Fresh allegations that a longtime Toronto-Dominion Bank branch worker in Florida took a series of $200 bribes to help clients move millions to Colombia by skirting anti-money-laundering defenses are adding to the lender's mushrooming U.S. legal problems.
Gerry Aquino Vargas, the now-former retail banker in a Hollywood, Florida, outpost of Canada's second-largest bank, falsified documents to open dozens of accounts and provided concierge-like services to help cash flow across borders, according to American prosecutors.
In another recent case, a former TD branch employee in New York admitted to bypassing the bank's compliance measures to defraud a customer.
The cases — which haven't yet been reported and don't identify Toronto-Dominion by name — are part of a sweeping probe by officials at the Justice Department, bank regulators and Treasury Department into allegations of money laundering and other financial crimes at the bank.
The dragnet may ultimately lead to a costly settlement for TD that some analysts now peg at $2 billion and, perhaps worse for the firm's investors, a yearslong setback for its lofty U.S. ambitions.
In a major blow to those plans, the company last year scuttled a $13.4 billion takeover of First Horizon Corp. — saying it didn't see a path for regulatory approval. The deal would have consolidated TD's status as one of the biggest U.S. banks.
The lender has also had to spend more than $350 million shoring up anti-money-laundering defenses and recently had its outlooks cut by Fitch Ratings Inc. and S&P Global Ratings.
So far prosecutors in the U.S. Attorney's Office for the District of New Jersey have filed at least four cases alleging serious misconduct by branch employees in New York, New Jersey and Florida. One case involved TD branches being used to launder drug money as part of a $653 million conspiracy.
Taken together they paint a picture of a bank whose controls were easily skirted by US employees looking to make extra cash. They've also trained an uncomfortable spotlight on the bank's leadership back in Toronto.
"Often it requires a management change for the regulators to feel confident that the issue's really being taken serious and the management's not sort of trying to protect its past track record," Evan Mancer, chief investment officer at Cardinal Capital Management, said in a recent BNN Bloomberg Television interview.
He said his firm recently sold Toronto-Dominion shares after investing in the bank for three decades.
TD's Fixes
Toronto-Dominion says Chief Executive Officer Bharat Masrani, who took a C$1 million ($730,000) pay cut after the First Horizon deal failed, has no current plans to go anywhere.
The CEO and other leaders have made substantial progress in boosting compliance, while delivering strong financial results, according to Toronto-Dominion spokesperson Lisa Hodgins.
Executives are "focused on the work needed to overhaul" the bank's anti-money-laundering procedures, she said in an email. The bank had no comment on analyst projections on potential penalties.
The Justice Department declined to comment.
Toronto-Dominion shares fell as much as 1.7% in Toronto following the report Monday. They're down 12% this year, compared with a 3.9% gain for the S&P/TSX Composite Financials Index.
The U.S. case against Aquino Vargas, whom the government alleges was paid at least $5,600 by a Colombian client and also boasted that he'd helped Venezuelans, Israelis, Bolivians and Peruvians use Toronto-Dominion accounts to skirt US rules, was filed in March.
TD Bank, as the lender's U.S. unit is known, is referred to only as "Financial Institution-A" in court documents.
Hodgins said TD fired Aquino Vargas. His lawyer didn't respond to messages seeking comment on the case against him, which include alleged misconduct as recent as last fall. Court documents show he waived his rights to a preliminary hearing and hasn't yet entered a plea.
Branch Growth
TD already has a network of almost 1,200 branches from Maine to Florida — a total that outnumbers its retail locations in Canada.
The bank has more than 10 million U.S. customers and also offers business and wealth-management services. But, it is looking to get much bigger in the US and expand into new regions.
When Toronto-Dominion killed its deal to buy Memphis-based First Horizon back in May 2023, executives said the bank would build its own new U.S. branches instead — 150 of them by 2027. As of this April, it only had three more than a year prior.
That anemic growth has stoked speculation that American authorities were preventing the bank from a big U.S. expansion amid the money-laundering probe.
The company isn't currently under any restrictions from regulators on growing in the US, but there isn't yet clarity at Toronto-Dominion over whether it will eventually face such limits, said a person with knowledge of the bank's internal response.
When pressed last month by analysts, Leo Salom, who runs Toronto-Dominion's US operations, said the lender is "deliberately pacing" how many locations it opens. The bank continues to talk with regulators and invest in compliance. Salom declined to comment directly on whether regulators had blocked its expansion.
Signs of Trouble
The federal prosecutors in New Jersey have been working with the Justice Department's money-laundering section in Washington to bring the smattering of cases involving conduct at branches and the broader probe into the bank's defenses and compliance.
Signs of trouble started to become public even before Toronto-Dominion announced in early 2022 that it planned to buy First Horizon.
Months earlier, federal prosecutors said in a criminal complaint that several branches of an unnamed financial institution dubbed "FI-1" were integral in a massive plot to move drug trafficking proceeds to China and Hong Kong. It later emerged that the firm was Toronto-Dominion.
