Canada’s financial-crimes watchdog is preparing to impose a significant monetary penalty on Toronto-Dominion Bank after an examination found the lender had faulty anti-money-laundering controls, The Globe and Mail has learned.
The Financial Transactions and Reports Analysis Centre of Canada, or FinTRAC, completed an assessment of TD Bank TD-T in late 2023 and deemed its anti-money-laundering compliance to be unsatisfactory, according to five people familiar with the matter.
The monetary penalty is expected to exceed $10-million, two of the sources said. A penalty of that size, while small by international standards, would be the largest ever levelled by the Canadian regulator.
FinTRAC, which has already shared its preliminary findings with TD, is preparing its final report about the compliance deficiencies, the five sources said. The federal regulator is expected to publicly announce details of the violations and the financial penalty over the coming months, according to two of the sources. The bank is entitled to an appeals process that has yet to expire.
The Globe is not identifying the sources because they were not authorized to speak to the media about regulatory issues.
The enforcement action comes at a critical time for TD. Canada’s second-largest bank is also facing scrutiny over its anti-money-laundering practices in the United States, its main growth market. Those investigations by U.S. law enforcement and regulators led to the collapse of TD’s proposed US$13.4-billion acquisition of Tennessee-based First Horizon Corp. TD, which initially said it was unable to elaborate on the regulatory issues that scuttled the deal, later revealed it anticipates those U.S. probes to result in a fine.
FinTRAC’s compliance examination of TD was not disclosed to the public because of confidentiality provisions outlined in Canadian law, which prohibit regulators and banks from commenting on continuing investigations and enforcement matters. Regulators on both sides of the border, however, have agreements in place to share financial intelligence and compliance information about financial institutions.
TD declined to answer specific questions about the Canadian and U.S. investigations, but said in a statement to The Globe that the bank is making improvements to its anti-money-laundering (AML) processes.
“Money laundering is a very serious issue for the global banking system and requires constant vigilance to stay ahead of bad actors. On an ongoing basis, TD is actively engaged with law enforcement and our regulators, including FinTRAC, to combat criminal activity,” TD spokeswoman Lisa Hodgins said in an e-mailed statement.
“We are making comprehensive enhancements to our AML program. This is a priority for the Bank, and includes the appointment of proven leaders in anti-money-laundering, external advisers with deep subject-matter expertise, and investments in technology, process redesign and training. We take our responsibility seriously to live up to the highest standards and we will continue to mobilize the required resources to strengthen our capabilities and build a best-in-class AML program.”
In response to The Globe’s queries, FinTRAC said in a statement it is “prohibited from disclosing information on compliance actions that may or may not be ongoing or planned in relation to a specific business,” except when it issues a public notice about the imposition of a financial penalty.
“FinTRAC has demonstrated its strong commitment to ensuring the compliance of businesses subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act … Compliance with the Act deters criminals and terrorists from operating in the legitimate economy,” the regulator’s head of communications, Darren Gibb, said in an e-mail.
“It also ensures that FinTRAC receives the information that it needs to generate actionable financial intelligence for law enforcement and national security agencies to help target, disrupt and dismantle the organized criminal and terrorist networks that threaten Canadians.”
Canada’s financial regulators are putting pressure on major banks and other businesses to bolster their anti-money-laundering procedures. FinTRAC levied fines on Royal Bank of Canada and Canadian Imperial Bank of Commerce in December, with assessments of other banks still to come.
Recently, FinTRAC postponed a compliance examination of Bank of Montreal, according to two of the sources. That assessment, which had initially been scheduled to take place during the first half of this year, is now expected to take place in 2025. BMO passed its last FinTRAC assessment years ago without any significant deficiencies identified by the regulator, one of those people said.
“BMO follows the laws and regulatory obligations in all jurisdictions where it operates,” bank spokesman Jeff Roman said in a statement.
FinTRAC also declined to comment on questions about BMO.
The regulator’s recent examination of TD, meanwhile, was an end-to-end assessment of the bank’s anti-money-laundering controls, the five sources said. As is typical with its bank appraisals, the regulator vetted a large sample of TD’s suspicious transaction reports and evaluated its compliance policies and procedures including training for staff, according to one of those people. The regulator paid particular attention to TD’s Canadian financial intelligence unit, which does tactical work such as the monitoring of suspicious transactions and case investigations, that person added.
Friction between the bank’s compliance officers and its lawyers has contributed to the bank’s regulatory problems, three of the sources said. The discord stems from a disagreement over privacy and permissible information sharing. TD’s lawyers have generally taken a conservative view of privacy legislation, especially the federal Personal Information Protection and Electronic Documents Act, the sources said. That strict interpretation of the act – which limits the collection and use of customer information – has affected the bank’s disclosures, including to regulators, the sources added.
Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, banks and other reporting entities are required to submit a suspicious transaction report to FinTRAC if there are “reasonable grounds to suspect” that a transaction or an attempted transaction is related to money laundering or terrorist financing activity – regardless of the monetary value.
Compliance officers, however, were outranked by the bank’s lawyers, the three sources said. TD’s chief anti-money-laundering officer previously reported into 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.
FinTRAC works closely with its counterparts in the United States where TD has faced a number of regulatory and legal issues. The Canadian regulator has taken note of those incidents, the five sources said.
Those matters included a US$37.5-million fine in 2013 resulting from the bank’s failure to file suspicious activity reports for accounts linked to the Scott Rothstein Ponzi scheme in South Florida.
The regulator also monitored a U.S. lawsuit stemming from TD’s correspondent banking relationship with Stanford International Bank Ltd. – another massive Ponzi scheme. TD settled the matter last year for US$1.21-billion – money that ultimately went to Stanford’s victims.
TD is already implementing a companywide action plan to strengthen its anti-money-laundering controls and risk management practices in Canada, the U.S. and other countries in response to concerns raised by regulators. That effort is being led by Herbert Mazariegos, TD’s new chief global anti-money-laundering officer, four sources said.
Mr. Mazariegos joined TD in November, 2023, according to the sources and his LinkedIn profile. TD recruited Mr. Mazariegos from BMO, where he served in a similar capacity, to replace Michael Bowman in that critical role. Mr. Mazariegos didn’t respond to a request for comment, while Mr. Bowman confirmed he remains employed by TD in a different capacity.
TD also hired Fnan Desta, another former BMO anti-money laundering expert, as associate vice-president and head of its Canadian financial intelligence unit. He replaced Kevin Doherty. Mr. Doherty declined to comment.
Mr. Desta, who also began his new job in November, is actively hiring for TD’s investigations team, according to his LinkedIn profile.
One of Mr. Desta’s goals is to limit the bank’s use of third-party financial crime contractors and strengthen its in-house roster of investigators to limit risks associated with outsourcing, one of the sources said.
Financial institutions often subcontract certain anti-money-laundering compliance functions, such as client screening, to outside companies to save money on payroll and benefit costs. Outsourcing, though, can leave banks vulnerable to a host of security, legal and regulatory risks. Some global banks have run into trouble with regulators for insufficient oversight of third-party contractors or inadequate controls over issues such as customer due diligence. Mr. Desta did not respond to a request for comment.
TD has also made other key changes in the U.S. In November, the bank hired Sophia Siddiqui as vice-president and senior counsel responsible for U.S. regulatory matters and investigations. Ms. Siddiqui did not reply to an inquiry from The Globe.
The following month, Maryann Kennedy, a former U.S. banking regulator, was elected to TD’s U.S. board of directors. Ms. Kennedy was previously TD’s examiner-in-chief at the Office of the Comptroller of the Currency, the banking regulator that supervises national banks in the U.S. Ms. Kennedy did not respond to a request for comment.
TD also hired McKinsey & Co. and other external consultants for support on regulatory and other matters in the U.S., according to a sixth source. (The Globe is not naming the source because this person was not authorized to disclose confidential information.) McKinsey, in particular, has built up its banking regulatory practice since the Great Financial Crisis of 2008-09. The company, however, declined to comment.
Much like other banks, TD uses software to assist with its compliance efforts. The bank is deploying new software for customer due diligence and transaction monitoring and is testing other software for sanctions screening, another one of the sources said.
U.S. regulators’ concerns with TD’s anti-money-laundering practices were first revealed by The Wall Street Journal last May after the bank said that uncertainty around the timeline for regulatory approvals derailed its takeover of First Horizon.
Then in August, TD disclosed in its third-quarter earnings results that it expected fines and other non-monetary penalties stemming from probes by U.S. regulators and law-enforcement agencies, including the Department of Justice, related to its compliance practices.
TD said that the probes were “both generally and in connection with specific clients, counterparties or incidents in the U.S.”
Analysts have estimated that the financial penalty could range between US$500-million and US$1-billion.
TD is also bolstering spending on its work force and technology to mitigate weakness in its anti-money-laundering infrastructure, along with other risks – outlays that threaten to weigh on profit growth.
During the bank’s fourth-quarter earnings call in November, chief executive officer Bharat Masrani said it would be “challenging” for the lender to meet its medium-term earnings per share objectives as it faces a tough macroeconomic outlook and elevated expenses, “including investments to enhance the bank’s risk and control infrastructure and accelerate growth.”
In TD’s corporate segment, it expects to post an adjusted net loss of $200-million to $250-million per quarter this year, a steep increase from the $100-million to $125-million in losses the bank previously anticipated. That jump will be driven by TD’s investments in its risk and control infrastructure, and could continue beyond 2024, chief financial officer Kelvin Tran said during the conference call.
“We look at opportunities to improve, that’s what we do,” Mr. Masrani said. “Sometimes we learn it ourselves, sometimes we learn from our regulators … This includes investments too, and we’ve talked about it before in our U.S. AML program. And that will include people, training, data, technology, et cetera, because those are sort of evolving areas, and we got to make sure that we’re keeping up with what is expected of a very large bank in the domestic business in the United States.”
For its part, FinTRAC announced at the end of last year that it plans to crack down on companies that cut corners on compliance, including major banks.
In December, FinTRAC levied a $7.475-million penalty – its largest fine on record – on RBC after it found the bank had committed three violations of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Days later, FinTRAC announced that CIBC paid more than $1.3-million for failing to flag transactions linked to money laundering and terrorist financing.
That sharpened focus on enforcement comes as Canada prepares for a coming evaluation by the Financial Action Task Force, a global body that sets standards to combat financial crime.
In the federal budget released last spring, Ottawa proposed new tools to mend weaknesses in Canada’s anti-money-laundering regime. The measures include expanded powers for both FinTRAC and the Office of the Superintendent of Financial Institutions, which is this country’s top banking regulator.
OSFI Superintendent Peter Routledge said during a conference held by TD on Jan. 19 that money laundering is one of the most prominent threats to financial institutions. Over the next year, regulators will make adjustments to catch up to the quickly evolving sophisticated techniques and money-laundering tools – capabilities that have “run out ahead” of regulators and financial institutions.
“The intensity of money-laundering risk is underappreciated,” Mr. Routledge said. “We certainly learned that in the 2½ two and a half years since I’ve been in the hot seat.”
When FinTRAC identifies a breach in anti-money-laundering processes, OSFI will have conversations with an institution’s board to ensure that directors are fulfilling their responsibility to ensure that it is complying with the laws, he said.
Rita Trichur
Stefanie Marotta