TD Bank, led by Bharat Masrani, pleads guilty to federal law violation

TD BANK became the largest bank in US history to plead guilty to violating a federal law aimed at preventing money laundering, and agreed to pay over $3 billion (£2.3bn) in penalties to resolve the charges, government authorities said on Thursday (10).

The plea deal, which includes a rare imposition of an asset cap and other business limitations, arises from multiple government investigations into what authorities described as pervasive issues.

The bank is led by Indo-Canadian executive Bharat Masrani. He was appointed Group president and CEO of the bank on November 1, 2014.

Masrani has been at the helm for nearly a decade and previously led its US operations. He will leave next year.

The cleanup effort will take years and require a lot of work and investment, Masrani said in a memo to staff.

"This is a difficult chapter in our bank's history," Masrani said in a statement. "These failures took place on my watch as CEO, and I apologize to all our stakeholders."

For years, TD ignored red flags from high-risk customers and created a "convenient" environment for bad actors to exploit, the government said.

In one example, authorities said, TD Bank facilitated over $400 million (£306m) in transactions to launder funds on behalf of people selling fentanyl and other deadly drugs.

TD is Canada's second biggest bank and the 10th largest in the US. Two units of the bank pleaded guilty to conspiring to launder money and conspiring to fail to file accurate reports or maintain a compliant anti-money laundering program, the Justice Department said.

"TD Bank chose profits over compliance in order to keep its costs down," US Attorney General Merrick Garland said at a press conference, noting TD was the largest bank to admit to violating the Bank Secrecy Act.

The asset cap, imposed by the Office of the Comptroller of the Currency, is a rare step typically reserved for severe cases. It deals a major blow to TD. The bank has sought to expand further in the US, which accounts for about a third of its income.

"We will make the necessary changes to put the bank on a stronger foundation," incoming CEO Ray Chuntold investors on a conference call on Thursday. "This is TD's number-one priority, and my number one priority. Make no mistake, we will meet our commitments to our regulators... we will get the job done."

Masrani was born in Uganda in 1956 to Indian parents. He was the youngest of five children. In the early 1970s, his family was forced to leave Uganda and later settled in England.

After finishing high school, Bharat travelled to North America to explore university options. He chose York University in Toronto, where he earned a BA with honours in 1978, followed by an MBA from the Schulich School of Business in 1979. While living in Canada, he met his future wife, Shabnam, and decided to make Toronto his permanent home. Eventually, he became a Canadian citizen.

He joined TD Bank in 1987 as a commercial banking trainee and, over the next 30 years, held several senior executive positions within the organisation.

Some critics of the bank thought the plea deal was too lenient. US  Senator Elizabeth Warren, a Democrat, said it "lets bad bank executives off the hook for allowing TD Bank to be used as a criminal slush fund."

TD failed to monitor over £14 trillion in customer activity for about a decade, enabling three money laundering networks to transfer illicit funds through accounts at the bank, US authorities said.

Bank employees "openly joked" about the lack of compliance on multiple occasions, Garland told reporters. Employees said TD's motto - America's most convenient bank - also made it attractive to criminals, authorities said.

TD Bank's issues were known at every level of the bank, authorities said. In some cases, TD did not flag suspicious activity until law enforcement raised attention to it. At times, tellers accepted gift cards as bribes.

"TD Bank knew of its compliance failures," said deputy attorney general Lisa Monaco. "As the light continued blinking red, TD Bank could only see green."

The bank will pay a $1.4bn (£1.07bn) fine to the DOJ, a record $1.3bn (£990m) to the Treasury Department's Financial Crimes Enforcement Network, $450m (£344m) to the OCC and another $123.5m (£94.5m)  to the Federal Reserve.

The deal also includes the imposition of independent monitoring for four years and prevents TD from opening a new branch or entering a new market without the OCC's approval.

An asset cap is "worst case scenario" for TD, said Cormark Securities analyst Lemar Persaud before the deal was announced.

Persaud drew a parallel with Wells Fargo, whose earnings have been constrained by a £1.5 trillion asset cap since 2018 following a fake accounts scandal. An asset cap would also constrain TD's profits, but to a lesser extent than it did for Wells Fargo, he said.

The probe has led to "significant underperformance" of TD's stock and prompted the retirement of its current CEO Bharat Masrani, Persaud said.

The lender first revealed it was responding to inquiries from regulators and law enforcement last year, months after it scrapped a £10bn purchase of regional lender First Horizon.

Investigators have been probing TD's internal controls since agents discovered a Chinese criminal operation bribed employees and brought large bags of cash into branches to launder millions of dollars in fentanyl sales through TD branches in New York and New Jersey, authorities said.

TD has spent millions to strengthen its compliance programs, fired dozens of staff at US branches and named Canadian personal banking head Chun as incoming CEO, distancing the new chief from the scandal.

As part of the resolution, TD has begun remediation and agreed to continue to cooperate in ongoing investigations into individuals.

TD also has clawed back executive compensation, authorities said, nothing the deal marks the first time a company has to look at recovering more funds in the future from employees.

(with inputs from Reuters)