They called it “Take New York.”
In 2012, almost a decade into a $20-billion American expansion, the top brass at Toronto-Dominion Bank
felt the time was right to go for all the marbles. Having built beachheads in and around cities such as Boston and Philadelphia, they wanted to infiltrate New York.
It was an audacious idea. New York’s metro area was urban, wealthy and home to Wall Street, which meant it was ultracompetitive. TD also wanted to try something new. Instead of buying its way in, like the bank had done before, then chief executive Ed Clark and then U.S. head Bharat Masrani wanted to build out a branch network brick by brick until the streets were flooded with TD green.
Against all odds, it worked. TD muscled its way to a top-three market share for retail banking in New York, and the strategy became the stuff of internal lore.
A decade in, the conquest has come back to haunt the bank.
In 2021, the U.S. Department of Justice (DOJ) laid charges against a criminal ring that laundered US$653-million worth of drug money through financial institutions in New York, New Jersey and Pennsylvania. For years, no one knew which banks had been targeted. But in May, it was revealed that TD was not only involved, but central to the ring’s activities – referred to as “FI-1″in the DOJ’s criminal complaint, or Financial Institution 1.
News that TD was caught up in a global drug war was stunning, but the details even more so. The criminals routinely deposited bundled stacks of U.S. dollars at multiple branches in the New York borough of Queens, and over five years the ring’s leader, Da Ying Sze, bribed employees, at TD and at other banks, using US$57,000 worth of gift cards and other financial incentives.
TD is still negotiating with U.S. regulators and the DOJ, so additional details have been kept top secret, but The Globe spent the past year investigating the scandal. Through interviews with more than 30 sources, including current and past executives, institutional investors, anti-money-laundering (AML) experts and rival bankers, a troubling picture has emerged: TD’s problems run much deeper than some rogue employees in Queens.
Inside the bank, a culture change has taken hold and conservatism rules the day. TD has become afraid of its own shadow, and increasingly dense layers of bureaucracy have stifled decision-making. At the same time, a number of highly respected leaders are leaving the bank and their departures have upended succession planning.
Despite these challenges, TD’s leadership and board of directors carry on as though the bank were encountering a speed bump. Meanwhile, TD’s share price has vastly underperformed the S&P/TSX Composite Index over the past five years and lagged behind competing banks, and its returns have fallen far short of those from arch-rival Royal Bank of Canada. The first step to recovery is admitting there’s a problem.
In some respects, TD’s AML failings can be blamed on ineffective technology, according to sources. Front-line staff filed hundreds of unusual transaction reports about the Sze criminal ring, according to someone intimately familiar with the situation, but the bank’s software struggled to aggregate this data.
The bank’s cultural erosion was also a factor. Since Mr. Masrani took over as CEO in 2014, risk aversion has dominated the bank’s day-to-day operations, according to sources, and TD has added layer after layer of legal and management approvals to everything it does. With the Sze criminal ring, some of the unusual transaction reports were escalated internally, according to the source, but they then disappeared into TD’s ether.
TD’s surveillance layers are also stifling financial performance. Current and past executives talk of a drift that saps motivation. “It takes 30 people to say yes to something, and only one person to say no,” a current executive explained. Asked about this trend, a former executive had only one quibble: “It’s not 30 people, it’s 50 people who need to say yes.”
The Globe is not naming its sources because they were not authorized to speak publicly, but in many cases they are concerned that TD’s culture, which used to be a magnet for top talent, is whittling away.
They also worry about accountability, or lack thereof. Some TD leaders, for instance, cannot reconcile that Mr. Sze pleaded guilty to the money-laundering conspiracy as far back as May, 2022, yet TD took nearly two years to replace its global head of AML.
Lately, Mr. Masrani has taken more accountability when it comes to AML. In an interview with The Globe in late July, his first in over a year, he used his most forceful language yet about TD’s shortcomings. “We know this was a failure,” he said. “We own it. I own it. We are fixing it.”
But he rebuffed the suggestion that TD’s culture has shifted under his watch, or that it has impacted the bank’s performance. “The one thing that has remained constant is the culture,” Mr. Masrani said. “It defines who we are, and it defines why TD has been so successful.”
Open this photo in gallery: A TD Bank branch in Flushing, Queens, NYC. Instead of buying its way in to the New York metro area, TD built out a branch network brick by brick until the streets were flooded with TD green.STEPHANIE KEITH/THE GLOBE AND MAIL
The roots of TD’s money-laundering woes
How TD’s “Take New York” strategy backfired looks like a textbook case of neglect – the bank was so focused on expanding that it sacrificed safety and control.
It isn’t so simple.
For one, TD was already in trouble with regulators for significant AML deficiencies when it set out to infiltrate New York, according to sources, and executives took the matter seriously.
In 2010 and 2011, Canadian and U.S. regulators identified numerous deficiencies with TD’s AML program – something outlined in a policy guide written by the Financial Action Task Force, the global body that sets AML rules. TD was not named, but sources confirmed they are the bank used as a case study for the guide.
Then in 2012, the bank’s executives participated in a three-way meeting with one of TD’s American regulators, the Office of the Comptroller of the Currency, and the bank’s Canadian watchdog, the Office of the Superintendent of Financial Institutions (OSFI), to co-ordinate remedial action.
Open this photo in gallery: Former TD president and CEO Ed Clark retired in 2014, after running the bank since 2002.CHRIS WATTIE/REUTERS
Embarrassed by the lapses, then CEO Mr. Clark promised a revamp, which included hiring Carmina Hughes as the bank’s global AML officer in 2011.
TD’s remedial effort was so swift that by 2013, OSFI determined the bank had fixed most deficiencies and the regulator concluded that executives were committed to resolving the rest.
The question, then, is how did TD go backward from there? According to sources, the answer is multifaceted.
To start, Mr. Masrani took over as CEO in late 2014 and an executive shuffle followed, which included naming a new U.S. head. New leaders need time to learn their businesses, and that task was complicated by a major restructuring in 2015.
The next year, in 2016, TD replaced its regulatory compliance management program with a platform from Archer Technologies LLC. The implementation was a disaster. Archer’s software often did not pair with TD’s legacy systems, and the bank struggled to consolidate data across the enterprise to monitor and identify risks such as recognizing patterns at specific branches or from repeat customers, according to sources.
As the integration woes dragged on, TD’s new regime did not maintain Mr. Clark’s commitment to AML – Ms. Hughes’ active work with the bank concluded in 2017 – and there were concerns the program was getting treated as a cost centre rather than an essential service, according to someone familiar with the evolution.
As TD’s focus shifted, criminal rings grew more sophisticated. Fentanyl and narcotics trafficking has exploded over the past decade and Mexican cartels that manufacture drugs are awash with U.S. cash that needs to be laundered. To do so, they hire criminal rings such as the one Mr. Sze ran, and often pay a 1-per-cent to 2-per-cent cut of the proceeds.
Open this photo in gallery: A warehouse on 43rd Ave in Long Island City served as a location for a front company related to the laundered money scheme TD has become embroiled in.STEPHANIE KEITH/THE GLOBE AND MAIL
TD isn’t the only bank cartels have targeted. In March, federal prosecutors accused a 37-year-old Chinese woman of running a courier network that laundered US$17-million for cartels and targeted banks that include JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., according to CNN.
TD, though, has a history of high-profile cases, which could attract the attention of regulators. In 2013, the bank paid US$52.5-million to settle charges over its role in a Ponzi scheme conducted by Florida lawyer Scott Rothstein. TD was accused by the U.S. Financial Crimes Enforcement Network of receiving repeated alerts about the potential for money laundering from Mr. Rothstein’s accounts, but the bank did not act on them.
More recently, TD agreed to pay US$1.2-billion in 2023 to settle an investor lawsuit over a Ponzi scheme run by Allen Stanford, a former Texas billionaire. Again, TD was accused of missing or ignoring red flags. (An Ontario judge, however, dismissed a separate lawsuit with similar accusations after deciding there was no basis to conclude that TD knew or suspected Mr. Stanford was engaging in fraudulent behaviour.)
And since the Sze guilty plea, more TD branches have been caught up in the global drug trade. An employee who worked at a New Jersey branch was charged in October for accepting bribes and helping to launder the proceeds of illegal drug sales, and another employee in Hollywood, Fla., was recently accused of accepting bribes to help move millions of dollars to Colombia.
Recently, the Biden administration called fentanyl trafficking an “extraordinary threat to the national security” of the United States, and last year The Economist determined that overdoses from fentanyl and its close chemical relatives have “almost certainly” become the biggest killers of Americans between the ages of 18 and 49.
To crack down, U.S. banking regulators and law enforcement are targeting the proceeds of drug sales. TD has already settled with one of its U.S. regulators and agreed to pay a US$450-million fine, but analysts expect the bank to pay around $2-billion more – and possibly face constraints on its growth in the U.S. until all of its AML problems have been fixed. (TD’s US$13.4-billion acquisition of Memphis-based First Horizon Corp. was terminated in 2023 because of AML troubles.)
As much as TD would love to move on, regulators have been in no rush to settle – and the uncertainty has weighed on TD’s stock price. Meny Grauman, an analyst at Bank of Nova Scotia, recently calculated that investors are so fearful of the repercussions that they were ascribing negative value to TD’s U.S. retail bank, even though it makes $4-billion annually.
Mr. Masrani said he wishes he could divulge more, but his hands are tied. “I fully understand investors’ frustration. It’s frustrating for me as well that we cannot provide you more detail. To have such lack of clarity for over a year is not welcome,” he said. With negotiations still in progress, all he could offer was optimism. “I’m 100-per-cent confident we’ll get to the other side of it and emerge stronger,” he said.
Cultural erosion hits performance
Mr. Masrani says that once TD offers investors clarity about the U.S. probes, the bank’s shares will start to rebound. “It’s very clear as to when the overhang came onto the TD stock price,” he argued. “It’s regarding this particular issue.”
To counter the negativity, Mr. Masrani cited 7-per-cent earnings growth in TD’s Canadian banking division in its most recent quarter relative to the year prior – which matters because that division makes the most money. He also touted TD’s recent market-share growth in several product categories, including residential mortgages and credit cards.
Executives and rivals, though, tell a different story. In fact, over the past five fiscal years, TD’s total deposits, residential mortgages and total loans in Canada have grown at either the second-slowest, or slowest, rates of the five largest Canadian banks, The Globe calculated.
Some of this stems from how TD is structured. The bank is branch-heavy, which made it harder to grow during the COVID-19 pandemic. But insiders and rivals say there’s more to it – that the bank lost its fastball.
Over the past five years, TD often reported the lowest ratio of gross impaired loans – that is, bad loans as a percentage of its total loan portfolio – of all its large rivals, according to data from RBC Dominion Securities. Although losing less money on loan defaults is usually a good thing, it can have adverse effects in the long run. Finance is built on a trade-off between risk and return, and TD hasn’t been sticking its neck out the way it used to.
Internally, TD leaders say this is partly a function of the bank’s bureaucracy. It’s harder for them to go out and win business because getting new initiatives approved requires moving mountains with risk and compliance. Eventually, paralysis sets in. (In recent years, TD has tried to remove some of this bureaucracy by launching a program known as Next Evolution of Work. The initiative brings people from different functions together to solve problems, instead of keeping teams siloed.)
It’s also representative of a cultural shift marked by less open communication and accountability.
When Mr. Clark was CEO, the bank’s communications strategy was based on being frank, and TD invested heavily in investor relations under the guidance of former chief financial officer Colleen Johnston. TD wasn’t a saint, but when it came to things such as talking about strategy, the bank happily showed its cards.
The same was true of speculation about Mr. Clark’s succession. Years before he retired in 2014, after running the bank since 2002, Bay Street knew who the potential successors were. Three, arguably four, executives had such good relationships with investors, analysts and the media that any one of them could have taken over and there would be no panic.
Mr. Masrani has a much more reserved style and it has changed how the bank functions. Give him the option to stick his neck out and weigh in on something mildly controversial or to stay quiet, he’ll almost always choose the latter, according to executives who have worked closely with him.
He’s also formalized the way he receives feedback. Mr. Clark made it a mission to meet with as many of the bank’s roughly 100 senior vice-presidents as he could each year, because he believed they would be frank about where the bank was going. With Mr. Masrani, multiple senior executives say they’ve met with him once or twice in 10 years, and that he chooses instead to get intel from a close group of advisers.
While culture is notoriously hard to value, in TD’s case, the erosion has had an impact on the bank’s share price. There is certainly some truth to Mr. Masrani’s argument that TD suffers from investor anxiety over the U.S. regulatory probe, but investors also wouldn’t be so panicked if they had more confidence in TD’s leadership.
Banks trade at a multiple of their book values – in effect, a multiple of what their shares were originally worth when issued – and investors reward those banks they trust more with higher multiples. TD used to command a premium multiple, just like arch-rival RBC, yet it has chewed through so much of its goodwill and now trades at 1.36 times book value, in the middle of the pack for Big Six banks. RBC, meanwhile, remains out front.
Where were the directors?
With AML uncertainty lingering and cultural issues brewing, TD executives have been leaving the bank. Notable departures started with leaders like Manjit Singh, executive vice-president of finance and a top contender to be TD’s next CFO, who left in 2021, and they continued in 2022 with Norie Campbell, a group head who was a mentor to many people inside the bank.
Lately these exits have picked up steam. In the second half of 2023, arguably the top three leaders in Canadian banking – group head Michael Rhodes, chief operating officer Andy Pilkington and mortgage business leader Frank Psoras – all left, according to sources. Mr. Rhodes’s departure was particularly notable because he ran TD’s largest division and was a contender to be the next CEO.
Since then, senior vice-president Katy Boshart left to run Manulife Bank of Canada and Shannon McGinnis, an executive vice-president of non-financial risk management, left for Bank of Nova Scotia, where she is now deputy chief risk officer.
For some, Ms. McGinnis’s departure was a dagger. Like Ms. Campbell, she had once been one of Ed Clark’s special assistants, a highly coveted two-year position that served as a stepping stone to big things inside TD. On top of that, she jumped ship for Scotiabank, which is the only Big Six lender whose shares have performed worse than TD over the past five years.
The departures have not only sapped morale but also raised questions about TD’s succession plans, putting a spotlight on TD’s board of directors.
Because Mr. Masrani is 67 years old, 10 years into his tenure and grappling with a money-laundering crisis, Bay Street wants to know who is next in line. (Bank CEOs tend to stick around for about a decade.) “Investors want visibility around what the leadership structure looks like and who is going to be at the helm over the next few years,” Bank of America analyst Ebrahim Poonawala said in an interview.
Yet succession has been an open question for years. In October, 2021, long before Mr. Rhodes departed, TD announced its Canadian banking head, Teri Currie, and U.S. retail head, Greg Braca, were both leaving – and never made clear why. To this day, some senior leaders still have to guess what actually went down – whether it was about underperformance or some personal matters.
Lately, TD has quietly signalled to investors it still has three solid CEO contenders, according to sources – TD Securities head Riaz Ahmed, who used to be chief financial officer; U.S. retail head Leo Salom, who used to run wealth management and insurance; and Ray Chun, who also ran wealth management and insurance, only more recently.
“The bank has a very robust process on succession, great candidates and a great team,” Mr. Masrani said in the interview. “The bank is very comfortable with our succession processes and succession candidates for various jobs.”
“I’m so blessed to have terrific leaders around my table,” he added.
But compared to TD’s last round of CEO succession, there are more questions about the current slate of candidates. Mr. Ahmed, a long-time stalwart in the bank, is already 61 and he is also focused on integrating Cowen Inc., the New York investment bank that TD purchased for US$1.3-billion in 2023. Mr. Salom has only run the U.S. for 2.5 years and may need stay there until the AML file is fixed. And Mr. Chun, who took over Canadian banking last December, needs more time to prove himself running one of TD’s growth engines.
Given these constraints, a top institutional investor has told TD’s board to consider a variety of scenarios, including hiring an outsider as the next CEO, according to someone familiar with the conversation.
Open this photo in gallery: TD handout of board member Brian Levitt, Aug 2024
Open this photo in gallery: Long-time TD board chair Brian Levitt (top) retired this spring and was replaced by Alan MacGibbon, formerly of Deloitte Canada.KATHRYN HOLLINRAKE/TD
So far, the board has not signalled that a CEO change is imminent. That approach has rankled some, because there were already concerns that long-time board chair Brian Levitt was too loyal to Mr. Masrani, according to people familiar with their relationship, and that the board didn’t have enough distance to hold management in check.
Recently, it seemed like the board might be turning a new leaf, because Mr. Levitt retired at TD’s annual general meeting in the spring after aging out at 75 years old. Yet he and his successor, Alan MacGibbon, go back decades and Mr. MacGibbon may not be inclined to do things much differently. In 2014, when Mr. Levitt was vice-chair of Osler, Hoskin & Harcourt LLP, he hired Mr. MacGibbon as a special adviser at the Bay Street law firm. The two men have also served together on the advisory board of John Bragg, a former TD director who runs the Oxford Frozen Foods empire out of Nova Scotia.
Asked about their relationship, and about the board’s succession plans, TD chief communications officer Ronald Alepian replied with a statement: “TD’s board is comprised of experienced, independent directors who discharge their oversight responsibilities with great diligence. Our chairs – past and present – are highly respected leaders recognized for their integrity, governance expertise, and long-standing contributions to corporate Canada over many decades. Any conjecture to the contrary is unfounded.”
Still, Canada’s banking watchdog is paying more attention to matters like these. In the past year, OSFI said it will start monitoring “non-financial risks,” such as the character of board members and senior executives, and that it will oversee how and when sensitive information is shared internally. In short, OSFI believes non-financial risks can morph into financial ones.
During a lunch hosted by the C.D. Howe Institute in June, OSFI deputy superintendent Ben Gully elaborated on this new approach, telling the audience that boards must ask the right questions to mitigate risks and reputational issues and pro-actively guard against complacency. He also said that board members must “consciously negate the halo effect” when dealing with the executives they oversee.
Open this photo in gallery: Bharat Masrani took over as CEO of of TD Bank Group in late 2014 and an executive shuffle followed, which included naming a new U.S. head.FRED LUM/THE GLOBE AND MAIL
Stuck in the middle
For all the drama, TD is still a formidable competitor. The bank amassed a war chest of low-cost deposits over decades – a cheap source of funding for loans that is the envy of its rivals. TD also runs a lean operation and its efficiency ratio – a measure of expenses to revenue – has historically been hard to beat. And in the past few quarters, the bank has seemed less scared of its own shadow, with mortgage and auto loan growth accelerating quickly.
Len Racioppo has studied TD for decades and used to be the bank’s largest institutional shareholder as an executive at investment manager Jarislowsky Fraser Ltd. He remains a holder today, albeit in a much smaller family office portfolio. TD, he says, faces slower growth for the next little while, but he doesn’t consider it a disaster. “It brings them back to an average Canadian bank.”
As for the U.S. division, he’s confident that TD will do what it takes to get back in regulators’ good graces. So long as TD shows remorse and takes action, authorities won’t stay mad forever. “Just think about what some of the banks got caught doing in 2007 and 2008,” he said.
To this end, TD recently gave investors a hard dollar amount on how much it has invested in AML fixes to date – $500-million – and the bank made a flurry of AML personnel changes this summer. In July, The Globe reported TD recruited Stuart Davis, a respected AML expert, to serve as an adviser to chief risk officer Ajai Bambawale, and TD parted ways with chief compliance officer Monica Kowal.
But AML is only one problem TD has to solve. Internal frustrations were brewing long before U.S. regulators stepped in, and executives keep leaving. In June, Dawn Cooper, an executive vice-president in charge of TD’s call centres across North America, departed – though she had only joined the bank in 2022.
Ironically, what a number of executives and investors would love is an acknowledgement that things need to change – with culture and with financial performance. The bank’s shares have underperformed the S&P/TSX Composite Index by 30 percentage points over the past five years, yet Mr. Masrani always suggests that, AML aside, everything’s great.
The same was true in his interview with The Globe. When asked about the bank’s slower growth, Mr. Masrani would not give an inch. “I’m not sure of your premise,” he said, “because I’m looking at the facts.”
When asked about executive departures, he brushed them off. “Look, people leave for various reasons,” he said. “But the great thing is, at TD, we’ve got a fantastic bench.”
And when questioned about TD’s cultural erosion, he would not budge. TD, he said, is “well known for a unique, inclusive culture. It’s part of our secret sauce.”
“Where you say that perhaps that there’s a perception out there that might be different,” he added, “I’m not sure what you mean by that.”
It’s possible Mr. Masrani was just putting on a brave face. It’s been blow after blow after blow for TD for 18 months. But if there’s any advice executives want to get through to him, it’s that at this point in the battle, a little vulnerability could go a long way