THE TD BANK GOVERNANCE FAILURE
High-profile governance failures deserve high-profile public announcements. Like this one:
“By making its services convenient for criminals, TD Bank became one,” said Attorney General Merrick B. Garland on October 10, 2024.
According to Garland and the US Department of Justice (DOJ), the issues and absence of oversight leading up to this dramatic announcement went on for ten years. The ongoing issues weren’t a secret within the Bank and from the DOJ’s perspective, the risks and fixes were ‘willfully ignored’ by Bank leaders.
Which raises a couple of troubling questions: Where was TD’s Board of Directors while this scandal was unfolding over ten years and why did they fail to mitigate it?
WHAT IS CORPORATE GOVERNANCE FAILURE?
The role of the Board of Directors at TD Bank and any organization with a governance Board structure is to oversee the organization’s risk, strategy, and success at implementing its strategic direction. Their job is to protect the long-term success and sustainability of the organization. A key element of this is oversight of Management. In governance organizations like TD Bank, Management reports to the Board of Directors through the CEO. It is through the CEO and Management that the strategic direction of the Board is executed.
Governance failure occurs when Boards fail to oversee Management properly and to protect the organization from risks that threaten the ongoing success and sustainability of the business.
High profile examples of governance failure include Boeing which is currently struggling for its financial life thanks to strategic and operating blunders that impacted quality, safety and culture; Volkswagen which conspired to manipulate diesel emissions resulting in fines, jail sentences, Board and Management turnover; and, Wells Fargo who opened accounts without customer consent resulting in billions of dollars of fines, lawsuits, Board and Management turnover, and regulatory restrictions on its business.
WHAT HAPPENED AT TD BANK?
TD Bank was fined a total of $3.09 billion USD by US regulators for failing to comply with anti-money laundering laws. It also pleaded guilty to multiple charges including conspiracy to violate the Bank Secrecy Act and to commit money laundering.
The investigation by US regulators revealed that TD Bank’s transaction monitoring program had significant, systemic breaches that allowed drug cartels to launder hundreds of millions of dollars.
As part of the settlement, TD Bank received a cease-and-desist order and non-financial sanctions, including an asset cap that limits its growth in the US.
TD became the largest US bank in history to plead guilty to Bank Secrecy Act failures and the first bank to admit to conspiracy to launder money.
“There is nothing wrong with a bank that tries to make its services convenient for honest customers, but there is something terribly wrong with a bank that knowingly makes its services convenient for criminals”, said Attorney General Merrick Garland on October 10, 2024.
The announcement has seriously impacted TD’s stock price, reputation, credibility, and ability to grow in the United States. Stock chart is from Yahoo Finance.
HOW HAS THE TD BOARD REACTED?
The Board has reacted to this failure by pointing fingers at Management and by taking responsibility for trying harder in the future.
“Money laundering is a serious global threat, and our U.S. operation did not maintain an adequate AML (anti-money laundering) program to thwart criminal activity. The Board has and continues to take action to address these failures and hold those responsible accountable. We have appointed new leaders across our U.S. operations, overhauled our U.S. AML team, and prioritized investments to drive the required changes,” said Alan MacGibbon, Chair of the Board, TD Bank Group. “Enhancing our program and meeting our obligations today and into the future is the number one priority of the Board and Management.”
There is not much obvious indication that the Board recognizes their role in this failure. The latest Annual Management Proxy Circular published prior to the DOJ settlement includes this report card from the Board’s Risk Committee.
WHAT ABOUT TD BANK’S CEO?
On September 19, 2024, less than a month before the DOJ announced its charges, TD Bank announced the retirement of its CEO, Bharat Masrani. Masrani was CEO since 2014, timing that coincides perfectly with the DOJ’s charges. In a press release dated October 10, Masrani accepted full responsibility for the money laundering scandal.
“We have taken full responsibility for the failures of our U.S. AML program and are making the investments, changes and enhancements required to deliver on our commitments. This is a difficult chapter in our Bank’s history. These failures took place on my watch as CEO and I apologize to all our stakeholders,” said Bharat Masrani, Group President and Chief Executive Officer, TD Bank Group. “I want to thank our colleagues, who continue to demonstrate their dedication and who play an important role in preventing criminal activity.”
Masrani must feel fortunate that the Bank’s Board is allowing him to walk away with a comfortable retirement package instead of something much worse. Although the Bank did not announce what Masrani’s package would be, their 2023 Information Circular discloses a pension obligation to Masrani of over eighteen million dollars. From an accountability perspective, this seems like a very soft and quiet landing.
SHOULDN’T THE BANK’S BOARD BE MORE ACCOUNTABLE?
It is difficult to see why not. By accepting responsibility and/or being held accountable, regulators, investors, customers, and employees would be reassured that the TD Bank Board understands its oversight role and are serious about executing it. It would be an important step in helping to restore TD Bank’s seriously damaged reputation and credibility.
Lack of acceptance is much more troubling and raises serious questions about the Board’s ability to oversee the Bank going forward.
TD BANK’S GOVERNANCE CHARTER AND FIDUCIARY RESPONSIBILITY OF DIRECTORS
As noted in the Risk Committee’s report card (above), the TD Bank Board has a clear Governance Charter (job description) that includes definitions for its oversight of strategy, risk, leadership, internal controls, and effective governance. Everything that occurred in the money laundering scandal falls under the Board’s responsibilities defined in this Charter. If there was an external, objective evaluation of the Board’s effectiveness in implementing this charter, one wonders how the Board would do. Perhaps a big, red F for FAIL would be appropriate?
Also, it should be noted that Directors of any Board have a fiduciary responsibility to act in the best interests of shareholders and others. This includes a duty of care to make decisions with the same level of care that a reasonably prudent person would exercise by staying informed, participating actively in governance, and conducting thorough analysis.
Given the following statements from the DOJ’s October 10 press release, it is difficult to imagine how the Board was fulfilling either of these mandates satisfactorily:
“TD Bank prioritized growth and convenience over following its legal obligations,” said U.S. Attorney Philip R. Sellinger for the District of New Jersey.
“As a result of staggering and pervasive failures in oversight, it willfully failed to monitor trillions of dollars of transactions – including those involving ACH transactions, checks, high-risk countries, and peer-to-peer transactions – which allowed hundreds of millions of dollars from money laundering networks to flow through the bank, including for international drug traffickers. The bank was aware of these risks and failed to take steps to protect against them.”
HOW COME MORE COMMENTATORS HAVEN’T QUESTIONED THE BOARD’S ROLE AND ACCOUNTABILITY?
It seems that most commentators have treated the fallout from this scandal as solely an indictment of TD Bank’s US Management. This aligns with the public statements made by the Bank.
Divorcing the Board from Management is a common mistake that demonstrates a profound misunderstanding of corporate governance.
It’s something that happens quite often, particularly in the US where high profile CEOs are assigned superhero (or bum) status and Boards are seldom heard about, or from.
HOW SHOULD THE TD BOARD BE HELD ACCOUNTABLE?
It will be up to shareholders and regulators if and how to hold the TD Board accountable. There are methods of recourse for shareholders to pursue if they conclude the Board failed in its duties. Voting Directors off the Board is one obvious means of holding them accountable.
In addition, shareholders could push for a comprehensive governance review of the TD Board. The review should be externally led by objective governance experts and the results should be transparent in a way that ensures the Board is held accountable for its performance going forward.
TD Directors are well compensated to perform their governance role. They are well trained and very experienced. There is nothing out of line in having high expectations about how they and the Board perform their governance roles.
This TD Director Compensation Table is from the 2023 Management Information Proxy Circular.
WHAT MORE WILL REGULATORS DO?
What Regulators will do going forward is unclear, but Banks are highly regulated in both the US and Canada. TD Bank has ensured that it is solidly on radar screens in both countries and according to the DOJ, it isn’t finished with TD Bank.
“TD Bank chose profits over compliance with the law — a decision that is now costing the bank billions of dollars in penalties. Let me be clear: our investigation continues, and no individual involved in TD Bank’s illegal conduct is off limits.”
Focusing on governance failure doesn’t seem like a stretch as Regulators continue to investigate.
TD BANK GOVERNANCE FAILURE: CONCLUSION
Whether the Board has accepted accountability or not, what happened at TD Bank is very disturbing. It is likely already being used as a case study by current and future Directors hoping to avoid similar-type failures.
By learning from TD Bank’s mistakes, other organizations can take proactive steps to ensure they do not face similar scandals. This includes corporate governance education for Boards and Management and objective/expert assessments of Boards and CEOs. For more information on Boards and avoiding Corporate Governance Failure write to [email protected].
FORM YOUR OWN PERSPECTIVE WITH THESE USEFUL LINKS
US Department of Justice Press Release
TD Bank Press Release
https://td.mediaroom.com/2024-10-10-TD-BANK-GROUP-ANNOUNCES-RESOLUTION-OF-AML-INVESTIGATIONS
TD Bank 2023 Annual Report
TD Bank 2023 Management Proxy Circular
https://www.td.com/content/dam/tdcom/canada/about-td/pdf/td-investor-2024-proxy-en.pdf
TD Bank Board and Committee Charters
https://www.td.com/ca/en/about-td/corporate-profile/charters-and-related-reference-material
Other Perspectives
https://www.theglobeandmail.com/business/commentary/article-td-bank-money-laundering-board-of-directors/#:~:text=put%20it%20lightly.-,In%20a%20plea%20agreement%20with%20the%20U.S.%20Department%20of%20Justice,most%20convenient%20bank%20for%20criminals.
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