Opinion: TD Bank’s U.S. woes show the limits of being a big fish in a small Canadian pond


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A person makes their way past a Toronto-Dominion Bank in the Financial District of Toronto on Aug. 14, 2023.Spencer Colby/The Canadian Press

John Turley-Ewart is a regulatory risk management consultant and Canadian banking historian.

If ever there was an opportunity to explore how Canada and the U.S. regulate financial institutions, Toronto-Dominion Bank’s U.S. anti-money laundering (AML) debacle is it.

U.S. regulators believe criminals successfully exploited holes in TD’s AML defences and laundered US$653-million in illegal drug money through TD branches in New York, New Jersey and Pennsylvania between 2016 and 2021. U.S. law enforcement suggests this helped drug traffickers expand their operations throughout the U.S. and around the world.

TD Bank TD-T paid and will continue to pay a steep price for this.

Last year, U.S. regulators rejected TD’s US$13.4-billion takeover of Tennessee-based bank First Horizon Corporation. Stock analysts now suggest heavy U.S. regulatory fines are likely, with some estimates as high as US$2-billion – news that sunk TD’s share price by almost 6 per cent in early May. Internally, TD chief executive officer Bharat Masrani had his pay cut, some leaders left the bank and new AML executives with proven records of success were hired.

Such drama is rare in Canadian banking. The novelty is driving media coverage, regulatory action and political attention.

The Financial Transactions and Reports Analysis Centre of Canada (FinTRAC) recently fined TD more than $9-million after it examined the bank’s AML controls and found them wanting. That this came after the revelation of the U.S. investigations is telling. Peter Routledge, the superintendent of the Office of the Superintendent of Financial Institutions (Canada’s bank regulator), told reporters earlier this month: “We have to get better” at AML. Now, the House of Commons finance committee is considering delving into TD’s AML lapses.

TD’s deficiencies deserve more than a political pile-on. They are a symptom of a larger challenge, and one not limited to TD Bank. As Canada’s Big Five banks – TD, Royal Bank of Canada, Bank of Montreal, Bank of Nova Scotia and Canadian Imperial Bank of Commerce – expand their U.S. footprint, they are experiencing a regulatory culture shock.

In Canada, bureaucrats regulate banks. In the U.S., prosecutors do.

Ottawa reluctantly implemented government bank supervision in 1925 after a series of bank troubles after the First World War, culminating in the Home Bank of Canada’s failure in 1923. Rather than a dramatic shift to rigid examination and public floggings for missteps, supervision extended into the present the pragmatic culture of closed-door collaboration cultivated after Confederation by bankers, deputy finance ministers and finance ministers. Peace, order and sound banking were the goals. It has generally served Canada well since 1925.

In the U.S., formal supervision of nationally chartered banks began in 1863 with the Office of the Comptroller of the Currency (OCC). It wrote the rules for national banks and relied on examinations to enforce them. This policy was consistent with the American reverence for the rule of law and punishment for not abiding by the rules. The OCC set the tone for agencies that followed in its footsteps: the Federal Reserve, the Federal Deposit Insurance Corporation and the Commodity Futures Trading Commission (CFTC). Stability has not been the hallmark of this approach.

Canadian banks operating in the U.S. have found the transition to the U.S. regulatory environment demanding. As big fish in a small Canadian pond, our bankers don’t have the pull, the connections or the ability to effectively manage the political spectacle that U.S. regulators make of compliance failures.

When lapses occur or disputes surface in the U.S., the Canadian closed-door, collaboration playbook does not work.

Consider the 2012 CFTC lawsuit against RBC, publicly alleging that Canada’s largest bank was “wash trading,” an illegal tax avoidance strategy. RBC rightly called the allegations baseless, as it had cleared its trading strategy with the CFTC several years prior. By 2014, a court ordered RBC to pay a $US35-million fine. It was a lesson for all Canadian banks operating in the United States: Just because you are innocent does not mean you are not guilty.

Scotiabank offers a case study as well. In 2020, it paid a US$60.4-million penalty to the CFTC to “resolve criminal charges related to a price manipulation scheme involving … precious metals futures contracts markets.” Scotiabank subsequently exited the precious metals business and U.S. regulators imposed a compliance monitor on the bank for three years.

TD is the latest Canadian bank suffering U.S. regulatory culture shock.

For the House finance committee, the issue should include more than TD’s AML problems. Canada’s Big Five banks are striving to be significant players in the United States. Canadian businesses that succeed in the U.S. benefit Canada. The question for the finance committee is this: What can we do to ensure our banks avoid self-inflicted wounds and succeed on the North American stage?


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