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In January, 2021, American law enforcement agencies spied a suspicious box truck and Lexus SUV through the streets of Queens, N.Y. Their tip was that a criminal ring was out to launder drug money.

Starting in a supermarket car park, a man and a woman got into the truck carrying three bags, then drove to a bank car park where a Lexus SUV pulled up. Bags were exchanged between the vehicles, and the box truck left.

Soon after, the woman, Yunqin Liu, took a bag from the SUV and walked into the bank, where she made a large cash deposit. He then drove to another branch of the same bank and did it again. And then even more was deposited in yet another branch.

Four months later, US authorities charged six people with money laundering, which led to the main defendant, David Sze, pleading guilty. Throughout the case, the authorities never named the Queen’s bank, referring to it only as FI-1. But on Thursday The Globe and Mail reported that the financial institution is Toronto-Dominion Bank, and the revelation sheds light on a years-long investigation that has dogged Canada’s second-largest lender.

“I regret that there were serious instances where the Bank’s AML program fell short and did not monitor, detect, report or respond effectively,” TD chief executive officer Bharat Masrani said in a statement on Friday. “This is unacceptable and not in line with our values.”

While TD is not the only financial institution involved in the money laundering operation, the amount of money involved is staggering. US authorities believe the criminal ring conducted more than US$2 million worth of transactions on that single day in January, and laundered US$653 million between 2016 and 2021.

The big question now: Will TD ever get its premium back?

Last year TD revealed it was the subject of an anti-money laundering (AML) investigation after US regulators blocked its US$13.4 billion acquisition of Memphis-based First Horizon Corp. of Tenn., but until Thursday investors and analysts never seemed to show up. all that fussed about the result. The working theory was that TD would pay a fine, but nothing obscene, and its expansion in the US, its big growth market, would be limited for the foreseeable future.

That narrative is now changing – fast. “We believe that TD could not only face a larger-than-expected fine, but also restrictions imposed by a regulator on its business activities,” wrote Gabriel Dechaine, a banking analyst at National Bank Financial, in a note to clients.

For months, analysts have predicted a fine in the range of US$500-million to US$1-billion, but that has now jumped. “We believe cumulative fines could easily hit $2 billion,” Mr. Dechaine wrote.

TD shares lost 5.8 percent on the Toronto Stock Exchange on Friday as investors digested the potential for more pain.

For months, investors and analysts have wondered whether the US authorities were worried about multiple AML breaches at TD over a long period of time, which could cushion the financial blow, or whether there was a new, major event that would lead to to much stricter enforcement. The revelation of TD’s involvement in a major money laundering operation that spanned three states – New York, New Jersey and Pennsylvania – suggests the latter.

In addition, US President Joe Biden has been intensifying his administration’s crackdown on the laundering of illegal drug proceeds through the financial system, particularly with regard to fentanyl.

TD, therefore, is in the middle of a geopolitical firestorm that spans China, which often supplies the chemicals for narcotics, Mexico, which produces the drugs and moves them to the United States, and Russia, whose spies are said to be deeply embedded in Mexican criminal groups. .

Susan Gibson, the special agent in charge of the New Jersey Division of the Drug Enforcement Administration, said in a 2022 statement that the money laundered by Mr. Sze’s criminal ring allowed “drug traffickers to expand their operations throughout the United States and throughout the world.” He added that such laundering helps drug organizations flood the streets of the United States “with deadly poison,” contributing to the high number of overdose deaths.

Until this week, TD had not said much about its AML shortcomings and what it was doing to rectify the problem, but on Friday chief executive Bharat Masrani used stronger language in a statement. Not only did he acknowledge serious issues, he added: “Criminals relentlessly target financial institutions to launder money and TD has a responsibility and obligation to thwart their illegal activity.”

Before taking over as CEO in 2014, Mr Masrani had been head of TD’s US division, as well as chief risk officer for the entire bank.

On Friday, TD also revealed that it has invested $500 million in upgrading its AML systems and overhauled its AML team in Canada and the US, hiring hundreds of new AML professionals, “with deep expertise in program design, oversight and action. ” The Globe reported in January that TD hired Herb Mazariegos as its head of global AML, and other hires include head of high-risk investigations in the US, head of financial crime risk management and head of global sanctions.

The new team is investing in enterprise-wide AML training, as well as AML programs for new hires. The US Financial Crimes Enforcement Network (FinCEN) has warned for years that drug traffickers use sophisticated methods to launder their money, which makes it much more difficult to trace – not only for banks, but for authorities as well.

Criminal rings now use “a wide range of innovative methods that evade international wire transfers and pose specific obstacles to law enforcement,” Vanda Felbab-Brown, a senior fellow at the Brookings Institution in Washington, DC, warned at a Senate hearing the United States in March.

The criminal ring used Mr. Sze used these money laundering tactics to bypass TD’s AML monitoring systems, and he also used bribes. In pleading guilty, he admitted to using various inducements to bribe bank tellers, including gift cards, which help explain why large cash deposits could be made.

In one case, law enforcement found one of the ring members carrying multiple heavy bags up to the teller window at an unnamed financial institution, after which Mr. Sze approached and removed several bundled stacks of money. the United States out and placed on the counter to be. processing.

The criminal ring also relied on cashier’s checks to launder the money through business accounts they controlled for companies including Queens Sewing 43 Inc. and Asia Sewing Corp.

Unlike personal checks, which are sometimes held for a few days to verify the details of the transaction, cashier’s checks are guaranteed by the bank. That means the person cashing them doesn’t have to wait for the checks to clear. Mr. Sze earned a fee of about 1 to 2 percent of the money he laundered, according to the Department of Justice.

Although financial institutions play a leading role in the criminal complaint against Mr Sze, the Department of Justice acknowledged that money is laundered by various methods, including in slot machines in casinos, where there is dirty money convert to tokens, and then the tokens are exchanged for a new currency.

Although Mr. Sze pleaded guilty, was granted bail on a US$500,000 surety bond. He has not yet been sentenced, but he surrendered his passport and his movement is restricted to New York and New Jersey.

With files from Tu Thanh Ha

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