'Tougher before it gets better': TD faces a long road on AML woes (2024)

'Tougher before it gets better': TD faces a long road on AML woes (1)

James MacDonald/Bloomberg

It's unclear how much damage TD Bank Group will suffer from its institutional failure to control money laundering, but the results of other companies' previous missteps in this area illustrate the spectrum of potential consequences that could come down on the Canadian company.

The Toronto-based bank said last fall that it was cooperating with a U.S. Department of Justice probe related to anti-money-laundering issues. Since then, TD has disclosed that it's invested more than $500 million to enhance its compliance, been slapped with a $6.7 million fine from a Canadian regulator and taken a $450 million provision for a potential regulatory penalty, while also implying there are more fines to come.

These actions suggest that TD could take one of the most expensive hits in recent U.S. history for AML deficiencies.

Although TD hasn't laid out specifics, the Wall Street Journal reported this month that the Justice Department is investigating the bank's role as a conduit for Chinese crime groups laundering money from fentanyl sales in New York and New Jersey. The Journal reported that in that case and at least one other, TD employees allegedly accepted bribes to help move the drug money.

"Simply put, our anti-money laundering program did not deliver," TD CEO Bharat Masrani wrote in a May 7 memo to employees. "We did not meet our expectations or our regulatory obligations to monitor, detect, report and respond to suspicious activity. As a result, criminals broke through our defenses and used the bank to launder money."

While it's difficult to compare TD's situation with other banks' prior infractions, due to the limited information about how sweeping the various compliance lapses were, a spate of actions in the 2010s illustrate a range of potential consequences for AML blunders.

Following the financial crisis of 2008, regulators found that AML at banks had fallen through the cracks while those institutions were focused on survival, said Daniel Stipano, a partner in the financial institutions practice at Davis Polk.

The consequences of such lapses can include fines, expenses to update AML systems that divert resources from other operations, reputational damage and consent orders, which can torpedo growth strategies like mergers and acquisitions, Stipano said.

Notoriously, the global megabank HSBC was fined $1.9 billion by U.S. regulators in 2011 for AML violations, including allowing more than $881 million in Mexican and Colombian drug cartel money to be laundered through the bank. The bank then spent a decade under a consent order that hindered its growth, and it invested $700 million into fixing its controls, according to Jefferies. A key reason for the major monetary penalties levied against HSBC was the bank's responsibility in overlooking red flags or actively circumventing certain measures.

From 2013 to 2017, M&T Bank spent four years under a consent order due to AML issues. The Buffalo, New York-based bank invested $400 million to enhance its compliance systems — a condition for approval of its 2015 acquisition of Hudson City Bancorp, which took three years to close because of the regulatory scrutiny.

U.S. regulators have also hit TD previously in connection with anti-money laundering lapses.

In 2019, the Office of the Comptroller of the Currency assessed a $37.5 million penalty against TD for violations of the Bank Secrecy Act connected to a $1.2 billion Ponzi scheme run by Scott Rothstein. The OCC, in coordination with the Financial Crimes Enforcement Network, found that TD failed to file suspicious activity reports on activity related to Rothstein's accounts in a timely manner between April 2008 to September 2009.

The Canadian bank's AML problems cropped up again last spring. Its planned $13.4-billion acquisition of First Horizon, which would have furthered its expansion in the Southeast U.S., fell through, reportedly due to regulatory concerns. Under the terms of the deal, TD had to pay $250 million to the Memphis, Tennessee-based bank.

Leo Salom, who serves as president and CEO of TD's U.S. subsidiary, said in a May 7 note to all employees of the Cherry Hill, New Jersey-based division that the recent news of TD's AML failures has been "a difficult moment."

Salom said that "our failure to thwart" the groups who laundered drug money through TD was "unacceptable."

"The DOJ investigation is ongoing, and I am therefore limited in what I can discuss," Salom wrote in the note. "However, as you know, we continue to take full responsibility for the fact that TD was not adequately monitoring, detecting and reporting attempted money laundering at the level we and our regulators hold ourselves accountable to."

'Tougher before it gets better': TD faces a long road on AML woes (2)

Della Rollins/Bloomberg

A common thread in many major AML cases is that the strength of the bank's compliance program and the risk levels of its clients and services aren't aligned, said Stipano, who spent three decades at the Office of the Comptroller of the Currency overseeing AML rulemakings and cases. Stipano, who didn't speak specifically to the TD case, said those imbalances can be problematic.

"If there's a single factor that I would say is true in virtually every case, it's compliance culture," he said, referring to AML missteps broadly. "Regulators will talk about compliance culture. What they mean by that is that the organization, at all levels, not just the compliance function, understands the importance of compliance and not just in a theoretical way, but in a way that's demonstrated by its actions."

Dana Twomey, a director in the financial services practice at West Monroe, said that one major repercussion of a regulatory action is what she calls the "compliance pendulum," when banks become so rigid about meeting requirements that they tighten business, even though there isn't a specific mandate to do so.

Once regulators point to AML issues, the remediation process can be harder than building the program from scratch, she added.

Analysts have mixed views about how much TD's compliance overhaul will hinder the bank in the long term. John Aiken, an analyst at Jefferies, anticipates fines of around $2 billion across four U.S. agencies' investigations, plus regulatory limits on U.S. growth and a five-year-plus timeline to fix the problems, he wrote in a May 6 note.

Aiken called the recent news reports "damning," adding in the note that "positive catalysts are hard to see." Still, he said that TD has strong retail platforms and excess capital, which offer a "solid growth profile" and protection from a potential recession.

But Mike Rizvanovic, an analyst at Keefe, Bruyette & Woods, said in an interview that he thinks $2 billion in penalties and major sanctions on growth are "far-fetched." He didn't provide an estimate for how large the penalty could be.

"There are varying opinions on this from one extreme to the other," Rizvanovic said. "I wholly believe that TD will continue to grow in the U.S. I'm not going to say it's an impossibility, but I think that the implication of some catastrophic end outcome … it's not a high risk."

Because TD disclosed the DOJ probe last fall, Rizvanovic said he wasn't surprised by recent reports about international crime rings laundering drug money through the bank. He said that heexpected major drug money involvement once federal prosecutors got involved. He added that TD has appeared to comply with regulators quickly and completely, unlike some other banks that were hit with major fines.

Masrani wrote in his note to TD employees that the bank has cooperated closely with the DOJ since it raised the issues, and has "mobilized all necessary resources" to overhaul its program.

"The fact that they're spending so much money to correct everything tells you they're obviously committed to placating the regulators," Rizvanovic said. "That gives me the confidence to say that [regulatory limits on growth] are a small probability."

Aiken and Rizvanovic agree that TD has plenty of capital to cover regulatory costs, even $2 billion worth. Additionally, expenses related to upgrading the bank's AML platforms are already baked into the company's future guidance.

Masrani said in a prepared statement that the AML issues were "unacceptable," but "not in any way related to TD's good faith dealings" with customers. He also said on a May 6 call with officers and executives at the bank that as more details "drip out," "this is going to get tougher before it gets better."

On the bank's first-quarter earnings call in February, Masrani said TD knew what went wrong with its AML program and was making moves to fix it, including hiring "hundreds" of new AML professionals and executives, developing new training and investing in new technologies.

Last year, Masrani took a $1 million CAD pay cut in connection with the scuttled First Horizon deal and the bank's regulatory problems. He brought in total direct compensation of $13.3 million CAD in 2023, down from $15 million CAD in 2023, the bank announced in its March proxy statement.

The regulatory scrutiny comes as Masrani, 67, has faced questions from investors and analysts about the bank's succession plan.

Twomey of West Monroe said that major AML violations can't be pinned on one person. Instead, they are ascribable to faults across an institution, such as systems not tagging risk, employees not following diligence procedures or improper responses to red flags, she said.

"At the end of the day, banks are absolutely on the front line when it comes to helping mitigate bad actors in the money-laundering financial crime space," Twomey said. "Fair or not, I don't know. I don't know if that should really be the bank's job, but that's why triangulating those pieces is critical. And when one part of it fails, the entire thing fails."

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Professional money launderers are adept at finding weak links in banks' compliance systems, Stipano said. He added that preventing major crimes should be a joint effort between banks and law-enforcement agencies, since banks are uniquely positioned to see the side of crimes, moving money, that law enforcement doesn't.

Banks should be expected to identify and report suspicious activity, Stipano said, before letting law-enforcement officials take the investigations from there.

Masrani said on his recent call with TD officers that the bank's system "did pick up a lot of this activity, but not enough and we were just too slow." He added that the bank has been working with the DOJ for "some time now," and that information the bank provided has helped apprehend the money launderers and build a prosecution.

The Wall Street Journal has reported that the DOJ's investigation of TD's AML practices stems from a criminal case involving the laundering of at least $653 million from illegal narcotics sales. Da Ying Sze, who was charged with coordinating the enterprise, pled guilty to money laundering in 2022.

The Journal has also reported on a TD branch employee in New Jersey allegedly taking bribes to launder millions of dollars in drug money. The employee, Marcelo Nunez-Flores, was charged last year with taking bribes to facilitate money laundering, the Journal reported.

"Globally, criminals are getting very bold," Masrani said. "They're using all kinds of techniques to get around all the defenses. It is important that we remain vigilant and ensure that we are adapting in real time.… We have to make sure that we meet our obligations. As we do at TD, when we identify anything out there, we come together and fix it. And I have no doubt in my mind that this too shall get fixed."

Catherine Leffert

Staff Writer, American Banker

'Tougher before it gets better': TD faces a long road on AML woes (2024)


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