In October, TD Bank cut deals with the U.S. Department of Justice and regulators to plead guilty to conspiracy to commit money laundering and pay a US$3-billion fine and.Jeenah Moon/Reuters
John Turley-Ewart is a contributing columnist for The Globe and Mail, a regulatory compliance consultant and a Canadian banking historian.
This month, the International Monetary Fund released its 80-page assessment of Canada’s financial system. That it describes the system as “strong” won’t surprise anyone. What will are the IMF’s doubts about Canada’s capacity to ensure chartered banks comply with anti-money-laundering (AML) and anti-terrorist-financing (ATF) laws.
The IMF’s assessment is a red flag given last October’s AML troubles at Toronto-Dominion Bank TD-T, which gave bank regulators a black eye at home and abroad. Canada needs an effective and holistic AML and ATF supervisory regime that will encourage confidence. What we have is a Byzantine model that, against common sense, hives off prudential oversight (ensuring a bank is financially sound) from supervising financial-crime detection and prevention, producing an additional bureaucracy for banks to manage.
In 2021, Canada’s Department of Finance let the Office of the Superintendent of Financial Institutions, or OSFI, step back from the hands-on supervision of AML and ATF compliance controls that banks rely on each day to detect, report and deter financial crimes (Guideline B-8). Peter Routledge, OSFI’s superintendent, explained that rescinding B-8 would “eliminate duplication and redundancy in how AML/ATF regulatory requirements are applied.”
It allowed OSFI to jettison continuing supervision of AML and ATF monitoring, reporting and management controls within the overall supervision of risk frameworks it routinely conducts. AML issues were excluded from OSFI’s quarterly meetings with banks by teams of inspectors, who understand the strengths and weaknesses of the banks they supervise and how to mitigate concerns with the appropriate bank executives before they surface as matters requiring formal attention.
This was replaced with ad hoc, siloed, report-focused examinations by the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC) that, according to the Canadian Bankers Association (CBA), produce a “disproportionately low number of intelligence reports to law enforcement.” This results in few charges, fewer convictions and one more reason for experts to believe Canada’s inadequate AML defences make us “a destination of choice for global financial crime,” as the editors of Dirty Money: Financial Crime in Canada put it.
FinTRAC is responsible for supervising banks, plus thousands of businesses subject to AML and ATF requirements. Today, systemically important banks wait in long lines to have their reports examined and opined on alongside one-stop cheque-cashing outfits and the local used-car dealer. It isn’t working, which is evident to the IMF.
“While the shifting of the … supervisory mandate to FinTRAC in 2021 was accompanied by some resource augmentation,” IMF officials say, “the frequency of supervisory engagements has since significantly decreased. FinTRAC should increase the frequency of intrusive supervisory activity for high-risk entities, ensuring resources are commensurate with assessed risk levels.”
What is apparent to the IMF – the need for more and detailed supervisory engagement with banks on AML and ATF controls – is less apparent to Ottawa, which introduced legislation in June, Bill C-2, that promises tougher penalties for banks that do not comply with AML and ATF rules, a reactionary rather than preventive measure.
More troubling is that legislators felt compelled in Bill C-2 to create formal mechanisms that enable OSFI and FinTRAC to share information and collaborate more effectively, a measure of how ill-conceived the 2021 policy decision was that handed over supervision to FinTRAC without such mechanisms already in place. It hardly comes as a surprise, then, that members of the CBA “vocally supported recent changes that enhance information sharing.”
Regulators need to go back to the future and reverse the 2021 decision that saw OSFI pass AML and ATF supervisory duties over to FinTRAC, which appears to be happening in practice if not in policy already.
This January, Mr. Routledge was asked at a bank executives conference if there is a bigger role for OSFI to play on the AML front. He responded: “AML is a critically important and growing area of focus, as failures in AML strike directly at the heart of the financial system’s integrity and security, as we learned in 2024.” The superintendent went on to assure the audience that “where we see failures in governance, compliance management or culture, OSFI will act urgently and decisively.”
The IMF highlights oversight failures and the need for resources to meet the moment to safeguard AML compliance at our banks. That is best delivered through OSFI alone, with its seasoned and specialized bank inspectors. The question is: Will Mr. Routledge act decisively now when the failure in governance and compliance management lies with regulators themselves?