Money laundering risks to Canada’s banks have ‘risen in prominence,’ banking regulator says

Risks to banks from anti-money-laundering issues have “risen in prominence” for Canada’s banking regulation as it gains a deeper understanding of the weak spots in financial institutions’ defences, some of which have not yet been publicly revealed, the head of the regulator said.

In January, the Office of the Superintendent of Financial Institutions (OSFI) rolled out a new guideline on risks to banks’ integrity and security, and since then it has started to engage directly with senior leaders about how to safeguard institutions against those risks.

As OSFI held those discussions with banks, “anti-money-laundering issues have risen in prominence as we’ve understood those risks more fully,” said superintendent Peter Routledge, speaking with reporters at the Global Risk Institute’s annual summit in Toronto on Wednesday.

“There are anti-money-laundering issues that are publicly known – I don’t want to talk about individual institutions – and there are ones that we’re aware of that we don’t disclose because it’s part of the regulatory process and we ‘re not allowed to disclose,’ Mr. Routledge said.

“In the last year, to be clear, the incidence of anti-money-laundering issues has caused us to elevate that risk,” he added. “And it’s not a single event. There have been a bunch of events that have caused us to think about that.”

Who’s ultimately at fault for TD’s US money-laundering woes? Canada’s regulator

For more than a year, Toronto-Dominion Bank has been under intense regulatory pressure over lapses in its anti-money-laundering program. The bank is bracing for a historic fine of more than US$3-billion ($4-billion) to settle investigations from US regulators, which would be one of the largest penalties on record for similar issues. And it is aiming to reach a settlement with regulators that will also include non-monetary penalties, although it is not yet clear what those will be.

The anti-money-laundering problems that have plagued TD, wiping out the premium valuation its stock had historically commanded and looming large over its unexpected election for the bank’s next CEO, came to public attention in part because TD terminated its attempted US$13.4-billion takeover of Tennessee-based First Horizon Corp. when it was unable to obtain timely approval from regulators.

Mr. Routledge’s comments signal that while TD’s issues have been especially prominent, and treated by US regulations as unusually severe, it is not the only bank struggling to keep up with criminal groups. Increasingly sophisticated bad actors often operate across borders and constantly probe for weaknesses in the banking system to wash and circulate massive sums of illicit money.

“That is a problem that has a transnational factor associated with it. And it is a risk that is more significant than I appreciated three years ago,” Mr. Routledge told an audience at Wednesday’s conference.

On Wednesday, OSFI also placed extra emphasis on two rising risks when it published a semi-annual update to its risk outlook, which was first released in May. The first category of risks is those that threaten “operational resilience” – a bank’s ability to keep its core functions running when faced with a shock, which include anti-money laundering and fraud. The other is the rapidly emerging risk related to artificial intelligence.

As OSFI uncovered anti-money-laundering issues at banks, including those that have been kept strictly confidential, “we’ve adapted our risk judgment and what we choose to emphasize in that public document,” Mr. Routledge said.

The updated document kept the four key risks that OSFI identified earlier in the year unchanged: Mortgage lending, funding and liquidity, wholesale credit as well as integrity, security and foreign interference. Mr. Routledge said Wednesday that “number one is still residential mortgage risk and the housing market more generally,” but that he feels “a lot better than I did a year ago” about how Canadian homeowners will cope with higher interest rates.