TD Bank’s $3 billion fine reveals the shortcomings of the banking industry’s anti-money laundering safeguards

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By means of Nicholas LarsenInternational banker

OOn October 10, the U.S. Department of Justice (DOJ) announced that TD Bank had agreed to a $3 billion settlement with the U.S. government over allegations that it repeatedly failed to detect money laundering activity within its institution. With the Canadian lender’s U.S. arm unable to prevent a series of criminals from laundering hundreds of millions of dollars through TD Bank accounts over nearly a decade, including profits from narcotics trafficking, pertinent questions are being raised about the effectiveness of U.S. anti- money politics. money laundering regulations (AML).

The settlement includes a record $1.3 billion in fines to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and $1.8 billion to the DOJ, along with TD Bank’s admission of guilt that it violated the Bank Secrecy Act (BSA), which requires financial institutions to maintain effective programs to detect and report suspicious activity by their customers.

“By making his services easy for criminals, it became one,” Attorney General Merrick Garland said during a news conference about the perpetrator. “Today, TD Bank also became the largest bank in U.S. history to plead guilty to the failure of the Bank Secrecy Act program and the first U.S. bank in history to plead guilty to conspiracy to commit money laundering. TD Bank chose profit over compliance – a decision that is now costing the bank billions of dollars in fines. Let me be clear: our investigation continues and no individuals involved in TD Bank’s illegal conduct are off limits.”

The Wall Street Journal (WJ) was the first publication to report news of the settlement, noting that investigations into the 10^e The largest U.S. bank began operating in 2021 after an alleged TD Bank regular, Da Ying Sze, and members of his money laundering ring were followed by law enforcement officers as they drove between several TD Bank branches in Queens, New York, depositing bags of cash in each branch with the help of bank tellers. According to Garland, Sze also found that TD Bank had the most permissive policy of the various banks in attempting to launder his money and was even able to provide TD employees with more than $57,000 in gift cards.

According to FinCEN, TD Bank facilitated more than $400 million in transactions for Sze between 2017 and 2021 before he pleaded guilty to money laundering in 2022 for his role in conspiring to conceal drug trafficking proceeds. “Sze conducted most of these transactions in large sums of cash (often in bags that Sze brought to TD Bank branches), but the Bank failed to restrict or restrict Sze’s activities in a timely manner,” said FinCEN in its press release. “TD Bank failed to timely file SARs (suspicious activity reports) on a substantial portion of this activity and also failed to identify Sze in more than 500 CTRs (currency transaction reports) totaling more than $400 million , which hindered FinCEN and law enforcement.”

The DOJ also provided a detailed report on TD Bank’s deficiencies, stating that the bank had “longstanding, pervasive and systemic deficiencies” in its U.S. AML policies, procedures and controls between January 2014 and October 2023, but no took appropriate measures. corrective action. “Instead, senior executives at TD Bank enforced a budget mandate, referred to internally as a ‘flat cost paradigm,’ requiring that TD Bank’s budget not increase year over year, despite growing profits and risk profile over the same period increased significantly. ”

The DOJ also noted that while TD Bank maintained elements of an AML program that appeared adequate in appearance, the program’s “fundamental, widespread flaws” made the lender an “easy target” for money launderers and financial criminals. “TD Bank’s AML failures made it ‘easy’ for criminals, in the words of its employees. These failures enabled three money laundering networks to collectively transfer more than $670 million through TD Bank accounts between 2019 and 2023.”

Federal regulators and even TD Bank’s own internal auditors have repeatedly flagged problems with its transaction monitoring program, which remained “effectively static” from 2014 through 2022, such that it failed to identify glaring known deficiencies and emerging money laundering risks in new countries to tackle. products and services. This also meant that TD Bank did not add any new transaction monitoring scenarios or make any material changes to existing monitoring scenarios during this period. As such, 92 percent of TD’s total transaction volume was unmonitored from January 1, 2018 to April 12, 2024, equivalent to approximately $18.3 trillion in transaction activity.

FinCEN found that TD Bank’s failures caused trillions of dollars in transactions to go unmonitored annually for potentially suspicious activity that required reporting. “Specifically, during the period covered by the consent order, TD Bank willfully failed to file Suspicious Activity Reports (SARs) on thousands of suspicious transactions – totaling approximately $1.5 billion,” the press release said. “In addition, TD Bank’s currency transaction reports (CTRs) of large cash transactions were often delayed and in some cases misleading to law enforcement.”

FinCEN also noted that TD Bank failed to timely detect suspicious activity involving its own employees. “For example, in 2021, a TD Bank employee facilitated the laundering of narcotics proceeds in exchange for bribes,” the statement said. “This employee opened numerous accounts, including for shell companies, which then engaged in funnel account activity worth millions of dollars in a high-risk jurisdiction where TD Bank did not maintain operations. TD Bank knew that this type of activity was not subject to appropriate controls and failed to mitigate this glaring risk.”

In TD Bank’s plea deal with the DOJ, it agreed to forfeit just over $452 million, of which $123.5 million will go toward a coordinated resolution with the Board of Governors of the Federal Reserve System (the Fed), and to pay a criminal fine. of $1.4 billion. The bank has also agreed to employ an independent compliance monitor for three years and to enhance and enhance its AML compliance program. “We will make the necessary changes to put the bank on a stronger foundation,” TD Bank’s new CEO Raymond Chun told investors. “This is TD’s number one priority, and my number one priority. Make no mistake, we will honor our obligations to our regulators… we will get the job done.”

But despite the massive amounts involved in the settlement, some still believe TD Bank’s punishment was too lenient. In a letter to Attorney General Garland and Deputy Attorney General Lisa Monaco on October 30, Senator Elizabeth Warren (D-Mass.) stated that the DOJ’s decision to shift certain legal obligations from the Canadian parent bank to the U.S. holding company, TD Bank to avoid the full list of possible sanctions.

She noted that the DOJ failed to charge the bank with money laundering, which would have triggered the Office of the Comptroller of the Currency’s (OCC) banking “death penalty” provision. According to Warren, this would have required the regulator to send the bank notice of its intention to terminate the bank’s charter and to hold hearings on a possible revocation. “These charging decisions represent absurd legal gymnastics by (the) DOJ that ultimately allowed the bank and its top executives to avoid full responsibility for their actions. This is not an acceptable outcome,” Warren wrote.

LexisNexis Risk Solutions findings from the latest report, “True Cost of Financial Crime Compliance Study – US and Canada,” conducted by Forrester, show that financial crime compliance costs have increased for 99 percent of financial institutions, with the total cost of financial crime compliance in the US and Canada reaching $61 billion last year. Included in this compliance are important requirements to monitor customer transactions and file reports regarding potentially suspicious activity.

And yet the current system has its fair share of critics who argue that resources are spent on the technicalities involved in complying with regulators’ anti-money laundering rules, rather than on looking for the worst forms of financial crime. According to a report from the Wall Street JournalFinancial crime experts argue that this approach to regulatory oversight has become a “check-the-box approach” that leads to the filing of a plethora of SARs each year, “many of which may have little value for law enforcement officers’ .

A FinCEN legislative proposal formalizes requirements for financial institutions to conduct assessments that identify the risks their organizations face, and for banks to integrate established national priorities into their anti-money laundering programs. However, banking groups argue that this approach does little to alleviate the already heavy regulatory burden on financial institutions. “As proposed, this approach risks prioritizing duplicative paperwork and technical compliance over goals of identifying and combating illicit financial activity,” Heather Trew, an attorney and former Treasury Department official, wrote in a letter seen by American Bankers Association (ABA) to FinCEN.

Both the ABA and the Bank Policy Institute (BPI) have criticized FinCEN’s proposed legislation, arguing that adding new requirements is not as effective as reforming existing requirements. “We believe the proposed rule will do little to change the status quo. It will neither implement the intent of Congress nor facilitate a risk-based approach to identifying and disrupting financial crime,” Gregg Rozansky, a director and attorney at BPI, wrote in a September letter to FinCEN. “Currently, the AML/CFT regime claims to be risk-based, but tolerates little to no errors in even the most mundane, administrative and low-risk tasks. In practice, it focuses on technical compliance (including, for example, documentation and re-verification) rather than effectiveness. This approach is completely separate from a focus on managing real risks.”