Sam Finkelstein, an Associate at The Volkov Law Group, joins us for his first posting about TD Bank’s compliance failures. Sam can be reached at [email protected].

How much is an effective Anti-Money Laundering (“AML”) Compliance Program Worth?

For Toronto-Dominion Bank (“TD”), the answer is at least $225 million––the amount that TD must now pay to First Horizon Bank, after backing out of a proposed $13.4 billion merger between the two on May 8, 2023. The Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve (“Fed”) stalled the deal over concerns about the bank’s AML controls. TD’s eleventh-hour overtures to regulators, pledging to make any necessary changes, fell flat.

The deal would have made TD the sixth-largest bank in the United States, and was reportedly central to the bank’s planned expansion into the South and Midwest––now it is back to the drawing board. It could take as long as five years, and many millions of dollars, for TD to overhaul its compliance program and regain regulators’ trust. Until then, the bank is unlikely to win regulatory approval for any domestic acquisitions.

It should come as no surprise that this deal collapsed under the weight of TD’s compliance failures. Lawmakers began calling on OCC to pause the merger in July of 2022, after an investigative report accused TD of running a “fake account” racket, much like the infamous Wells Fargo scam. This came on the heels of a 2020 settlement that TD reached with the Consumer Financial Protection Bureau for $122 million, to resolve allegations that the bank had illegally charged overdraft fees to account holders, deliberately misled customers about fees, and enrolled customers in costly overdraft services without their knowledge or consent.

Regarding TD’s Anti-Money Laundering Compliance in particular, regulators considered the bank’s chronic lack of diligence in screening for suspicious transactions––as required under the Bank Secrecy Act––to be cause for serious concern. When TD did flag suspicious transactions, the bank was unreasonably slow in reporting them to the relevant authorities.

TD’s client screening deficiencies were also on display in late-2021, when the bank reached a $115,000 settlement with the Treasury Department’s Office of Foreign Assets Control (“OFAC”) after discovering that it had processed nearly 1,500 transactions in violation of the North Korea sanctions, and also maintained accounts for an individual who was flagged as a Specially Designated National under the Foreign Narcotics Kingpin Sanctions. TD found itself on the wrong side of OFAC in 2017 as well; the bank paid a civil penalty of $516,105 after disclosing that it had conducted 167 transfers, issued letters of credit, and provided other banking services in violation of the Cuba and Iran sanctions.

TD has been similarly negligent in preventing fraud. The bank failed to detect when a regional manager used his position at TD to defraud the Paycheck Protection Program of more than $15 million––for which he was recently sentenced to 10 years in prison. Earlier this year, the bank agreed to pay $1.21 billion to the victims of Allen Stanford’s $7 billion Ponzi scheme. TD was one of Stanford’s main banks, facilitating one of the largest frauds in American history. Evidently TD did not learn anything a decade prior, when OCC fined it $37.5 million for doing essentially the exact same thing; in that case, by banking another billion dollar Ponzi scheme. This ultimately led to the prosecution and imprisonment of a TD Vice President.

Between litigation and settlements, TD’s role in the latter Ponzi scheme has cost the bank at least $495 million––bringing the bank’s losses to more than $1.7 billion from these two failures alone. The combined losses attributable to TD’s poor compliance track record in recent years, between public and private settlements, are substantial. Against this sordid backdrop, one can appreciate why regulators might balk before allowing TD to grow any bigger than it already is.

A similar situation emerged in 2012, when the Federal Reserve delayed M&T Bank’s acquisition of Hudson City Bancorp­­ over concerns about M&T’s lax AML policies. But unlike TD, M&T managed to work with the Fed, and successfully obtained regulators’ blessing to complete the merger in 2015. Undeterred, M&T kept the Hudson City deal alive for three years, correctly predicting that it would assuage regulators soon enough. Finally in 2017––four years and $400 million later––the Fed officially ended its AML enforcement action against M&T.

TD, on the other hand, quickly concluded that there was no viable path towards near-term regulatory approval, and with such confidence that it backed out of the First Horizon merger at great expense. Where M&T found regulators ready to cooperate, TD found a brick wall.

Had TD taken its past failures seriously, and reformed its compliance program in response to earlier enforcement actions, it would have more credibility with regulators today. TD blew those opportunities, and instead came to the government hat-in-hand––as a repeat offender, having never cleaned up its act. The Fed and OCC predictably viewed TD’s promises to change its ways as unpersuasive in this context. Now, as the latest consequence of TD’s compliance failures, the bank has wasted another $225 million and fumbled a high-value acquisition target.

Consistent with the Justice Department’s aggressive approach towards promoting corporate responsibility overall, the Fed and OCC’s frigid treatment of TD Bank shows that they too have high expectations for corporate compliance programs––and will not hesitate to enforce them.