What are the repercussions for TD Bank’s money laundering scandal? We answer your questions

In 2021, the U.S. Department of Justice laid charges against a criminal ring that laundered millions worth of drug money through financial institutions in the country – and Canada‘s TD Bank was named as one of the banks central to the criminal ring’s activities.

TD pleaded guilty to conspiracy to commit money laundering, and has been hit with a historic fine – more than US$3-billion – as well as penalties such as an asset cap and restrictions on opening new branches in the U.S.

Readers asked about the repercussions of the scandal, the future of TD Bank and how Canadian consumers are affected. Here are some highlights from the Q+A.

Questions and answers have been edited for length and clarity

The fallout of the scandal

Has anyone been arrested or fired? Are management salaries or bonuses being reduced?

As for salaries and bonuses, regulators disclosed that TD has so far withheld or clawed back about US$2-million in compensation from executives. That includes a $1-million reduction to CEO Bharat Masrani’s bonus pay last year. TD expects to claw back another US$5.5-million.

What are the consequences for the CEO for this scandal? Is he being held responsible?

David Milstead: TD has said its CEO Bharat Masrani had a $1-million reduction in his annual bonus last fiscal year. (For context: Mr. Masrani earned $13.38-million in fiscal 2023, with $1.55-million of that the bonus. In the previous five years, his bonus averaged nearly $2.2-million and his total compensation averaged $13.4-million.)

TD made an announcement on Mr. Masrani’s status before the revelation of the U.S. criminal plea: he was announcing his intention to retire on April 10, 2025, and he would then serve as an advisor to the bank until October 31, 2025. He did not resign and he was not fired.

Clearly, TD felt he should remain to help the transition to a relatively inexperienced new CEO. And U.S. prosecutors and regulators did not object to him remaining.

None of the actions revealed this month included any TD executives or directors as defendants. Many people question prosecutions or regulatory actions against corporations that do not include individuals. After all, a corporation is not a living thing; people must act and direct it. It is very reasonable to ask if the leaders of TD have been adequately held responsible.

Has TD changed its policies for flagging money laundering?

Stefanie Marotta: TD is going to have to spend quite a bit of time and money on overhauling its anti-money laundering controls. But most banks have their own versions of “see something, say something” programs where employees can anonymously flag concerns.

The incredible thing about this situation is that employees were raising red flags with upper management at TD, including the senior employees who were responsible for the bank’s anti-money laundering program in the U.S. Staff were also joking through internal channels about the bank’s reputation as an enabler of money laundering.

Canada’s financial crimes watchdog – the Financial Consumer Agency of Canada (FCAC) – has a whistle-blower program that allows employees of federally regulated banks to send in tips about suspected financial crimes.

Are there grounds for a class action shareholder suit?

There are, however, existing class action lawsuits over the termination of TD’s attempt to acquire First Horizon Corp., a Tennessee-based bank that TD intended to buy for US$13.4-billion. That deal fell apart when TD was unable to get regulatory approvals, as regulators intensified their scrutiny of the bank over its money laundering lapses.

What this means for Canada

How do any of our major Canadian financial institutions assure Canadian consumers that they are talking steps to ensure money laundering activities are being addressed head on?

Also, this month the head of Canada’s banking regulator OSFI, Peter Routledge, told me and some other journalists that risks to banks from anti-money laundering issues have “risen in prominence,” and that there are AML issues the regulator is aware of that haven’t yet been disclosed publicly. He also said “it’s not a single event“ that has the regulator concerned, without naming TD. ”There have been a bunch of events that have caused us to think about that.”

Money laundering is hard to stop. Criminal groups are sophisticated, international and constantly probing for weaknesses. But you can bet every bank is trying to tighten up to avoid TD’s fate.

Does the money laundering scandal affect people’s bank investments?

Tim Kiladze: The short answer: it already has. This year alone the top three performing bank stocks in Canada have vastly outperformed TD. CIBC CM-T is up 35% and both National Bank NA-T and Royal Bank RY-T are up 30%. TD, meanwhile, is down 9 per cent. So that’s nearly 45 percentage points of underperformance relative to CIBC.

The big unknown is what this will mean for TD going forward. Historically, TD earned a premium valuation alongside RBC. It’s lost that, and no one really knows if they’ll get it back any time soon.

Another thing to keep in mind: there’s been a big divergence in performance between Canadian banks – and it’s not just TD. BMO BMO-T and Bank of Nova Scotia BNS-T have also struggled. That means it’s much harder to buy the equal-weight bank index and expect it to do well.

Has there been any investigation by The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) into TD’s anti-money-laundering policies in Canada?

Marotta: FINTRAC levied its largest-ever penalty against TD earlier this year to the tune of nearly $9.2-million. While that’s a historic penalty for the Canadian agency, that’s a drop in the bucket compared to the $3-billion blow dealt by U.S. authorities. To put $9.2-million in context for a large Canadian bank, TD CEO Bharat Masrani received $13.4-million in compensation in 2023, even after taking a $1-million pay cut. So in theory, the CEO could have paid the FINTRAC fine from just one year’s salary. So FINTRAC’s fine won’t have much impact on the bank’s overall finances.

Should Canadians not expect high standards of regulatory oversight meted out with respect to our financial institutions which happens in the U.S.?

Marotta: This is a question that keeps coming up in my conversations. Why was it the Americans that detected and acted on this before we heard from Canadian regulators? The issue is that two federal laws prohibit Canada’s banking regulator from discussing or disclosing its oversight measures of the Canadian banks. The regulator calls it confidentiality. Critics call it secrecy. But ultimately, Canadians don’t get to hear much about the banking regulator’s enforcement measures over the banks.

But really, the ability to change these laws lies with the federal government and the Finance Minister.

Could or should Canadian regulators have acted differently?

Milstead: The big questions here, rather obviously: if all this money laundering was occurring at TD’s U.S. operations, what was happening in Canada? And if we suspect there was indeed money laundering at TD’s Canadian operations, will there be a Canadian regulatory action?

Canadian bank regulation is cloaked in even more secrecy than in the U.S., in large part because of the laws. I think the Canadian regulators should answer these questions, and if the law precludes them from answering, the law should be changed.

I personally believe Canada’s privacy laws protect government officials, regulators and law enforcement from scrutiny more than they protect individuals’ privacy.

TD Bank’s dirty laundry: Inside the cultural shift that seeded a money-laundering crisis, succession woes and a leadership exodus

The future of TD Bank

Given that the sanctions against TD are only in its retail operations, does the company have the ability and the skills to expand its other divisions in the U.S. to pick up some of the slack that it would have had from an expansion of retail operations?

Kiladze: That’s right – the asset cap, which limits the bank’s ability to add new loans, applies to U.S. retail specifically. So, TD can keep making corporate loans through TD Cowen, which can then drive investment banking revenue. (A lot of IPO and M&A mandates are awarded because a bank has lent the client money.) But the asset cap is still a big blow. TD is built on bringing in low-cost deposits and then lending that money out in the form or mortgages or credit card balances at higher rates. There are also rules that limit money from being shifted across the border, so it’s not like an excess of deposits in the U.S. can be used easily to lend in Canada (it gets technical, so I’m just saying that broadly speaking).

Assuming no further growth in the USA for 10 years, can TD reach its all-time high stock price without this growth driver?

Kiladze: It’ll be much harder. That’s not to say it can’t be done. CIBC, for instance, is heavily focused on Canada and it recently set a new all-time high. But it’ll be tough. Likely very tough. TD still has to spend hundreds of millions to beef up its anti-money laundering systems in the U.S, so there’ll be drag on growth from that alone.

The bank will also have to set a new narrative. For the past two decades TD talked up the U.S. as its huge growth play. Now it also has to prove it can expand in other divisions. Again, it’s possible. For instance, TD can keep growing its capital markets business in the U.S. (which now includes its acquisition of the investment bank Cowen). But there’s no denying U.S. retail was a huge part of its growth story.

What surprised our reporters most from the investigation

Marotta: I’m quite certain that in 30 years, I’ll be saying that one of the most incredible news conferences I’ve ever attended is the one a few weeks ago held by the U.S. Department of Justice and other regulators. In less than 40 minutes, they totally obliterated any benefit of the doubt that TD was unaware of or unable to stop criminals from laundering money through the bank.

Sure, when the U.S. DOJ gets involved, that’s a pretty big clue that the issue is serious. But the DOJ produced piles of evidence that showed that TD employees, including senior management responsible for anti-money laundering, were aware that the program was faulty and that bad actors were laundering criminal proceeds through TD bank accounts. Employees were literally joking about it in internal platforms. I’ll just leave the link to the news conference here. Wait till you get to the part where they read employee chats verbatim.

When TD announced in February of 2022 that it had struck a deal to buy U.S. bank First Horizon Corp. for US$13.4-billion – a major deal that would have transformed TD’s U.S. footprint – a criminal who laundered US$470-million through TD had already pleaded guilty to charges in a U.S. court.

More than a year later, TD’s CEO was still saying the bank was fully committed to the transaction. TD’s regulatory problems ultimately scuttled that deal and have now cost the bank US$3-billion in fines and much more in terms of the valuation of its stock, as well as damage to its reputation.

Kiladze: Just how frustrated some TD employees and executives had been – for years. To the outside world, outgoing CEO Bharat Masrani presented this image of ‘Everything’s fine, we’re TD, we’ll fix it all. You can trust us.’ But internally there was real anger – and more and more respected leaders were leaving.