The Decibel - TD Bank caught up in drug money-laundering scheme

Episode Date: May 9, 2024

TD Bank has been plagued by concerns about its anti-money-laundering capabilities for over a year. In March 2023, they tried to acquire the U.S. based bank First Horizon Corp. Regulatory issues delayed the acquisition, and in May 2023, the deal fell through.The extent of TD’s anti-money-laundering issues weren’t clear until now, when it’s revealed that TD is involved in a U.S. investigation of a US$653 million money-laundering and drug-trafficking operation. Tim Kiladze, financial reporter and columnist for the Globe, is on the show to talk about TD’s alleged lack of oversight and what this means for the bank – and its customers – going forward.Questions? Comments? Ideas? Email us at [e-mail]

From what we know, it all started in January 2021. Some investigators from U.S. law enforcement agencies started surveying and tracking what they suspected was a criminal ring. That's Tim Collatz, a financial reporter and columnist at The Globe. And they were following them around Queens, New York, which is one of the boroughs of New York, following them from branch to branch. And they basically made these connections between bags of money being moved around, taken into branches, and money being shuffled in these bags between a box truck and a Lexus SUV. Eventually, they realized that in a single day, they were depositing $2 millionS. And over time, the sum of all these transactions at multiple financial institutions totaled $653 million U.S. American authorities have charged six people with money laundering,

and they've said it was tied to drug trafficking. For the longest time, no one knew what banks were involved because the way that these criminal complaints are laid out, they just leave these institutions as Financial Institution 1 or FI1. What has come to light since is that within this large criminal ring, TD Bank was FI1. Today, Tim is here to tell us what we know about how this money laundering scheme happened and what these new revelations mean for the future of one of Canada's biggest banks. I'm Mainika Raman-Welms and this is The Decibel from The Globe and Mail.

Tim, thanks so much for being here again. Happy to be here. Tim, I think in order to really understand the new revelations, let's just back up a little bit here and get some of the backstory. When were questions first raised about something actually going on at TD? The first time we ever knew something was up was March of last year. So just over a year ago, TD was in the process of buying a bank called First Horizon, which is based in Memphis, Tennessee, to kind of expand its US footprint. And First Horizon, as part of its like kind of quarterly regulatory disclosures, revealed that the deal was having

some regulatory hiccups, and then it may not close in time. Now, this happens quite often. Sometimes you have to appease regulators and throw them some bones. You know, maybe you promise like you're not going to close branches in a certain city because they don't want to have job losses, things of that sort. So no one really knew what to make of it at the time. But as more time passed, you kind of got the sense that, oh, this thing might not go through. But no one really knew why. In May of last year, the deal got killed and it was very clear that it was blocked by the regulators. The language was something along the lines of, you know, we didn't think we'd get their blessing in a normal amount of time. It's all legal language. But First Horizon was pissed.

And they said, this has nothing to do with us. So it became very clear, like, something's up with TD. Then there was a news report in the US that said TD has issues with its anti-money laundering programs and systems in the US. But again, not that many details, but at least it started to kind of paint the picture of, oh, there's like a systemic issue here of some sort. When we really got more detail was in August when TD Bank reported its own batch of quarterly earnings. And they said, we expect, you know, significant financial and non-financial penalties. And that's when it was like, oh, they're in the crosshairs of the

regulators. And since then, people have had to guess just how big these fines could be. About a month ago, people were estimating it could be like 500 million to a billion dollars US, which is significant. But, you know, TD makes a few billion dollars a quarter. So it was not like it's not going to sink the bank by any means. But it was a big embarrassment and it was definitely significant. And then it all blew open last week. All right. So, yeah, this brings us to kind of the recent, the most recent revelation.

So what did we learn last week? On Tuesday, April 30th, TD itself disclosed that it's settled with one of its regulators or was close to settling with one of its regulators in the US. And they were putting aside $450 million US, which is about 600 million or so Canadian to pay a fine effectively. But it was really weird language. They said this is to set up with one of three regulators. Plus, there's also an investigation going on with the department of justice so all of a sudden the alarm bells start going off they're like well if this is just one of the three we don't know which one it is um and to have the

department of justice involved that sounds like a big deal we knew that that was kind of in play but it formalized it all and then a few days, this was Thursday, there was a media report out of the US that TD is tied to laundering money for narcotics and a drug ring in the US. And then shortly after, we confirmed the news and got a lot of details and found the criminal complaint that this was all tied to. Again, TD Bank is not named. And I want to make it really clear, TD Bank is just one of multiple institutions that are part of this criminal probe. But they were FI1, which is what we learned. And it was big. And all of a sudden, people were like, sorry, this isn't just for past issues. No one really knew if it was because there'd been a history of, you know, lapses that

over time accumulated and amounted to a large amount of money, or if there was some new significant event. And now we realize, oh, no, there's like a major thing they're zeroing in on, and it's $653 million. On top of that, the US has been cracking down, President Biden in particular has talked about stopping the use of money laundering to help the drug trade grow, and in particular fentanyl. In this situation, there's a lot of narcotics involved, so we don't want to single anything out, but it's very much in line with what the U.S. has been trying to crack down on.

Do we know where this money came from? Is there any way to kind of to track that? Not yet. But the suspicion, because this has been a long term pattern, is that it's tied to Mexican cartels who use Chinese criminal rings to kind of do the frontline laundering. And the Mexican cartels, believe it or not, are tied to Chinese manufacturers of drugs. So there's kind of this circular thing that goes on where the Chinese had to crack down because they're the ones who really supply a lot of the fentanyl around the world. They had to crack down because it was becoming such a big problem. So instead of actually making and finishing fentanyl, they just create the chemicals for

it. They ship it to Mexico. Mexican cartels actually produce the drugs and then they bring them in to the US, and then the money gets laundered through often through these Chinese criminal rings. At the same time, there's a Russian element to this. There have been reports that Russian spies are deeply embedded in Mexican cartels, in part because they want to be able to influence US policy through them and around things like immigration and potentially like violence in Mexico, which then drives more

people to try to flee to the US, which causes more political problems in the US. Like it's all very intricate and delicate. And it's just been quite alarming that this Canadian bank has found itself in the center of it. So we have some of these details now, it sounds like, of what was actually going on when we're talking about this money laundering scheme. Tim, what do we know about what was actually happening? This is the part that was really fascinating as well. And also just put an even bigger question mark over like, how did this happen? Because the details in the main criminal complaint weren't like sexy, clandestine,

like international wire transfers, you know, to Bermuda or to like to Panama or anything of that sort. It was literally people walking into branches with bags of US currency and depositing it. And it seems like one of the ways that they were able to get away with it is that they bribed tellers or bribed some individuals. Unfortunately, we don't have that much information about it right now.

But it was like an orchestrated scheme. But still, it was done under the video cameras, you know, everything, you know, all the surveillance possible. So it raises these questions of like, well, how did TD Bank or any other financial institution involved like not catch it? Because, you know, if you are depositing a certain amount of cash in particular, shouldn't some system flag that? Even if you have human error, because I've seen enough of these things over time that you're always going to have bad individuals. It's just a function of life. What you really need to do in the way an institution of any type, financial, crime, whatever, needs to stop fraud is to clamp down when an alert is raised. And it seems like alerts weren't going off.

So this is maybe where the system was kind of breaking down then, or people were not using this system the way it was supposed to be used. You mentioned they were bribing tellers. Do we know more about how that was happening? It sounds like there was the use of gift cards, but that was just one of the examples provided. There was also other ways that they were laundering money. So I'm saying this not to kind of let TD off by any means, but it was like a very elaborate network.

There's also something called bill stuffing where you use casinos and slot machines and you effectively take dirty money and you go to casino, you buy chips or tickets or whatever you want, play a bit, and then you cash those chipsits out for new cash. So it's a way to kind of mix the money up, you know,

and no one can really track. People also do it with ATMs. There's a whole way of doing this. But I think what has really caused problems is that this is exactly what government officials have been talking about was going on, and yet it's still prospered um again that might just be small one-offs of like a bad teller etc but clearly there was a like a systemic issue that hadn't been fixed and for the longest time the bank had not addressed what had been

going on um it's only in the last like three days or three or four days really where they've actually acknowledged that there were like major flaws. And so that's just led to all these questions of like, were they even tracking this? Yeah, I think this is like a big question here of, you know, shouldn't these amounts have been flagged? Shouldn't, you know, shouldn't there have been something, some alarm bells going off if you're seeing, you know, massive cash deposits kind of going through the system, right? So like anti-money laundering,

I guess, processes are usually in place in banks, right? So like, do we know what happened here? That's the part we're still reporting. And it hadn't been clear until very recently either whether TD had made changes and effectively fired people. In the last few months, we've learned that they hired a new global head of AML or anti-money laundering. There's been a whole slew of hires in the U.S. They kind of have revamped the team. It's just been a bit mind-boggling to not know why this was never kind of disclosed before. To TD's credit, in a way, I get that they are involved in multiple negotiations with regulators, with the Department of Justice. I'm assuming there's other financial institutions involved in these potential settlements or whatever the case may be defines.

And it makes it really hard that you can't say much because you're kind of like it's like in the middle of being in the middle of a jury trial. Right. You can't go out and speak publicly when your defendants like on the stand. We'll be right back. Over the last two decades, really, it's grown bit by bit. It started in New England. So I bought a Maine-based bank and then expanded with a New Jersey-based bank. And its U.S. headquarters is now in New Jersey, which is why this kind of criminal complaint and probe is tied to the DOJ office in New Jersey. They're now in the top 10 of U.S. banks. And that also has caused problems for them. And when I say problems, what I mean is that there's just more eyes on you. Like you are now, there's a term called a systemically important

institution, because you're big enough that if you fail in a worst case scenario, it's going to have problems for the economy. And then on top of that, in the US and Canada, there's two different approaches to regulation. In Canada, we have what's called a principles-based approach, which is, there's a lot of discussions that happen behind the scenes where, you know, regulators might ream institutions out or officials out, executives out, but it doesn't come to light. Because it's kind of this like Canadian way where it's like, you're going to make this right, or else we're going to harm you. But they go and they make it right. In the US, they love their perp walks. You know, every big trial you see, you know, they put people out in front of the cameras.

And so there's an element of that coupled with they're just more aggressive. Like they love the splashy headline, the actual like, you know, criminal complaint that went out. There was a news release with it and the quotes were like just juicy, you know, they were calling it like street poison. Like TD Bank is helping to effectively like, let street poison out in

our communities and things of that sort. And again, they didn't name the bank. I want to make that clear. Right? Yes. Now we know this, this is the bank here. So, so since all of this has happened, what has the fallout actually been for TD Bank? So there's been a lot of shock internally, because, because of all the legal provisions and negotiations that were going on, not many people knew what was actually happening or how big the stakes were. Everyone knew this issue was out there. From what we are learning is that there's just been shock in the bank that, oh, there was a big thing. And it's coupled with this ongoing cultural issue and identity, I guess you could say, that's been playing out at the bank over the last 10 years.

For the longest time, TD was kind of seen as this place that was well run. It was not afraid to take its neck out on social issues. It cared about the environment like a decade before that even became a thing. It was out in front on LGBT issues. It really kind of wrapped itself in the Canadian flag. And I'm trying to not get too political here, but that was kind of its mission. It wasn't just a bank. It was here for Canadians and social progress, if I had to summarize it. And over time, they just retreated more and more from that. And so all of this has kind of resulted in another fallout, too, in terms of its plans for U.S. expansion.

It's facing some fines and penalties, right? So what exactly, I guess, is the extent of all of that? TD was really betting on the U.S. as its future growth driver. And that's why it went and bought, you know, tried to buy this Memphis-based bank. There are these non-financial penalties that we don't know really are going what they're going to be but it could be like putting a fence around td for a while and saying you're in the penalty box until you fix all these programs um you aren't gonna be able to expand and there's no understanding yet of does that mean they just can't buy anything

does that mean they can't even open new branches? Like it's really not clear. And the worst thing that can happen in financial markets is uncertainty. And sometimes it's not your fault. Like I keep saying, TD probably wants to say more, but it can't. And investors are now kind of filling that void with just more and more questions. And that's why we've seen ever since this news came out late Thursday, the stock took a big hit on Friday. And over the last five years now, TD is effectively flat, like its stock hasn't gained. Whereas RBC is up like 30%. And you mentioned earlier, Tim, that TD is anticipating paying some

fines. Do we know the extent of those fines? Yeah, the thinking until very recently was that it could be 500 million to a billion US overnight that effectively doubled. And that's just kind of a minimum now, maybe like no one really knows where it's going to fall. But people do think it's going to be more. But it's on some level an image problem more than anything, you know, it's like you've lost that premium valuation that that's really based on trust. At the end of the day, that's what a lot of like

of investing is about. Like, do we trust they'll get it right, that they'll come back, that they can rebuild? And no one's quite sure right now. So we've been talking about everything that's happening with TD in the US, but they're also facing some penalties

in Canada too, if I believe, right? So can you just remind us what that's all about? Yeah, so Canada's agency that oversees money laundering, broadly speaking, is called Fintrack. There have been some fines here, but it's been much smaller. We're talking in like $9 million range. It's still not clear whether there's been deficiencies here like there have been in the US. So obviously, everyone wants to know that. But it's also not clear if it's because there's that

difference between US and canadian regulators where canadians will say we're going to kind of publicly shame you and say like you know you're getting a fine but really a lot of the work's behind the scenes whereas in the us they just come out you know we're going to cut your throat a little bit and then you better fix the problems you know it's uh it's it's really not clear if there's even been much interaction between the Canadian and US regulators and whether they have differences over the kind of the issues. And the fines that they're facing from FinTrack,

do we know, are those also related to money laundering or what is that about? It's been very vague. A lot of it has been tied to just what have been phrased as like deficiencies effectively. And I should add other banks in Canada, RBC and CIBC have also gotten fines that are effectively in the same range. So it's hard to kind of single TD out. And it's also hard to know whether the Canadians are kind of just playing catch up to the US and being like,

well, if there's this major problem, we don't want to look like we were just sitting here not catching anything. You know, it's been very tough to know. All this being said, I mean, what does all of this do to TD's reputation? It's a big dent to the reputation. You know, TD had built up a lot of trust and goodwill. It was really about being out front and being frank with people. Like as a reporter, if you had a question of TD, they would always respond. Sometimes they would lay down like they couldn't comment, but it wasn't they were never hiding. They were always trying to give you information context, things that could actually make you smarter, like help you understand how they were

thinking about it. And they did the same with investors. Over time that really disappeared. And so now, because there's been such a kind of a void or a black hole for so long, it's getting filled with doubt. And that is always a problem in financial markets. What you need to know about TD is that it really built its reputation around retail banking, particularly in the last two decades. And it really used that to its advantage to expand in the US coming out of the 08 financial crisis. Because you had a lot of global banks that got into a lot of dirty behavior tied to like complex investments. Here was TD and their former CEO, Ed Clark, on American TV talking about the power of retail banking.

And just being a good, you know, steward of the economy and giving good service to clients. It was really, you know, steward of the economy and giving good service to, you know, clients. It was really, you know, plain vanilla core banking and it really worked. And now there's this like disconnect because that is what has landed them in front of the Department of Justice. And how is TD responding to all of this? They are really taking action now. They've had internal calls with executives. They've put out internal memos to really address the issue. As I was mentioning at some point, they had kind of shrank or turtled for a long time, probably because they couldn't say much because of the ongoing negotiations. That's not going to cut it anymore because now employees

themselves are wondering like, what is going on? like this is way worse than even we thought it's also becoming more clear that they had made changes in the u.s they had hired all these new people and revamped the system specifically with aml with aml yeah anti-money laundering financial sanctions and all like that whole kind of bucket of stuff legal counsels things of that sort i think now you're going to hear more and more about that because there was a narrative, whether it's rightly or wrongly, that TD actually wasn't doing much. TD was just being like, no, no, no, it's all good. We'll spend some money. Now they're putting dollars to it. You know, we've spent $500 million revamping our systems. We've hired all these people. And I think they're gonna have to sell that message more and more

to show that they're very serious about it. And we now have had comments from the CEO, from Mr. Mizrani, who says, like, I deeply regret how this played out. Like, we know that there's almost a bit of shame involved. I think I should ask you this, too, Tim, because a lot of Canadians bank with TD, right? So is there any way that all of this could actually affect their Canadian customers? Probably not or not in some like major direct way. There could be like residual effects where it's like they have to now divert money that maybe they were going to spend on, you know, upgrading their mobile app that now has to be diverted to fixing problems in the US

because it is a significant amount of money. But I don't think there's anything that, you know, day to day you would notice for quite a long time. There are questions now about whether an executive change is needed. Mr. Mizrani has been in the role for 10 years now. And around the 10-year mark, that's when you usually have CEO transition or succession anyway. So there are questions about like who's going to take over and how it could kind of drive or change the strategy going forward but again for like the average canadian just going into the branch or just like using the mobile app like you you won't notice just lastly here tim we've talked through a lot of things here but what are you watching next kind of in this in this whole saga around td

wondering is there more it's tricky because td isn't named in a lot of stuff and we don't want also don't want to single out td we want to know like are there has this been rampant you know across the u.s um are there deficiencies everywhere and also wondering like what has td been doing to try to prevent this you know i think we're going to hear more on that because they don't want to seem like they have just been sitting by letting significant illicit activities happen. Tim, always great to have you here. Thank you for doing this. Always happy to.

That's it for today. I'm Maina Karaman-Wilms. Michal Stein produced this episode. Our intern is Aja Sauter. Zura Jabril joins us as a fellow of Carleton University's Brooke Forbes Award. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrian Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening and I'll talk to you soon.