The Decibel - TD Bank’s anti-money-laundering troubles

Episode Date: February 5, 2024

For months now, TD Bank has been making headlines. First there was the news they were acquiring U.S.-based First Horizon Bank. Then the news that that acquisition wasn’t going through. Then the bank announced it was under investigation.And now, thanks to the reporting of Rita Trichur and Stefanie Marotta, we know that a Canadian regulator is also set to levy a penalty against them. Stefanie, The Globe’s banking reporter, is on the show to explain what is going on inside Canada’s second-largest bank.Questions? Comments? Ideas? Email us at [e-mail]

So, Stephanie, you're our banking reporter. And recently, money laundering at banks seems to have really taken over your beat. I mean, do you have a sense of why there's been so much news on this lately? There certainly has been a lot of headlines on anti-money laundering. I've been saying AML, the acronym for it, way too much. But essentially what's happened is regulators on both sides of the border have been cracking down on anti-money laundering procedures. This includes Canada's anti-money laundering regulator, Fintrac. Now, the thing that's really interesting here is Canada has long been known for having a very stable banking system.

You know, Canada's banks were known for coming out of the 2008 financial crisis relatively unscathed to its international counterparts. But when it comes to its AML regime, there are more weaknesses in Canada than our strong banking system would imply. At the end of last year, Fintrack levied penalties against two of Canada's big banks, CIBC and RBC, for $1.3 million and $7.4 million, respectively. And recently, Stephanie and our colleague Rita Tricher have been breaking news about what's happening at TD Bank. Now, in the context of TD, TD is Canada's second largest bank. And that means that it manages a lot of money for a lot of people. And sometimes bad actors take advantage of all the money that flows through that bank

and through Canada's other large banks. And that's where we see AML deficiencies come through. Today, Stephanie Marotta is on the show to walk us through TD Bank's ongoing regulatory issues around money laundering. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Stephanie, thank you for being here today. Thank you so much for having me. Okay, so there's a lot to this story, and I think it might be helpful if we can go back to the beginning. So Stephanie, when did the issues for TD really start?

So really, this part of the story started back in May. So like spring 2023. Exactly. So TD was just a few weeks away from closing one of the biggest acquisitions in its history. By acquiring Tennessee-based First Horizon Bank, TD would have expanded its footprint into the U.S. enormously. Just a few weeks before that was supposed to happen, TD announced that it was terminating the deal. And that the reason it was terminating the deal was because it didn't have a reasonable timeline on when U.S. regulators would approve the acquisition. And that's kind of all we got.

Okay. Then shortly after that, there were some media reports that suggested that anti-money laundering issues were at the forefront of the reasons why regulators were holding off on approving the deal. Okay, so the acquisition of First Horizon falls through, and then it sounds like after that, we start to get some of this news coming out. Exactly. Okay. And then anytime that executives were asked about this by analysts or investors on earnings calls or at conferences, the bank executives largely said, you know, we can't disclose what's going on, and we can't talk about our dealings with regulators. So it's been a bit of a mystery. But then in August, when the Canadian banks reported their third quarter earnings, TD disclosed in a quick paragraph deep in its earnings reports that it was aware of an investigation by U.S. law enforcement and

regulators into its anti-money laundering practices and that the bank did expect to receive a penalty as a result. Okay. And is that a significant thing then? I mean, and regulators into its anti-money laundering practices and that the bank did expect to receive a penalty as a result. And is that a significant thing then? I mean, it sounds like it's significant. It's significant. In one part, it mentioned that one of those law enforcement bodies was the U.S. Department of Justice.

And we very rarely see the DOJ take such a high level of interest in Canadian banks. That's not to say it's never happened. It's just it is a significant thing to see. Why would TD announce that, though? I mean, that seems like bad news that maybe they would have liked to make not so public. That's a very good question. And on the other side of the argument, people have been asking, why didn't they say that sooner? So all publicly traded companies are required to disclose when there's something material that could affect their earnings. And that's fancy business speak for there's something, there's a charge or an expense that is large enough that it is going to affect the profit or the level of the earnings that they report. And it could potentially affect their share price.

So we don't know at what point this happened, at what point TD became aware of the extent of this, but you could assume that there came a point where TD decided this is significant enough that we do need to make our investors aware of it. Although you said they kind of, it sounded like it was a little bit buried in this report. So they weren't trying to make too much noise around it, but people certainly found out because of that. Right. If you're an investor or a banking reporter, you're looking for it. Otherwise, it wasn't the most obvious spot to put it. As you said, these are significant probes. How much are these probes by U.S. agencies, I guess, going to cost TD? Because it probably comes down to money here. We've had a couple of different estimates from analysts that cover banking. Those estimates have ranged from $500 million to $1 billion in U.S. dollars, that is. To compare, recently the OCC,

or the U.S.'s main banking regulator, levied a penalty on RBC of $65 million. So the difference between that $65 million charge and what analysts are estimating for TD, that's a very wide margin. Yeah. So Stephanie, we're talking big picture here. But do we know how money laundering actually happens like at an individual branch level? How does how does this happen? So there was a really interesting case that came out of the U.S. recently that offered us a really interesting look into how this sort of thing happens at the branch level, for example. So there was a former TD employee in New Jersey who was charged with helping and assisting

launder millions of dollars of drug trafficking proceeds from the U.S. to Columbia. And in the court documents, the authorities allege that through his position at the bank, he had the ability to open accounts and also create a number of different bank deposit cards. And that this employee was allegedly doing this knowingly for individuals who were going to use those accounts to launder money. Through the court documents, the authorities also allege that

this employee accepted several bribes to perform this type of work. All right, so we've talked about the troubles TD Bank faced last year in the U.S., but it is now back in the news again, not for good reasons. So, Stephanie, what is happening now at TD? So my colleague Rita Chuchura and I found through our reporting that Fintrack is now preparing to levy a significant penalty on TD in relation to weaknesses that the regulator found in its anti-money laundering practices. The amount under consideration that we've heard from our sources is around $10 million.

This is significant because in December, Fintrack levied its biggest penalty on record when it comes to a Canadian bank. It levied a penalty of $7 million on RBC. Now, if the $10 million penalty sticks for TD, that would make it the newest record-level setting penalty on a Canadian bank. Now, TD has the opportunity to appeal that. We don't know if they are or what's happening behind the scenes. So that amount could change. Okay, but as you're saying, so the biggest ever penalty so far, and then also the third penalty recently, because you said RBC and CIBC also got penalties recently. So this has become a bit of a trend, it sounds like, in the last little bit. That's right. This is all very much in the line of the regulator showing and displaying its efforts to crack down on anti-money laundering issues. There is a global agency that

is going to be conducting a review of Canada specifically in 2025. So this could be part of the effort that we're seeing, that there's a more concerted focus on getting Canada up to speed in preparation of that review that's to come. Okay. So in Canada, we want to kind of get our ducks in a row before this other probe we'll be investigating next year. Okay. So I guess let's talk about how TD was handling anti-money laundering processes. I think maybe it would just help, Stephanie, if SARs. And what's supposed to happen is the training that bank employees receive is that if they find that a deposit or an account opening or a loan or any sort of transaction or product opening has to do with money laundering or terrorist financing. The bank is supposed to flag it both internally and to regulators.

And they do that through these special reports. When those reports are not properly flagged or not properly completed or don't end up making their way into the hands of regulators, that's when you start to see some lapses in the way that AML is supposed to happen. Okay because this is now my next question because if that's how it's supposed to work what you just described I guess what seems to have gone awry at TD? So what we heard in reporting this story is that the governance structure at TD caused some issues. A few years ago the team at TD tasked with investigating financial crimes reported into general counsel so that's the bank's top lawyer. But the compliance leaders and the lawyers that they reported into had differing views on privacy rules that limit how and when a bank can share customer information. But under a separate set of laws, banks are required to report suspicious transactions

to authorities. Now, in some cases, the lawyers outranked the compliance officers, and that may have caused some issues in reporting. Now, those are all details that we've heard from sources, and we don't know how much FinTrack and other regulators take into account governance issues. But that's an area where we heard there was some friction that could have caused some discrepancy. understand this. So it sounds like the lawyers were, I guess, prioritizing privacy over like anti-money laundering here. So less stuff was being disclosed because they were trying to prioritize privacy. So not have too much out in the open. Is that kind of where we see the issue here? That's right. Sometimes different laws are very much up to interpretation. And sometimes interpretation can affect how these things are disclosed.

We'll be right back. All right, so there's some very specific stuff that sounds like it was going on at TD that potentially maybe was part of this. I guess we should talk, Stephanie, about what TD is doing in response. Do we know what the bank is doing with all of this? That's right. So we don't know what their full plan is yet. They haven't disclosed any details. But through our reporting, we have gotten a glimpse at the different steps that they've been taking over the last few months. So late last year, TD hired on a number of different executives to its anti-money laundering teams to bring in some new expertise and lead a bit of an overhaul of the division. One of those executives we heard is in particular tasked with reducing TD's reliance on third-party services to monitor their AML transactions and instead bring that talent

in-house. So all that monitoring is happening within TD premises. Another example that we heard through our reporting is that TD has hired McKinsey and other consultants to help consult on its regulatory practices and some of the issues that it's working through. Okay. And to go back to your first point for just a sec, you said, so it used to have like third-party services like contractors do this work, and now they're going to hire people themselves to do it? That's right. So it's in the form of contractors and also different layers of technology that help flag and indicate when a transaction needs to be reported. So there are a number of different ways that the banks assess these measures. I mean, that all sounds pretty expensive, though, too, right? Like, do we have a sense of how much this is all going to cost TD? And expenses are very much at the forefront for the banking system right now as well. For what it's worth, across all of the banks, their expenses have gone up over the past

year due to inflation and a number of different cost issues. In particular, part of the expenses that TD expects is in the amount that it's going to cost them to address these AML discrepancies. So what we heard in fourth quarter earnings from bank executives was that they expect to post between a $200 million and $250 million loss in its corporate segment per quarter. Per quarter. And that that's directly related to the enhancements that the bank is making on its risks and controls procedures. Okay. And so what is likely to happen next, I guess, with these regulatory probes? Do we know? So the first thing that we're waiting for is a FinTracks report, which is expected to come out over the next few months.

The big thing that investors are watching for, really, is the U.S. probe. That's the review that's going to come with potentially the heftier penalty, perhaps some other non-monetary penalties that prevent TD from doing certain activities. We don't have a timeline for when that's supposed to happen, but that's the big one. Okay. So it sounds like potentially monetary penalties. You also said non-monetary penalties. So I guess what form would that take? So this could take the form of cease and desist orders. So stop doing the faulty practices that you were doing before and instead present us with a report on how you're going to fix this. This could also come in the form of saying until you fix these issues, you're not able to do another acquisition

in the U.S. until regulators have given you the green light that this has been resolved. That must be a big deal for TD because it sounds like they really wanted to expand into the U.S. That's right. It's a big deal for TD and it would be a big deal for any of the banks that have a large presence in the U.S. At this point, that really is their growth market. And in particular with TD, much of their U.S. strategy hinged on that acquisition because you buy up a bunch of clients, a bunch of employees and all that infrastructure all at once, whereas they've had to pivot in recent months. So they had Investor Day last year where they illustrated a new approach to the U.S. where they're going to open more than 100 branches in their key markets. Now that takes a lot more time than just buying up a bank all at once.

And I'm just curious, is it common, I guess, for Canadian banks to be moving into the U.S. like this? Like we're seeing TD try to do this. Are other banks doing this as well? It is. Sometimes I find it surprises a lot of Canadian readers to hear just how big of a presence many banks have in the US. So TD has been in the US for a while at this point and has done it in a big way. Last year, we saw BMO close its acquisition of California-based Bank of the West, which expanded its reach into several states, plus California, which is a huge market. RBC also has its establishment in California with Citi National Bank. And we've heard CEO Dave McKay say that at some point he'd be interested in doing another acquisition in the

U.S. So that's just a sample of the different ways that the Canadian banks are trying to expand into the massive market of the U.S. Interesting. yeah. Just lastly here, Stephanie, I guess on the larger issue really of money laundering in Canada, I'm just wondering whether the size of Canada's banks affect their ability to have strong anti-money laundering practices? Because we talk about how big the banks are in Canada. Does this affect things? So this is a really interesting debate that's happening in the industry right now. And since March, when Silicon Valley Bank and a number of other regional lenders failed, there's been a lot of discussion around how big should a bank be and how big should the banking system be. So in the U.S., there are more than 4,000 financial institutions, many of them smaller regional players.

In Canada, we have less than 500 financial institutions, but the market is dominated by the big six banks. So in the US, when there were those issues with regional lenders, there was a lot of discussion on whether the US system should look more like Canada's. Fewer lenders and those banks are too big to fail in theory. But there are a number of different sides to this debate. And when we look at AML in particular, when you are a larger lender, sure, you have more money and more people to deal with, and maybe it's easier for things to fall through the cracks. But you also have the resources and the infrastructure to have significant, well-constructed AML policies and teams to

assess those things. Yeah, you have more people and you have more money to do that kind of thing, right? Exactly. If you're a smaller lender, maybe your compliance team is a little smaller. Maybe you don't have the same infrastructure and resources that the big bank does. In some cases, that can be a pro. You're more nimble, more agile, it's easier to identify things. But it really depends on how you're looking at it. Stephanie, thank you so much for being here to explain all this today. Thank you for having me. I really appreciate it. That's it for today. I'm Maina Karaman-Wilms.

Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrienne Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.