Ongoing anti-money laundering probes at TD Bank and penalties levied at other Canadian financial institutions aren’t likely to have a material impact on banking customers, experts say, though the regulatory crackdown could have implications for investors and the banking sector long-term.
TD faces a regulatory probe in the United States on allegations that Chinese drug traffickers used the bank to launder at least US$650 million from 2016 through 2021 and that an employee took a bribe to facilitate the laundering of drug money, according to Reuters.
The bank has said it was setting aside US$450 million to cover potential fines for one of three regulatory probes and expects more monetary penalties.
The lender has also been fined $9.2 million by the Financial Transactions and Reports Analysis Centre of Canada – or Fintrac, the Canadian financial watchdog – for administrative violations.
TD CEO Bharat Masrani conceded in a conference call earlier this month that there had been “unacceptable” incidents where the bank did not effectively monitor, detect, report and respond to suspicious activity. TD Bank has said it is making investments of about $500 million to overhaul its compliance program and has also terminated employees.
Two credit rating agencies, Fitch and S&P Global, downgraded their outlook for TD Bank this week amid the probes. Both agencies have maintained their AA- rating for the bank’s debt.
And while recent headlines have focused on TD Bank’s woes, it’s not the only Canadian bank that has been slapped with fines over failing to report suspicious transactions.
In December 2023, Fintrac announced in the same week that it had penalized RBC for $7.5 million and CIBC for $1.3 million, both on grounds of non-compliance with money laundering and terrorist financing measures.
Global News reached out to TD Bank, RBC and CIBC to ask whether recent probes or penalties would affect the banks’ customers in any way. CIBC has yet to respond with comments.
TD Bank spokesperson Lisa Hodgins said in an email on Thursday that “there is no impact to our customers and we remain focused on serving their financial needs.”
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An RBC spokesperson noted that the 2023 Fintrac penalty was “administrative in nature” and not directly related to findings that anyone at the bank acted improperly.
The statement added that financial crimes are “increasingly sophisticated” and that the bank regularly improves its anti-money laundering regime in response.
“We are deeply focused on upholding the trust and confidence our clients place in us, and there is no impact to how we serve them,” the spokesperson concluded.
Natasha Macmillan, business director of everyday banking at Ratehub.ca, tells Global News that while anti-money laundering probes like these are of “significant concern at the regulatory and institutional level,” it would be “quite rare” for a client with a chequing account or a mortgage at one of these lenders to notice impacts from any alleged wrongdoing.
“The impact that we see from everyday consumers, it’s a bit too early to tell at this point. It tends to be rather limited,” she says.
In the drastic case of a bank’s business taking severe hits affecting its ability to operate, Macmillan notes that most Canadians’ money would remain relatively secure.
Holdings at the Big Six banks and many other federally regulated financial institutions are backed by Canada Deposit Insurance Corp., which insures up to $100,000 in eligible deposits per individual in the event of a failure. Macmillan notes that many credit unions also have similar protections at the provincial level.
Greg Taylor, chief investment officer at Purpose Investments, says that despite the recent scrutiny and penalties facing TD Bank, it’s incredibly unlikely that one of Canada’s top financial institutions would collapse in the wake of these probes.
Once the bank firms up its anti-money laundering practices, Taylor expects TD will be even more cautious about suspicious transactions going forward and will return to its historic status as a “best-in-class” Canadian financial institution.
“I wouldn’t say it’s going to kill the bank forever, but it’s just going to be in the penalty box for the next little while,” he says.
Macmillan says that while financial risks to consumers may be low, she has anecdotally heard from some banking clients that they have a moral concern about their bank being accused of financial malpractice.
For those who want to look for a bank that aligns with their values, she encourages consumers also to be mindful of fees associated with transferring funds, opening new accounts or even closing existing ones.
“It is definitely worth investigating, particularly if you do want to switch, but just be aware of some of those costs that might be incurred,” Macmillan says.
While everyday banking customers might not notice any changes at TD, Taylor says the bank itself is having to make significant adjustments to its business strategy.
U.S. regulatory probes prevented the bank from getting approval for a US$13.4-billion deal to acquire First Horizon Bank last year, which Taylor says has “thrown a wrench” into TD’s ambitious expansion plans south of the border.
Curtailed growth expectations and concerns tied to money laundering have weighed on TD’s share price, he says.
When the Wall Street Journal first reported the extent of the U.S. anti-money laundering probe earlier this month, shares of TD dropped more than seven per cent, though the price has since recovered.
“They’ve gone from a stock that was always trading at a premium to the other banks and now is trading at a discount for the first time in 20 years,” Taylor says.
TD Bank’s reputation has taken a hit, but Taylor remains confident that the bank will recover, which he says makes it worth considering for an investor looking to add a bank with a solid yield to their portfolio.
While TD Bank is currently in the spotlight, Taylor says the investigations show regulators are “getting way more serious” in cracking down on suspicious transactions.
Other financial institutions are likely shoring up their own anti-money laundering regimes in response to Fintrac penalties and ongoing probes south of the border, he says, which makes the entire financial sector a better place to do business going forward.
“Some of these issues, which most people may not have been not focused on, are starting to really affect the valuation,” Taylor says.
“I think it’s been a wake-up call for everyone in the industry, and I think everyone’s trying to make sure they’re doing everything above and beyond to make sure they’re not caught up in this next.”
– with files from Reuters and The Canadian Press