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A TD sign on a post outside the TD Terrace building at Front St. West and Simcoe St. in Toronto’s Financial District, on Mar 4.Fred Lum/The Globe and Mail

Toronto-Dominion Bank TD-T is under escalating pressure to shake up its leadership in response to emerging details about its anti-money-laundering gaps that prompted a probe from U.S. regulatory and law-enforcement agencies.

Media reports Thursday revealed that the lengthy investigation is tied to a US$653-million money-laundering and drug-trafficking operation, providing a long-awaited look into the issues that derailed TD’s major acquisition of Tennessee-based First Horizon Corp. last year.

The uncertainty around the extent of the blow that the investigation would deal to Canada’s second-largest lender has caused concern among investors and analysts over TD’s growth prospects. The latest revelations have bolstered those worries and cast further doubt over chief executive officer Bharat Masrani’s remaining runway in the top job.

“Repeated control failures call for a refresh of the management team,” Jefferies analyst John Aiken said in a note to clients. “While there has been some reshuffling of the deck in the U.S. operations, these failures are likely to call for more dramatic changes at the executive committee level. With departures around the table, TD’s bench strength has weakened, and we are concerned it could be facing an analogous succession conundrum as Scotia.”

In 2022, Bank of Nova Scotia BNS-T stunned Bay Street by forgoing internal candidates and tapping a board member as its new CEO – a strikingly rare move for a Canadian bank.

Mr. Masrani has been at the helm of TD for a decade – the typical term for a Canadian bank CEO. As his departure becomes ever more imminent, the anti-money-laundering missteps threaten to strike his legacy as a CEO who presided over a bank that ultimately failed to curb money laundering in the world’s largest banking market.

In another blow to the bank’s reputation, doubt is rising among analysts and investors over the board of directors’ ability to prepare a successor after several high-profile departures dwindled the pool of CEO candidates.

In December, head of Canadian banking Michael Rhodes, who was considered a candidate for the top job, left the bank.

Among the remaining C-suite executives, many have been in their roles for a short time, prompting concern over the depth of TD’s talent bench. TD chose head of wealth Raymond Chun as Mr. Rhodes’s successor. Leo Salom, head of the bank’s U.S. division, has been in his role for more than two years. Riaz Ahmed became the head of TD’s capital markets unit in 2021, having previously worked in finance and treasury roles in his nearly 30-year career.

At TD’s annual shareholder meeting in April, Mr. Masrani said that the bank has “very robust succession plans.”

TD’s link to the drug-trafficking operation sheds light on other departures that came as the case was surfacing. The money laundering and drug trafficking took place between 2016 and 2021, according to the U.S. Department of Justice. The agency filed a criminal complaint in 2021.

In October, 2021, Greg Braca, the head of TD’s U.S. retail bank, was shuffled to a new job as vice-chair after about four years in the role, and TD tapped Mr. Salom as his successor. The lender said Mr. Braca in his new role would help support business development, build new customer relationships and advise on new opportunities in the U.S. market. However, he left the bank shortly after.

At the time, TD also announced the retirement of Teri Currie, the head of Canadian personal banking.

A few months later, TD’s general counsel Norie Campbell – who had also overseen the bank’s anti-money-laundering division for part of her tenure – left the bank.

The Globe and Mail reported in January, citing confidential sources, that TD’s chief anti-money-laundering officer previously reported to the bank’s general counsel. That changed in March, 2022, when the anti-money-laundering division was moved into the lender’s risk department under the oversight of the chief risk officer.

On Thursday, news emerged that lead defendant Da Ying Sze, who goes by David, pleaded guilty in 2022 to laundering hundreds of millions of dollars in cash, “consisting of narcotics and other illicit proceeds, utilizing a variety of financial institutions and methods,” the Justice Department wrote in a summary of its investigation.

Law-enforcement agencies said in a criminal complaint that they tracked Mr. Sze to multiple branches of a single financial institution, referred to as “FI-1.” That institution is TD, according to a source.

“As more information comes to light in TD’s U.S. AML probe, it becomes more damning. Earlier in the week, it was our belief that concerns were approaching an ‘overblown’ status,” Mr. Aiken said. “However, with the bank allegedly a focal institution in a drug money laundering scheme, the worst case scenario has become more likely with TD potentially entering a lost decade: Growth in the U.S. will likely be constrained and the timeline for a fix is extended by several years.”

Analysts have estimated that the penalty could reach as high as US$2-billion, and could include a consent order that may limit its ability to grow in the U.S.

U.S. regulators imposed a nearly US$2-billion penalty on Britain-based HSBC Holdings PLC and its U.S. subsidiary in 2012 for anti-money-laundering and sanctions violations.

On Tuesday, TD said it is setting aside US$450-million to cover penalties stemming from the investigation, but added that the provision does not reflect the final amount of the potential monetary penalties or any non-monetary penalties.

Investors, however, are more concerned about the threat of non-monetary penalties, and the time and cost it could take for TD to remediate its anti-money-laundering gaps. In the case of HSBC, it took nearly a decade for the Federal Reserve to lift its enforcement order.

“How long will the remediation period take? We have low confidence in forecasting the bank’s earnings without answers to these and other pertinent questions,” Bank of Montreal analyst Sohrab Movahedi said in a note to clients.

With reports from Tim Kiladze and Rita Trichur

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