NY Fed Can Cut Off Puerto Rican Bank in Venezuela-Related Crackdown – US Judge, According to Reuters

By Jonathan Stempel

A U.S. judge has decided against blocking the Federal Reserve Bank of New York from ending a Puerto Rican bank’s access to the U.S. central banking system, amid increased scrutiny of banks with ties to Venezuela.

U.S. District Judge John Koeltl, based in Manhattan, stated that Banco San Juan Internacional (BSJI) did not demonstrate that it would face irreparable harm if a preliminary injunction was not issued. The bank announced its intention to appeal the ruling.

In July, BSJI filed a lawsuit seeking to prevent the New York Fed from shutting down its "master account," which facilitates access to the Fed’s electronic payment system. This action was taken due to concerns over potential noncompliance with U.S. sanctions and anti-money laundering regulations.

The bank claimed to have enhanced its compliance efforts during a suspension that lasted 22 months in 2019 and 2020, which followed an investigation into its lending agreements with the state-run oil company Petroleos de Venezuela, a target of U.S. sanctions. BSJI stated that the previous suspension led to the loss of more than 90% of its customer base and contended that the termination of its account would threaten its survival.

However, in his detailed 33-page ruling, Judge Koeltl dismissed the bank’s concerns as "self-serving speculation." He stated that there was "no likelihood" that the New York Fed had acted improperly, citing a "significant number of red flags" identified during its review.

The judge emphasized the risks posed to the Federal Reserve Bank of New York (FRBNY) and the broader financial system by maintaining banking relationships with an institution like BSJI that has a history of noncompliance. He noted that granting emergency relief to BSJI would jeopardize public safety.

The New York Fed had agreed to keep the bank’s master account operational until a ruling on the preliminary injunction was made.

In their statement, BSJI argued that the decision contradicted decades of consensus regarding its entitlement to a master account, asserting that various independent experts have recognized its compliance program as both comprehensive and effective.

The New York Fed opted not to provide any comment on the case.

Historically, Puerto Rico’s banking industry has had close connections with Venezuela. In 2019, the New York Fed announced it would cease approving new master accounts for Puerto Rican offshore banks due to sanctions aimed at removing Venezuela’s socialist President Nicolas Maduro.

The case is formally registered as Banco San Juan Internacional Inc v Federal Reserve Bank of New York et al in the U.S. District Court for the Southern District of New York.