Why the TD Bank Scandal is Far from Over and the Board Must Face Accountability

"There’s still more to come." This was the response of a senior Canadian political figure when questioned this week about the ongoing TD Bank anti-money laundering (AML) scandal.

Despite setting aside $3 billion in provisions for fines in the U.S., it is evident that the saga is far from over for TD Bank's CEO and board.

While some analysts are forecasting total fines to exceed $4 billion, with additional Federal Communications Commission (FCC) costs of $500 million due to a series of recent firings and hirings, the real blow could come in the form of U.S. regulators restricting TD’s business operations south of the border. This situation serves as a clear wake-up call for banks that neglect their Financial Crimes Compliance (FCC) responsibilities.

Driven by its rapid expansion in New York City, its suburbs, and along the U.S. East Coast, TD Bank's board and C-suite seemingly overlooked the associated risks in terms of AML and Anti-Financial Crime (AFC) measures. This oversight led to TD becoming entangled with Chinese fentanyl traffickers and Colombian drug lords. Compounding the issue were employees who accepted bribes to facilitate the laundering of these illicit funds.

There should be no doubt that U.S. federal regulators will be unforgiving toward anyone linked to fentanyl traffickers, and TD Bank will undoubtedly feel the repercussions when penalties are handed down.

TD Bank has expressed confidence that it can resolve these issues by the end of the year, as stated earlier this week. But is this overly optimistic? Almost certainly. The initial $3 billion provision is also likely to need revisiting. It was only last April that the bank set aside $450 million to address the scandal, a move that now appears inadequate.

Once again, TD seems to be attempting to move on too quickly from the scandal, potentially overlooking the underlying issues that led to the crisis in the first place. To understand the potential timescale, one need only look at how long it took Danske Bank to resolve its issues with U.S. regulators over the Baltic states' $200 billion money laundering scandal in the 2000s, which culminated in a $2 billion settlement just last year.

Meanwhile, TD Bank still has to engage in regulatory negotiations with Canada’s AML watchdog, FINTRAC, and the Office of the Superintendent of Financial Institutions (OFSI), its banking supervisor at home. Domestically, there has been growing unease over the scope of, or lack of, local supervision.

Canadian banking historian and regulatory compliance consultant John Turley-Ewart was particularly critical of OFSI this week. "Canada’s bank supervisor misread the risk associated with AML that Canadian banks face in the U.S., and how at risk TD was. It’s a point that OSFI itself ironically confirmed in May this year when it conducted a long-after-the-fact assessment of TD’s compliance framework only to come to the somewhat obvious finding of deficiencies and weaknesses in TD’s AML controls," Turley-Ewart wrote.

He added, "If OSFI had effectively understood that risk years ago and exercised early interventions, TD would most likely be in a better spot today." In a comment piece in The Globe and Mail, he noted that the entire episode "is particularly embarrassing for OSFI and Canada."

According to Turley-Ewart, Canada’s banking system and its reputation for effective prudential bank supervision have been a source of pride and international acclaim, especially since the financial crises of 2007 and 2008. During those crises, Canada’s supervision and risk management abilities were considered superior to those of most other countries. This reputation allowed Canadian bank supervisory officials to play leading roles in international organizations, including the Financial Action Task Force (FATF).

However, in what now seems like a prescient warning, the FATF criticized Canada in 2008 for its lack of sanctions. The body found that "sanctions remain infrequently used, and do not appear to be sufficiently effective, proportionate, and dissuasive, though this may be partially due to the early intervention strategy adopted by OSFI." FATF is scheduled to return to Canada later this year for an evaluation, which Turley-Ewart predicts "is likely to lead to an assessment that gives Canada a black eye on the global stage."

In the meantime, TD Bank still has much to reckon with regarding regulators both north and south of the border. Its attempts to move on from the scandal too quickly appear unseemly, and this will likely be reflected in the severity of both financial and non-financial penalties. While the bank has been outwardly apologetic, this seems to be only on the surface. The board needs to seriously reflect, atone, and place FCC at the heart of its operations—both at home and abroad.

By fLEXI tEAM