Pedestrians pass TD Bank in Toronto on June 4.Sammy Kogan/The Globe and Mail
John Turley-Ewart is a regulatory compliance consultant and Canadian banking historian.
TD Bank’s TD-T now US$3-billion provision for anticipated record U.S. regulatory penalties puts Canadian bank supervision in the international spotlight, and the look isn’t good.
The U.S. case against TD claims that from 2016 to 2021, US$653-million in illegal drug money was successfully laundered through TD branches in three U.S. states. Because of TD’s ineffective anti-money laundering (AML) controls, U.S. officials claim drug traffickers expanded their operations throughout the United States and internationally.
The impact of TD’s regulatory compliance lapses on the bank is there for all to see. In its latest quarterly report, TD added to its existing US$400-million provision for U.S. regulatory fines with a startling US$2.6-billion provision, declared a quarterly loss of 14 cents a share, and sold off more than 40 million shares it owned in Charles Schwab Corp. to shore up its Tier 1 capital ratio – money banks hold in reserve to absorb potential future losses from normal banking operations.
Ambitions to expand TD in the U.S. are on hold.
All this comes at a moment in Canada when our economy is teetering on a recession. This prospect has already given TD cause to put aside more than a billion dollars this quarter to cover potential loan losses owing to rising unemployment and high interest rates. Meanwhile, TD is simultaneously spending millions on severance packages as it attempts to reduce operational costs by cutting jobs.
Yet the failure here goes beyond TD. It points to ineffective supervision by Canada’s bank regulator, the Office of the Superintendent of Financial Institutions, whose responsibility includes preventing this exact situation.
To be specific, OSFI’s 2014 Guideline E-13 spells out the key controls a bank must have in place to manage regulatory compliance risk “in any jurisdiction in which it operates.”
This means OSFI must be satisfied that our banks operating subsidiaries in countries such as the U.S. have the required and effective controls to comply with U.S. regulations.
That satisfaction is determined through the regulator’s supervision of the banks. OSFI states that the “intensity of supervision will depend on the nature, size, complexity and risk profile of … [the bank] and potential consequences of the [bank’s] failure.”
The “intensity of supervision” would in effect measure the amount of risk OSFI assigned to issues (e.g. AML) and institutions. And “failure” means a case such as TD’s current one – having inadequate regulatory compliance management controls.
Canada’s bank supervisor misread the risk associated with AML that Canadian banks face in the U.S., and how at risk TD was. It’s a point that OSFI itself ironically confirmed in May this year when it conducted a long-after-the-fact assessment of TD’s compliance framework only to come to the somewhat obvious finding of deficiencies and weaknesses in TD’s AML controls.
If OSFI had effectively understood that risk years ago and exercised early interventions TD would most likely be in a better spot today.
That all this is unfolding now is particularly embarrassing for OSFI and Canada. The country’s banking system and its reputation for effective prudential bank supervision have been a source of both pride and international acclaim since the financial crises of 2007 and 2008, when our supervision and risk management abilities outshone those of most other countries.
That reputation has allowed Canadian bank supervisory officials to take leading roles in sharing expertise through many international organizations, including the Paris-based Financial Action Task Force, the global organization that sets international standards for fighting money laundering and terrorist financing.
In 2008, the international task force’s report on Canada’s efforts to meet its global AML standards raised concerns about OSFI. Despite the wide range of enforcement actions and sanctions at OSFI’s disposal, the task force concluded that “sanctions remain infrequently used, and do not appear to be sufficiently effective, proportionate and dissuasive, though this may be partially due to the early intervention strategy adopted by OSFI.”
The TD AML saga suggests that OSFI’s “early intervention strategy” is now also insufficiently effective.
The Financial Action Task Force is scheduled to return to Canada later this year to assess our country’s capacity to fulfill the international AML standards we pledged to support when we joined the FATF in 1990. It is likely to lead to an assessment that gives Canada a black eye on the global stage.
We know what TD is doing to fix its deficiencies. What is OSFI doing?