The Toronto-Dominion Bank (TD), commonly known as TD Bank Group, is one of the largest and most influential financial institutions in North America. Serving over 27 million customers globally, TD offers a broad range of services, including personal banking and wealth management, while maintaining a strong presence in both Canada and the United States. The US has been a key growth market for TD, where it has invested billions over the past two decades to acquire smaller regional banks along the east coast, building a network of approximately 1,100 branches – surpassing its branch count in Canada.

Given its size, TD Bank has certainly made significant investments in advanced anti-money-laundering (AML) regulatory compliance technologies (RegTech), as manual oversight is impractical for an institution of its scale. Regulators worldwide strongly encourage banks to adopt automation solutions to ease compliance burdens, reduce false money laundering alerts, and enhance risk insights.

As a result, TD’s AML infrastructure likely includes systems for customer name screening, risk rating, and transaction monitoring, along with continuous optimization of rules and methodologies to support critical AML risk controls.

Not surprisingly, TD Bank has also been vocal about its commitment to advancing artificial intelligence (AI) solutions. One notable example is its partnership with the Vector Institute, where it supports AI research initiatives and participates in collaborative projects aimed at advancing the use of AI in financial services.

This partnership has enabled TD to strengthen its AI talent pipeline, with the bank hiring 57 AI specialists through Vector’s network. Consequently, TD leverages AI to enhance customer relationships, improve internal processes, and uncover new opportunities for applying machine learning across its operations.

The failure wasn’t due to the complexity of the money laundering scheme in question … but rather its simplicity and effectiveness.

And yet despite its continuing investment in sophisticated technologies, TD Bank failed to prevent being used as a conduit for laundering money linked to Chinese fentanyl trafficking.

Yes, you read that correctly. And the failure wasn’t due to the complexity of the money laundering scheme in question or its insignificance (the amount laundered has been described as “staggering”), but rather its simplicity and effectiveness. What one could probably term a case of “hiding in plain sight”.

It was the traditional human-led policing that caught the offenders red-handed. US regulatory probes revealed that at least $653m was laundered through the bank between 2016 and 2021 orchestrated by Da Ying Sze. Agents from the Drug Enforcement Administration and the Internal Revenue Service’s criminal investigations unit tracked suspected participants in the operation through Flushing, Queens, where they observed large bags of cash being taken into various banks (something eerily similar to a recent UK NatWest case). The suspects operated across multiple financial institutions, often using accounts tied to small local businesses to avoid suspicion. TD Bank, with its many branches, was an ideal target for the scheme.

Illicit cash proceeds

In one day of surveillance, agents followed members of Da Ying Sze’s organization as they used a box truck to stop at three separate TD Bank branches. Sze regularly accepted illicit cash proceeds, depositing the funds into financial institutions in New York, New Jersey, Pennsylvania, and other locations. He used the illegal money to purchase official bank checks, wrote personal and business checks, and transferred funds via international and domestic wires.

These transactions funnelled the illicit money to thousands of individuals and entities in the US, China, Hong Kong, and beyond. In return, Sze earned a fee of approximately 1 to 2% of the laundered cash. Prosecutors also alleged that Sze and others provided gift cards and bribes worth at least $57,000 to bank employees to aid in laundering the proceeds.

The US Attorney’s Office for the District of New Jersey has now filed a number of cases alleging serious misconduct by TD Bank employees in New York and New Jersey.

In one case, a now-departed TD Bank employee in Florida allegedly accepted a series of $200 bribes to facilitate money laundering. Another employee, Oscar Marcelo Nunez-Flores, from the Scotch Plains branch, allegedly abused his position to open bank accounts under the names of shell companies with nominee owners. These accounts were then used to launder narcotics proceeds, including funds sent to Colombia.

Nunez allegedly provided further assistance by enabling online access and issuing dozens of debit cards for the accounts, which were later used to withdraw cash from ATMs in Colombia. For his involvement in the scheme, Nunez purportedly received thousands of dollars in bribes for each account he opened. It was a profitable side business.

TD has been implicated in facilitating criminal activities that are becoming politically significant at a national level.

The seriousness of TD’s offenses is amplified by growing concerns over Chinese criminal groups exploiting the US financial system. A recent money-laundering risk assessment by FinCEN highlighted the increasing prevalence of these groups and identified them as one of the most significant money-laundering threats to the financial system. In this context, TD has been implicated in facilitating criminal activities that are becoming politically significant at a national level.

Interestingly, there are uncomfortable echoes of historical narratives from the late 18th century, when stereotypes – such as the distorted image of Chinese opium traffickers corrupting innocent victims – replaced facts and fuelled fear, advancing political agendas in both the US and Europe.

TD Bank, therefore, may face significant penalties for enabling “drug traffickers to expand their operations throughout the US and around the world,” as stated by Susan A Gibson, Special Agent in Charge of the Drug Enforcement Administration’s New Jersey Division.

A potential fine as high as $4 billion may not be the only consequence. US regulatory restrictions could limit TD’s growth, such as curbing new branch openings and imposing an asset cap, similar to restrictions placed on Wells Fargo in 2018 to limit loan growth. Additionally, TD will likely incur substantial AML remediation costs.

For example, both Standard Chartered and HSBC had to invest hundreds of millions of dollars in overhauling their systems, purchasing additional regulatory technology solutions, and hiring thousands of staff as part of their settlements. Standard Chartered is reported to have initially paid $700m in penalties for money-laundering violations, followed by an additional $300m as part of compliance measures agreed upon with regulators, based on the findings of a regulatory-appointed monitor.

Internal communication

TD has already spent $500m to strengthen its AML program, hiring key executives, and investing in staff training. The bank is also enhancing its internal communication systems as part of its efforts to overhaul its AML processes. CEO Bharat Masrani acknowledged the severity of the challenges: “We had a situation where some bad actors were able to exploit the bank … In an organization of our size, it’s easy to overlook accountabilities. There’s a lot of information available, and it’s crucial to ensure the right information is accessible to the right people at the right time”.

Costs are likely going to escalate as Regtech firms, promising AI-driven decision intelligence and future crime prevention, seize this lucrative opportunity to market their solutions to the bank.  

In addition to the costly technology upgrades, leadership changes at TD Bank also seem imminent. Ten shareholders and two analysts have indicated that a CEO change is likely next year, with many advocating for an external candidate who can drive a “cultural shake-up” and is particularly knowledgeable about the US market.

Such a leader could bring a fresh start once TD resolves its AML issues with US regulators and tries to move on. Beyond the potential CEO change, compliance leadership is also undergoing shifts, which illustrates the unfortunate human impact of such a costly fiasco. Chief Compliance Officer Monica Kowal, who joined in 2017, has recently left the company and will be replaced by Deputy Chief Compliance Officer Erin Morrow, who will report to Chief Risk Officer Ajai Bambawale. Additionally, Vishal Ranjane, former Head of Global AML Strategies, Solutions & Transformation, has also departed from the bank and now works for a different institution.

As you would expect, the scandal has also had an immediate impact on TD Bank’s stock price that dropped after the announcement of potential fines. However, for high-risk investors, the lowered stock price may present an attractive buying opportunity, as large banks like TD have historically demonstrated resilience and the ability to recover from regulatory setbacks.

“Although this is a large amount, we remain well-capitalized … I am confident we are doing all the right things to manage through this,” said TD CEO Bharat Masrani. His confidence is supported by TD’s US arm in Delaware, which manages over $370 billion in assets and is the 10th-largest commercial bank in the US  To further mitigate the fine’s impact, TD announced plans to sell part of its 12.3% stake in US brokerage Charles Schwab, for which it had already provisioned $450 million in the previous quarter.

Shockingly, the global estimate of $2.9 trillion laundered annually has remained consistent since 1999, and what is most surprising is that criminals are still able to deposit bin bags of cash by simply walking into a branch.

As TD Bank addresses its regulatory compliance issues, improves its risk management frameworks, and invests in more RegTech solutions, there is potential for the stock to rebound, offering significant returns for investors willing to bet on its long-term recovery.

However, while high-risk investors might profit, customers are almost certainly about to face the consequences of both penalties and remediation efforts. These may include higher fees, more friction in banking services, stricter KYC conditions, and restricted access to high-risk products.

Someone has to pay after all and rarely is it the bank itself. Small local businesses, similar to those exploited in the money laundering scheme, are those that are most exposed and may experience increased de-risking and de-banking as the bank attempts to satisfy regulators that it is managing AML risks effectively.

However, history shows that public and private institutions have long struggled with effective AML measures.

Shockingly, the global estimate of $2.9 trillion laundered annually has remained consistent since 1999, and what is most surprising is that criminals are still able to deposit bin bags of cash by simply walking into a branch.

A failure such as this one also fuels a conference cottage industry where AML experts , sometimes without any knowledge of the bank’s systems or indeed the nuances of the case itself, debate its regulatory failures and explain how these could have been avoided.

Meanwhile, and this is the real kicker, perhaps the most perplexing aspect of this and other similar cases is that the simplest money laundering techniques still succeed, despite of the plethora of systems, processes, Regtech solutions both available to and deployed by banks. And in the end, it is small businesses that pay the highest prices for an AML regime that remains clearly unfit for purpose.