Why didn’t banks prevent alleged $11M fraud?
Red flags should have been raised sooner in case involving COVID relief funds, experts say
At the centre of an alleged scheme to defraud the provincial government of $11 million in COVID-19 relief payments are more than 400 bank accounts.
All of them were opened this spring in quick succession at the Bank of Montreal and TD Canada Trust, which then processed more than 40,000 electronic transfers from the province for $200 to $250 each — money that was supposed to be for families with young children or children with disabilities.
The volume and frequency of the banking activity is so suspicious that financial crime experts say the banks should never have let it happen.
“The banks have acted as a catalyst for the money laundering,” said Garry Clement, a former director of the RCMP proceeds of crime unit. “There is zero reason for the banks to have catered in this manner.”
Clement, who now runs an antimoney-laundering consulting firm, said there is no plausible reason to set up so many accounts so quickly and then process so many small transfers in quick succession. BMO and TD should have blocked the transfers before they occurred, he said.
“There are so many red flags that only blindness could explain how they were missed,” said Clement.
Richard Leblanc, a professor of corporate governance at York and Harvard universities, said large numbers of small transfers is a well-known bank fraud technique called “smurfing.” Most banks have software that would automatically flag this kind of activity.
“I’m surprised that in 2020 this occurred, because it is so common,” he said. “The banks should have caught that. Especially with the repeated transactions. That’s standard operating procedure for fraudsters.”
With only five individuals and two private corporations allegedly involved, it should have been easy for the banks to recognize the payments ended up in the same place, he said.
“What the bank should have done is not allow the accounts to be used until the owners had been vetted,” Leblanc said.
BMO spokesperson Jeff Roman said the bank has “robust systems in place to help detect, prevent and mitigate fraud,” and it informed the province of the suspicious activity.
“We’ve continued to co-operate with the authorities as they have investigated those concerns. We are unable to comment further given that this matter is before the courts,” Roman wrote in an email.
TD spokesperson Laura Butcher said the bank has controls in place that are regularly reviewed and updated.
“We were troubled to learn about this alleged theft of public dollars that are meant to support families through the pandemic,” she wrote in an email. “In response to the alleged abuse perpetuated against this government program, we also conducted a comprehensive internal review and have put additional measures in place.
“This is not an (anti-money laundering) issue and we have no further comment.”
According to documents filed with the Ontario Superior Court, the government alleges “some or all of” Sanjay Madan, his spouse Shalini Madan, their sons Chinmaya Madan and Ujjawal Madan, and their associate Vidhan Singh perpetrated “a massive fraud” to direct COVID-19 aid payments to hundreds of TD and BMO accounts.
Chinmaya Madan’s lawyer said he cannot comment. Through his lawyers, Sanjay Madan has not commented. Shalini Madan’s lawyer said “my client will not be commenting.”
Ujjawal Madan told the Star, “I cannot comment at this time. It’s not a good time.”
The four members of the Madan family were working as computer specialists at Queen’s Park until August. Sanjay Madan was the information technology leader of the government’s online Support for Families program (SFFP), which dispensed more than $300 million to parents in the spring.
The government alleges Sanjay Madan “used his in-depth knowledge,” of the SFFP “to direct an unauthorized rule change to allow for fraudulent … payments.” He allegedly eliminated a cap of five payments per bank account so up to 20 payments could go into a single account.
The government’s 25-page factum says after the emergency aid program was launched in April, “over 400 new accounts at the Bank of Montreal were opened in the names of the Madan respondents.”
“Over $2.5 million in Support for Families payments were then deposited into those BMO accounts. The BMO payments alone would be equivalent of payments to a family of more than 10,000 children,” the court documents say.
“The respondent Vidhan Singh, who is likely known to Sanjay Madan, received $42,500 in Support for Families payments, equivalent to having over 200 children,” the factum continues.
“It is likely that similar payments were made into accounts at other banks. At TD there are over 30,000 payments totalling approximately $8 million with the same or similar characteristics and payment patterns as the SFFP payments made into the Madan BMO accounts,” the filings say.
The province’s accusations, part of a civil action to freeze Madan family assets, have not been proven in court. Ontario Provincial Police said Thursday the investigation is ongoing but no charges have been laid.