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The TD Terrace building in Toronto’s Financial District on March 4.Fred Lum/The Globe and Mail

In January, 2021, American law enforcement agencies surveilled a suspicious box truck and a Lexus SUV through the streets of Queens, N.Y. Their hunch was that a criminal ring was out to launder drug money.

Starting in a supermarket parking lot, a man and a woman got in the truck carrying three bags, then they drove to a bank parking lot where an Lexus SUV pulled up. Bags were exchanged between the vehicles, and the box truck left.

Shortly afterward, the woman, Yunqin Liu, took a bag from the SUV and walked into the bank, where she made a large cash deposit. Then she drove to another branch of the same bank and did it again. And then deposited even more at yet another branch.

Four months later, the U.S. authorities charged six people with money laundering, which resulted in the lead defendant, David Sze, pleading guilty. Throughout the proceedings, the authorities never named the Queens bank, merely referring to it as FI-1. But on Thursday The Globe and Mail reported that the financial institution is Toronto-Dominion Bank TD-T, and the revelation shed light on a years-long investigation that has haunted Canada’s second-largest lender.

“I regret that there were serious instances where the Bank’s AML program fell short and did not effectively monitor, detect, report or respond,” TD’s chief executive officer Bharat Masrani said in a statement Friday. “This is unacceptable and not in line with our values.”

Although TD is not the only financial institution tied to the money laundering operation, the sum of money involved is stunning. U.S. authorities believe the criminal ring conducted more than US$2-million worth of transactions on that single day in January, and that it laundered US$653-million between 2016 and 2021.

The big question now: Will TD ever get its premium back?

Last year TD disclosed that it was the subject of an anti-money-laundering (AML) investigation after U.S. regulators blocked its US$13.4-billion takeover of Memphis, Tenn.-based First Horizon Corp., but until Thursday investors and analysts never seemed all that fussed about the outcome. The working theory was that TD would pay a fine, but nothing obscene, and its expansion in the United States, its major growth market, would be limited for the near future.

That narrative is now changing – fast. “We believe that TD could not only face a larger than expected fine, but also regulator-imposed limitations on its business activities,” Gabriel Dechaine, a banking analyst at National Bank Financial, wrote in a note to clients.

For months, analysts have predicted a fine in the range of US$500-million to US$1-billion, but that’s now jumped. “We believe cumulative fines could easily hit $2-billion,” Mr. Dechaine wrote.

TD’s shares lost 5.8 per cent on the Toronto Stock Exchange on Friday as investors digested the potential for greater pain.

For months, investors and analysts have wondered if U.S. authorities were concerned about multiple AML breaches at TD over a long period of time, which might soften the financial blow, or if there was a new, major event that would result in much tougher enforcement. The revelation of TD’s involvement in a major money laundering operation that spanned three states – New York, New Jersey and Pennsylvania – suggests the latter.

As well, U.S. President Joe Biden has been escalating his administration’s crackdown on the laundering of illicit drug profits through the financial system, particularly when it comes to fentanyl.

TD, then, is in the centre of a geopolitical firestorm that spans China, which often supplies the chemicals for narcotics, Mexico, which manufactures the drugs and moves them into the U.S., and Russia, whose spies are reportedly deeply embedded in Mexican criminal groups.

Susan Gibson, the special agent in charge of the Drug Enforcement Administration’s New Jersey Division, said in a 2022 statement that the money laundered by Mr. Sze’s criminal ring allowed “drug traffickers to expand their operations throughout the U.S. and around the world.” She added that such laundering helps drug organizations flood U.S. streets “with deadly poison,” contributing to the high number of overdose fatalities.

Until this week, TD had said little about its AML deficiencies and about what it was doing to remedy the problem, but on Friday chief executive Bharat Masrani used more forceful language in a statement. Not only did he acknowledge serious issues, he added: “Criminals relentlessly target financial institutions to launder money and TD has a responsibility and an obligation to thwart their illegal activity.”

Before taking over as CEO in 2014, Mr. Masrani had been head of TD’s U.S. division, as well as chief risk officer of the entire bank.

On Friday, TD also disclosed that it has invested $500-million in upgrading its AML systems and has overhauled its AML team in Canada and the U.S., hiring hundreds of new AML professionals, “with deep expertise in program design, oversight, and execution.” The Globe reported in January that TD had hired Herb Mazariegos as its global AML head, and other hires include a head of high-risk U.S. investigations, a head of financial crime risk management and a global head of sanctions.

The new team is investing in enterprisewide AML training, as well as AML programs for new hires. The U.S. Financial Crimes Enforcement Network (FinCEN) has warned for years that drug traffickers are using sophisticated methods to launder their money, which makes it much harder to track – not just for banks, but for authorities, too.

Criminal rings now use “a wide range of innovative methods that avoid international wire transfers and pose particular obstacles for law enforcement,” Vanda Felbab-Brown, a senior fellow at the Brookings Institution in Washington, D.C., warned in a March U.S. Senate hearing.

Mr. Sze’s criminal ring used these laundering tactics to evade TD’s AML monitoring systems, and it also used bribes. When pleading guilty, he admitted to using various incentives to bribe bank tellers, including gift cards, which helps to explain why large cash deposits could be made.

In one instance, law enforcement found one of the ring’s members carrying multiple heavy bags up to the teller window at an unnamed financial institution, after which Mr. Sze approached and took numerous bundled stacks of U.S. currency out and placed them on the counter to be processed.

The criminal ring also relied on cashier’s cheques to launder the money through business accounts they managed for companies that include Queens Sewing 43 Inc. and Asia Sewing Corp.

Unlike personal cheques, which are sometimes held for a few days to verify details of the transaction, cashier’s cheques are guaranteed by the bank. That means the person who cashes them does not have to wait for the cheques to clear. Mr. Sze earned a fee of approximately 1 to 2 per cent of the cash laundered, according to the Justice Department.

While financial institutions played a prominent role in the criminal complaint against Mr. Sze, the Justice Department acknowledged that money was laundered through various means, including at slot machines in casinos, where dirty money is converted to tickets, and then the tickets are cashed out for new currency.

Although Mr. Sze pleaded guilty, he was granted bail on a US$500,000 surety bond. He has yet to be sentenced, but he surrendered his passport and his movement is restricted to New York and New Jersey.

With files from Tu Thanh Ha

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