Federal Reserve Wins Legal Battle Over Master Account Closure
The Federal Reserve Bank of New York (NY Fed) has prevailed in a lawsuit filed by Banco San Juan Internacional (BSJI), a Puerto Rican bank, challenging the termination of its access to the U.S. central banking system.
U.S. District Judge John Koeltl dismissed BSJI’s claims on Wednesday, ruling that the Federal Reserve Act grants the NY Fed discretion to close “master accounts,” which provide banks access to the central bank’s electronic payment system. The decision is a significant win for the Federal Reserve amid its crackdown on financial institutions with ties to Venezuela.
BSJI’s Lawsuit Stems from Sanctions Concerns
BSJI filed its lawsuit in July 2023 after the NY Fed announced plans to terminate the bank’s 11-year-old master account. The decision was reportedly tied to concerns over BSJI’s compliance with U.S. sanctions and anti-money laundering (AML) regulations.
The bank, which previously conducted business with Venezuela’s state-run oil company, Petroleos de Venezuela (PDVSA), argued that it had improved its compliance measures and that losing its account could jeopardize its survival.
Judge Rules Fed Act Allows Account Termination
In his 69-page ruling, Judge Koeltl emphasized that the language of the Federal Reserve Act grants the NY Fed broad discretion over master account decisions. He rejected BSJI’s claims that the account termination violated its due process rights.
“The Federal Reserve Bank of New York determined that BSJI’s heightened risk profile and noncompliance created undue risk, justifying the closure,” Koeltl wrote. He added that BSJI failed to present evidence suggesting the NY Fed acted improperly or made a “clear error of judgment.”
Standing Lacking for Related Claims Against Federal Reserve Board
Koeltl also dismissed BSJI’s related claims against the Federal Reserve’s Board of Governors, stating that the bank lacked the standing necessary to pursue those allegations.
Puerto Rican Bank Given Option to Amend Complaint
BSJI has until January 27 to file an amended complaint. The bank’s attorney, Kelly Librera, indicated that BSJI is considering taking further legal action.
“The issue is a serious one,” Librera said in an email. “The agency’s interpretation undermines the role of state regulators, a matter we believe the Supreme Court may ultimately weigh in on.”
