Binance and TD Bank: Compliance Failures and the Rising Importance of Regtech
Binance: USD 4.3 billion for non-compliance
One year ago, US regulators blasted the world’s largest cryptocurrency exchange, Binance, with a record-setting penalty of USD 4.3 billion for outrageous compliance failures. In November 2023, the company and its founder Changpeng Zhao pleaded guilty to non-compliance, poorly executed anti-money laundering instruments, and deliberate disregard for illegal funds being routed through the platform. We covered this story in our December newsletter in 2023.
The charges against the platforms included but weren’t limited to facilitating transactions worth billions of dollars without proper KYC checks, inadequate compliance measures, proceeding transactions that were clearly the proceeds from darknet market operations (which included transactions to Hydra, a notorious Russian marketplace used by criminals for nearly everything for drug sales to contract murders), enabling sanctions evasion, and financing of terrorist organizations, such as Hamas or Hezbollah. These “shortcomings” in compliance were hardly a secret for the management and the employees, but no steps were made to prevent Binance from being used for illegal operations.
Other changes were related to “Tai Chi,” the scheme Binance used to deceive US regulators by setting up a separate compliant US entity yet providing crypto services to US citizens on its main platform. Forbes originally revealed this scheme in 2020. In June 2023, the US Securities and Exchange Commission sued Binance and Zhao for illegal operations in the US and defrauding crypto investors.
Both the platform and its founder pleaded guilty. The court obliged both to pay massive non-compliance fines. Zhao was also sentenced to several months in prison. That verdict dramatically differed from other cases, when cryptocurrency platform operators faced decades of imprisonment for facilitating money laundering, which was widely considered a result of Binance’s full cooperation with the US authorities.
TD Bank: guilty plead for money laundering
In November 2024, for the first time in US history, TD Bank pleaded guilty to money laundering charges. The Toronto-headquartered bank (its name stands for Toronto Dominion) is the second largest in Canada and the sixth largest in North America. Following two decades of successful expansion in the US market, the bank now faces a USD 3 billion fine and a little-used asset cap for compliance failures.
TD Bank’s history of regulatory failings in Canada and the US is continuous enough to be separated into several paragraphs.
The bank often failed to report suspicious activity and take the necessary actions. In 2008 and 2009, TD Bank did not file suspicious activity reports regarding the notorious Scott Rothstein Ponzi scheme while its regional vice-president was found involved in fraud and misleading investors. TD Bank’s P2P payments app Zelle, launched in 2017, raised numerous red flags for the lack of transaction monitoring with investigations identifying alleged money laundering and payments for illicit activities, such as human trafficking. From 2018 to 2021, the bank failed to terminate hundreds of accounts marked for closure by its compliance team, allowing a total of USD 5 billion to be transferred to suspicious accounts.
Over the years, TD Bank’s compliance department lacked personnel and underperformed. According to reports, the bank systematically failed to detect and report alerts and respond to subpoenas. The bank’s management was aware of the issues but took no measures. The loopholes in the bank’s systems allowed corrupt bank employees to bypass compliance controls and execute transactions on behalf of customers potentially related to criminal groups in Colombia.
On another note, TD Bank failed to implement Regtech software effectively and had deficient Know Your Customer (KYC) procedures, which permitted high-risk clients to open accounts and perform transactions. In 2017, the internal assessment of the interbank transaction monitoring system found naturally no active system to monitor domestic transactions. In 2023, it became public that due to coverage gaps, transactions worth several trillion dollars weren’t screened by the bank’s software. The bank had spent several years changing its Regtech services provider but only made things worse. The new system seemingly failed to identify questionable operations, leading to a 123% increase in transactions that passed the AML checks. Still, the bank didn’t notify regulators or apply any mitigation control.
Under the penalty agreement, The Office of the Comptroller of the Currency (OCC), a US bank regulator, also implemented a USD 434 billion asset cap: a limit on TD Bank’s business functions and consolidated assets. Alongside the fines, such restrictions are meant to ensure that the bank focuses on implementing proper controls and risk management. The asset cap will remain indefinitely unless the OCC removes it. It will likely take years to satisfy the regulators: for instance, Wells Fargo still deals with its USD 1,95 trillion asset cap enforced in 2019.
It’s time for a change: AML regulation in Canada
TD Bank’s problems in the US had an unusual outcome: the Canadian Bankers Association requested the House of Commons to reform the national AML procedures. The regulatory burden in Canada is terrible: banks and other businesses (such as brokers, agents, real estate firms, sales representatives, money services, casinos, etc) have to submit 12,5 times more reports than those in the US and 96 times more reports than those in the UK. However, the performance of the Financial Transactions and Reporting Analysis Centre of Canada (FINTRAC), the national supervisory and financial intelligence organization, is subject to debate.
At the same time, Canada is considered a money laundering haven due to legislation that shields the real owners of companies, effectively allowing criminals or sanctions evaders to establish shell companies in Canada, make transactions, and purchase assets. Many forms of business organizations only require the key managers to be publicly disclosed, and some exempt people from filing taxes in Canada if they are living elsewhere. The practices of tax evasion, sanction evasion, and money laundering using Canadian firms are sometimes referred to as “snow washing”. TD Bank’s woes resulted from a combination of many factors. However, one can’t write off the regulatory requirements and enforcement practices that shaped the bank’s business strategy.
Our simple advice to the banks: invest in Regtech
We are not strictly neutral on the matter. Dataspike.io is an advanced regulatory technology platform that automates KYC and legal screening operations for banks, money services, and other firms in regulated markets. TD Bank’s problems resulted from poor managerial decisions, vastly underperforming Regtech software and a short-staffed compliance department.
Dataspike.io focuses on a particular component of AML compliance, but we get your back no matter your Regtech stack. Our platform scales well and works for both newborn startups and established banks. It integrates well with other compliance technology as a component of a robust compliance system that minimizes the chance for mistakes and noncompliance penalties.