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TD money-laundering fines may reach US$4 billion, Jefferies says

Christine Dobby, Bloomberg News

Fines against Toronto-Dominion Bank tied to U.S. money-laundering probes may total as much as US$4 billion following fresh allegations involving the lender, according to Jefferies Financial Group Inc. analysts — double previous estimates of the potential impact on Canada’s second-largest lender.

A now-departed Toronto-Dominion branch employee in Florida took a series of $200 bribes to help clients move millions of dollars to Colombia by skirting anti-money-laundering defenses, prosecutors allege in a case first reported this week by Bloomberg News. In another recent case, a former branch employee in New York admitted to bypassing the bank’s compliance measures to defraud a customer.

Toronto-Dominion is under investigation by the U.S. Department of Justice, bank regulators and the U.S. Treasury Department over allegations of money laundering and other financial crimes at several of the bank’s U.S. branches. 

“While our previous estimate for the regulatory fines was at $2 billion, given that a third AML issue has been reported, we now believe that this estimate could be low,” Jefferies analysts led by John Aiken wrote in a report Wednesday. “Although a $4 billion fine does seem a bit high at this juncture, we cannot deny that it is still within the realm of possibilities, potentially eroding all of TD’s current excess capital.”

The U.S. Attorney’s Office for the District of New Jersey has so far filed at least four cases alleging serious misconduct by branch employees in New York, New Jersey and Florida. One of those cases, reported by the Wall Street Journal in early May, involved TD branches being used to launder drug money as part of a $653 million conspiracy. 

The revelations came after Toronto-Dominion said on April 30 that it was setting aside an initial provision of $450 million for potential regulatory fines.

Toronto-Dominion likely knew of the additional cases that have since been reported when it took that charge, Bloomberg Intelligence analysts Elliott Stein and Paul Gulberg said this week. They maintained an estimate of $600 million to $1.1 billion in total fines facing the bank.

Analysts at firms including Bank of Nova Scotia and National Bank of Canada have previously estimated penalties in the range of $2 billion for Toronto-Dominion. Royal Bank of Canada’s Darko Mihelic wrote on May 8 that he believes the fine “may be larger than $1 billion” and that, in a “bad scenario,” Toronto-Dominion could pay $3 billion or more in penalties and face an asset cap on its U.S. business for five years.

The bank is also facing a proposed shareholder class-action lawsuit filed Tuesday in the Ontario Superior Court of Justice in Toronto. The suit, filed by law firm Sotos LLP on behalf of retail investor Gerald A. Gazarek, alleges that the bank misrepresented systemic deficiencies its anti-money-laundering controls and how those failures would affect its U.S. operations. 

“Following the disclosure of these deficiencies on April 30, 2024, TD Bank’s stock price dropped considerably, giving rise to remedies under Canadian securities legislation,” the firm said in a statement announcing the claim. The claim cited “material” disclosures in the Wall Street Journal and Bloomberg stories.

Glancy Prongay & Murray LLP and the Law Offices of Frank R. Cruz have also said they’re pursuing possible suits.

“TD’s disclosures and public statements are and have been accurate and consistent with our obligations under the securities laws and responsibilities to our shareholders,” spokesperson Lisa Hodgins said in an emailed statement Wednesday. “We will contest the assertions of these proposed class actions, which are without merit.”

Proposed class action launched against TD related to anti-money-laundering issues

The Canadian Press

A proposed class-action lawsuit has been launched against TD Bank related to the ongoing investigations into the bank's anti-money-laundering program in the U.S.

The suit launched by Sotos Class Actions is on behalf of shareholders who bought TD shares between Aug. 26, 2021 and June 3, 2024. 

It alleges TD misrepresented systemic deficiencies in its anti-money-laundering controls which, after the deficiencies were disclosed, caused a significant drop in TD's stock price. 

TD has faced financial penalties in connection to the ongoing U.S. regulatory inquiry into its anti-money laundering compliance program, which it disclosed last year. 

In a statement, the bank said the allegations in the proposed class action are without merit and would be contested.

TD said its disclosures and public statements are and have been consistent with its obligations under securities law and its responsibilities to shareholders. 

This report by The Canadian Press was first published June 5, 2024.

TD bribery woes spread to Florida as new allegations surface

Tom Schoenberg and Christine Dobby, Bloomberg News   Jun 3, 2024

Fresh allegations that a longtime Toronto-Dominion Bank branch worker in Florida took a series of US$200 bribes to help clients move millions to Colombia by skirting anti-money-laundering defenses are adding to the lender’s mushrooming U.S. legal problems.

Gerry Aquino Vargas, the now-former retail banker in a Hollywood, Florida, outpost of Canada’s second-largest bank, falsified documents to open dozens of accounts and provided concierge-like services to help cash flow across borders, according to American prosecutors. In another recent case, a former TD branch employee in New York admitted to bypassing the bank’s compliance measures to defraud a customer. 

The cases — which haven’t yet been reported and don’t identify Toronto-Dominion by name — are part of a sweeping probe by officials at the U.S. Justice Department, bank regulators and U.S. Treasury Department into allegations of money laundering and other financial crimes at the bank. The dragnet may ultimately lead to a costly settlement for TD that some analysts now peg at US$2 billion and, perhaps worse for the firm’s investors, a yearslong setback for its lofty U.S. ambitions.

In a major blow to those plans, the company last year scuttled a US$13.4 billion takeover of First Horizon Corp. — saying it didn’t see a path for regulatory approval. The deal would have consolidated TD’s status as one of the biggest U.S. banks. The lender has also had to spend more than US$350 million shoring up anti-money-laundering defenses and recently had its outlooks cut by Fitch Ratings Inc. and S&P Global Ratings.  

So far prosecutors in the U.S. Attorney’s Office for the District of New Jersey have filed at least four cases alleging serious misconduct by branch employees in New York, New Jersey and Florida. One case involved TD branches being used to launder drug money as part of a US$653 million conspiracy.

Taken together they paint a picture of a bank whose controls were easily skirted by U.S. employees looking to make extra cash. They’ve also trained an uncomfortable spotlight on the bank’s leadership back in Toronto. 

“Often it requires a management change for the regulators to feel confident that the issue’s really being taken serious and the management’s not sort of trying to protect its past track record,” Evan Mancer, chief investment officer at Cardinal Capital Management, said in a recent BNN Bloomberg Television interview. He said his firm recently sold Toronto-Dominion shares after investing in the bank for three decades.

TD’s fixes

Toronto-Dominion says Chief Executive Officer Bharat Masrani, who took a $1 million pay cut after the First Horizon deal failed, has no current plans to go anywhere. 

The CEO and other leaders have made substantial progress in boosting compliance, while delivering strong financial results, according to Toronto-Dominion spokesperson Lisa Hodgins. Executives are “focused on the work needed to overhaul” the bank’s anti-money-laundering procedures, she said in an email. The bank had no comment on analyst projections on potential penalties. 

The Justice Department declined to comment. 

Toronto-Dominion shares fell as much as 1.7 per cent in Toronto following the report Monday. They’re down 12 per cent this year, compared with a 3.9 per cent gain for the S&P/TSX Composite Financials Index.

The U.S. case against Aquino Vargas, whom the government alleges was paid at least US$5,600 by a Colombian client and also boasted that he’d helped Venezuelans, Israelis, Bolivians and Peruvians use Toronto-Dominion accounts to skirt U.S. rules, was filed in March. TD Bank, as the lender’s U.S. unit is known, is referred to only as “Financial Institution-A” in court documents.

Hodgins said TD fired Aquino Vargas. His lawyer didn’t respond to messages seeking comment on the case against him, which include alleged misconduct as recent as last fall. Court documents show he waived his rights to a preliminary hearing and hasn’t yet entered a plea. 

Branch growth

TD already has a network of almost 1,200 branches from Maine to Florida — a total that outnumbers its retail locations in Canada. The bank has more than 10 million U.S. customers and also offers business and wealth-management services. But, it is looking to get much bigger in the U.S. and expand into new regions.

When Toronto-Dominion killed its deal to buy Memphis-based First Horizon back in May 2023, executives said the bank would build its own new U.S. branches instead — 150 of them by 2027. As of this April, it only had three more than a year prior. 

That anemic growth has stoked speculation that American authorities were preventing the bank from a big U.S. expansion amid the money-laundering probe.

The company isn’t currently under any restrictions from regulators on growing in the U.S., but there isn’t yet clarity at Toronto-Dominion over whether it will eventually face such limits, said a person with knowledge of the bank’s internal response.

When pressed last month by analysts, Leo Salom, who runs Toronto-Dominion’s U.S. operations, said the lender is “deliberately pacing” how many locations it opens. The bank continues to talk with regulators and invest in compliance. Salom declined to comment directly on whether regulators had blocked its expansion.

Signs of trouble

The federal prosecutors in New Jersey have been working with the Justice Department’s money-laundering section in Washington to bring the smattering of cases involving conduct at branches and the broader probe into the bank’s defenses and compliance.

Signs of trouble started to become public even before Toronto-Dominion announced in early 2022 that it planned to buy First Horizon.

Months earlier, federal prosecutors said in a criminal complaint that several branches of an unnamed financial institution dubbed “FI-1” were integral in a massive plot to move drug trafficking proceeds to China and Hong Kong. It later emerged that the firm was Toronto-Dominion. 

As part of a plea deal, a New York man said in February 2022 that he coordinated a US$653 million money laundering conspiracy, partly by bribing bank employees with gift cards and other favours to open accounts in the names of shell companies.

In another case, Oscar Nunez-Flores, who worked at a branch in Scotch Plains, New Jersey, since 2020 was charged last October with taking bribes to open debit cards and online accounts in the names of shell companies registered in Florida. Nunez-Flores masked the real owners of the accounts on documents filed with the bank, according to the government’s complaint charging him with bribery and conspiracy to launder money.

The funds deposited into these Toronto-Dominion accounts included proceeds from the sale of illegal narcotics, prosecutors allege, and the scheme sent millions of dollars from the U.S. to Colombia. Nunez-Flores, who has been discussing a potential plea deal with the government, according to court papers, netted more than US$20,000 for his work, prosecutors allege. 

A lawyer for Nunez-Flores, whose court documents also indicate he hasn’t yet entered a plea in the case, declined to comment.

As part of the money-laundering investigation, prosecutors have uncovered seemingly unrelated misdeeds: In the other case that hasn’t been previously reported, a former New York-based branch manager pleaded guilty in May to stealing more than US$200,000 from an elderly customer and fabricating email messages after the client died. 

A lawyer for James Gomes, the former manager, said in an emailed message that her client was “extremely remorseful” and didn’t know about the customer’s death until just before admitting to the charges.

Thumbs up

Aquino Vargas, the banker in Florida, worked with customers at Toronto-Dominion since 2012, according to the government’s complaint, filed in federal court in New Jersey.

Prosecutors say that, in 2022, Aquino Vargas began helping the Colombian client – identified in court papers only as “Co-Conspirator-1” – by opening dozens of fraudulent accounts on his instructions in the names of “witting and unwitting” people. Debit cards for those accounts were used to transfer cash from the U.S. to Colombia. 

Aquino Vargas was charged with obstructing a grand-jury investigation. A judge in April gave him and the government until to July to negotiate a potential plea, according to filings in the case.

U.S. authorities say that when Toronto-Dominion later blocked some of the cards, Aquino Vargas called the bank’s hotline and vouched for the transactions. A few weeks before opening those accounts, Aquino Vargas discussed getting paid by his alleged Colombian conspirator via WhatsApp for 28 debit cards, seeking US$200 per debit card.

“That $200 I’m giving you guys, I’m not doing anymore,” Aquino Vargas wrote, according to prosecutors’ translation of the messages in Spanish. “With other people it’s $500-$800 per account man.”

After he received payment to his personal Toronto-Dominion account through Zelle, prosecutors say Aquino Vargas sent another WhatsApp message to the Colombian: “Gracias,” he said, with a meme of actor Jean-Claude Van Damme giving a thumbs up.

‘Strong bank’

More than a dozen people who worked with retail clients have been fired for code-of-conduct violations, said the person with knowledge of the matter, asking not to be identified discussing personnel matters. The lender also has replaced close to 10 senior leaders in compliance and legal roles, including hiring Herbert Mazariegos away from Bank of Montreal to become chief global anti-money-laundering officer. 

The U.S. hasn’t charged Toronto-Dominion with any crimes stemming from the cases. Investigations into conduct by financial firms can end with no charges being brought or fines being imposed. Toronto-Dominion said that Aquino Vargas, Gomes and Nunez-Flores were all terminated by the bank.

Still, the bank has acknowledged surveillance gaps and says it’s cooperating with authorities.

“When front-line staff were in any way complicit in activity, we investigated and took immediate action, coordinating our efforts with the DOJ” on its investigation, said Hodgins, the bank spokesperson. “More broadly, where our program was ineffective, we have held those leaders accountable and are taking action to drive the changes and meet our obligations.”

For Masrani, Toronto-Dominion’s CEO, regaining momentum in the U.S. may be key to his legacy. The 68-year-old executive has continued the bank’s aggressive push across Canada’s southern border during his tenure of almost a decade, and profit from U.S. retail banking almost tripled since he took the reins.

He’s already weathered past scandals during his time as a senior leader. Masrani, previously the lender’s chief risk officer as well as president and CEO of its U.S. division, became CEO of the entire company a little more than a year after Toronto-Dominion paid more than US$50 million to settle U.S. regulators’ claims that its American unit failed to file suspicious activity reports tied to a massive Ponzi scheme for which Scott Rothstein was convicted and sentenced to decades behind bars.  

And the bank agreed last year to pay US$1.2 billion to settle a lawsuit by investors who claimed Toronto-Dominion aided Allen Stanford’s US$7 billion Ponzi scheme more than a decade earlier, while denying wrongdoing. Stanford was also convicted and received a 110-year sentence in 2012.

Issues ‘unacceptable’

Masrani recently told analysts that Toronto-Dominion’s compliance issues were “unacceptable” and that he hoped Toronto-Dominion would reach a resolution with authorities “as soon as possible.” 

He was even more pointed in his remarks to employees in May, when he said he took the situation “very personally.” Masrani had just flown to Hollywood, Florida — the same town where Aquino Vargas is alleged to have run his scheme — to reassure executives. The bank often hosts internal events in the beach town, about 20 miles north of Miami.

“This is going to get tougher before it gets better. More information is going to drip out over the next little while,” he said, according to a transcript of his remarks. “We have the means to fix this and we will.”