TD Bank’s failure to thwart money laundering in U.S. prompts calls for stronger regulation at home

TD Bank CEO Bharat Masrani said during the bank’s second quarter earnings call Thursday that it failed to thwart criminal activity on multiple occasions, following a tumultuous few weeks that saw several developments in the U.S. Department of Justice’s (DOJ) probe into the troubled financial institution.

Some experts say that Canada’s regulatory system needs to be more aggressive in punishing banking institutions that let financial crime go unchecked.

The DOJ investigation is reportedly focused on how Chinese drug traffickers allegedly used the bank to launder at least $653 million US, and bribed TD employees to do so.

TD has not commented directly on the report, but said its anti-money laundering defences had been deficient. It is also facing investigations by three other regulators in the U.S. for its handling of suspicious transactions.

Pointing to a press release from earlier this month, Masrani told shareholders and investors that “there were serious instances when the bank did not effectively monitor, detect, report and respond to suspicious activity.”

“Criminals are regularly targeting financial institutions and in these cases, TD did not effectively thwart their activity. This is unacceptable. TD has been cooperating closely with the authorities to help them prosecute these criminals.”

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Masrani said that the bank took disciplinary action against “responsible employees,” including termination. He didn’t immediately offer more information on additional penalties that the bank might be facing.

The bank said last month that it had set aside $450 million US to be paid to one of the regulators, and that it is bracing for other fines — including potential non-monetary penalties that analysts say could limit the bank’s U.S. operations.

TD’s efforts to buy U.S. bank First Horizon last year were derailed by the DOJ probe. Executives said during the earnings call that the bank still has plans to expand its footprint down south.

After telling shareholders in April that TD was working to improve its anti-money laundering program, saying that it was “regretfully … not where it needed to be,” Masrani reiterated that the bank was putting $500 million toward repairs to its U.S. anti-money laundering program.

Some analysts say that the monetary fines in the U.S. could be a lot worse than expected (up to $1 billion US), but more significant — and meaningful — are the penalties that could limit the way the bank operates, experts told CBC News.

“Can crime be profitable? Unfortunately, yes. Is it costly for banks to monitor themselves and try to avoid underwriting crime? It is,” said Matthew Sooy, assistant professor at Western University’s Ivey Business School in London, Ont.

“But when banks underwrite crime, we all lose.”

Between $45-$113 billion Cdn is laundered in Canada every year, according to estimates from Criminal Intelligence Service Canada.

Financial crime experts say that TD’s troubles shine a spotlight on the difference between the way the U.S. holds financial institutions accountable for illicit transactions, and the gaps in Canada’s own regulatory systems that allow financial crime to flourish.

U.S. fines meant to be punishing: expert 

Financial watchdogs in the U.S. have a rigorous oversight structure that encourages “proactive reporting” of suspicious transactions, according to Christian Leuprecht, author of Dirty Money: Financial Crime in Canada.

“The Americans have shown repeatedly in the past that they are quite willing to make good on ensuring that if you operate in the United States, that you follow U.S. law and you ensure that the way you conduct business operations aligns with U.S. interests,” Leuprecht told CBC News.

Fines doled out by U.S. authorities are meant to be large enough to hurt a bank’s reputation and bottom line, Leuprecht noted. They also frequently come with requirements for future reporting of illicit transactions and might impose constraints on a bank’s operations.

Canada’s system operates differently, according to Leuprecht, with the federal financial crime watchdog, Fintrac, having a “much, much more limited, constrained and conservative set up.”

Fintrac has the power to administer monetary penalties up to $500,000 for serious violations, or it can alert authorities of non-compliance in disclosing illicit transactions. It can only do one or the other for a single case.

TD was recently fined $9 million by Fintrac for not disclosing suspicious transactions, among several additional violations. Other Canadian banks have faced similar money laundering-related fines recently, though with fewer violations than TD: RBC was fined $7.5 million and CIBC was fined $1.3 million.

TD’s Fintrac fine has already been resolved: the penalty was paid in full by the bank and the proceedings have ended, according to the regulator’s website.

The $9.2 million fine is “chump change for a bank like TD,” said Susan Côté-Freeman, a board member and former chair of Transparency International Canada, an anti-corruption organization.

She noted that the fines doled out by Fintrac aren’t meant to be punitive and that this kind of money is “certainly not a deterrent.” 

Sooy, the Western University professor, agreed.

“When we limit enforcement to fines alone, it’s really easy for a person or a business that puts profits first to just compare the size of the fine to the potential profits and pick whichever one’s bigger, right?” he said. “And that’s not what we want people to do. We want them to not even entertain the idea.”

TD spokesperson Lisa Hodgins told CBC News that the bank is in contact with regulators regarding risk management practices on an ongoing basis, including with the Office of the Superintendent of Financial Institutions.

Impact on consumers still unclear

TD’s troubles shook the bank’s stock earlier this month as the institution tried to assuage concerned board members and shareholders.

Experts who spoke with CBC News diverged on whether the bank’s woes would have an impact on its retail clients.

“My sense is that it won’t affect consumers, but it certainly might affect shareholders,” said Côté-Freeman.

She said that other Canadian banks that are active in the U.S. are likely scrambling to ensure that their anti-money laundering programs meet the country’s standards.

Leuprecht said that between the costs related to compliance, risk management and fraud, some of those fees will ultimately be passed on to consumers.

“When financial institutions get fined, make no mistake about it, ultimately consumers are going to be affected,” he said.