Bharat Masrani, Group President and Chief Executive Officer of TD Bank Group, outside the bank offices in downtown Toronto, on Sept. 3, 2020.Fred Lum/The Globe and Mail
John Turley-Ewart is a Canadian banking historian and principal at Regulatory Risk Management Inc.
Too slow, too late – that is how Toronto-Dominion Bank’s response to its U.S. money-laundering mess will go down in history.
Friday was a reminder of this reality when it was suddenly announced that the Toronto-based institution and 10th-largest U.S. bank had found the wherewithal to hold 41 executives, and the bank’s current chief executive officer, Bharat Masrani, accountable for a catastrophic failure to comply with U.S. anti-money-laundering regulations from 2014 to 2023.
The late change in plans smells of desperation, an attempt to quell growing shareholder anger for mismanagement of the bank’s U.S. operations that cost TD US$3-billion in fines, tens of millions more in current and future spending to fix the problem, an asset cap in the United States and the threat of being forced to shrink the bank’s U.S. footprint further if American regulators are not satisfied with TD’s remediation efforts during the bank’s five-year probationary period.
TD TD-T risks five years of stagnation as it works to earn its way out of the U.S. regulatory penalty box.
The current CEO, Mr. Masrani, was scheduled to step down on April 10, but he will now be out by Feb. 1 and will have to make do with his $1.5-million base salary in TD’s fiscal 2024 versus the roughly $13.3-million he received in fiscal 2023. However, the question of why his past CEO performance bonuses were not repaid lingers, given that he clearly did not earn them based on the detailed and egregious management failures that occurred on his watch and that TD Bank admitted to in its October U.S. guilty plea to conspiracy to commit money laundering.
Friday’s notice from TD also indicated that $30-million in bonuses had been withheld from 41 executives and that many of them were “no longer with the Bank.” Shareholders might wonder why any of them are still at the bank.
Changes have been made to TD’s corporate governance that limit board member terms to a maximum of 12 years, as opposed to 15, which offers an easy off-ramp for five long-serving TD board members who will be out in April following the bank’s annual meeting. TD chair Alan MacGibbon will leave by year’s end, the assumption being that he is sticking around to oversee the transition of new members onto the board and the installation of TD’s new CEO, Raymond Chun.
As part of the board governance shakeup, TD will propose at its annual meeting in April new board committee chairs and, more importantly, a “newly constituted” remediation committee that will presumably oversee the bank’s efforts to meet the requirements under its plea agreement with U.S regulators.
But that is not all the remediation work TD faces. TD needs to rebuild its relationship with its primary supervisor in Canada, the Office of the Superintendent of Financial Institutions.
It was profoundly embarrassing for OSFI to have had U.S. bank regulators uncover some of the most deeply troubling compliance failures at a Canadian bank in modern memory. Just the example alone of TD intentionally allowing approximately US$18.3-trillion in transaction activity to go “unmonitored” from January, 2018, to April, 2024, is astounding.
TD was caught doing this by U.S. regulators, and that forced OSFI to play defence and manage its reputation as an effective regulator at home and abroad, something it has never had to do before.
OSFI started by conducting a hasty examination of TD’s money laundering controls in early 2024, finding deficiencies and putting TD on a Canadian remediation plan. OSFI then had to explain to the public last fall why it had not found problems at TD earlier and pronounced upon them – something it is prohibited from doing because of arcane laws in Canada that prevent OSFI from publishing findings on non-prudential compliance matters such as anti-money-laundering.
TD’s litany of mistakes gave OSFI reason to publish a regulatory notice on “Culture Risk Management” that specifically calls out the responsibility of bank boards, a notice that says, “The board is responsible for the institution’s culture and should promote a risk culture that stresses integrity and effective risk management.”
This is table stakes for any bank board, but that OSFI felt the need to publish such a guideline reflects how troubled it is by the role TD’s board played in its U.S. money-laundering affair.
That it took TD’s board this long to take executive accountability seriously and to act on it, suggests OSFI’s concerns about the bank’s governance are more than merited.