crimes. There truly has never been a story quite like this in Canadian banking.

Stephanie, thank you so much for your reporting and for being here today. Thank you so much for your reporting and for being here today. Thank you so much for having me. That's it for today. I'm Maynika Ramen-Wilms. Our producers are Madeleine White, Michal Stein, and Allie Graham. David Crosby edits the show. Adrian Chung is our senior producer, and Matt Frainer is our managing editor. Thanks so so much for listening and I'll talk to you tomorrow.