Banco San Juan Internacional Inc. v. The Federal Reserve Bank of New York
Date: Oct. 30, 2023
Issue: Whether a bank has a statutory right to a Federal Reserve master account.
Case Summary: A Manhattan federal court ruled banks do not have a statutory right to Federal Reserve master accounts.
A master account is a type of bank account which grants access to the Federal Reserve’s payment networks. Without the account, banks are forced to rely on a partner bank for access. Master accounts are hosted at the Federal Reserve’s regional reserve banks such as the Federal Reserve Bank of New York (FRBNY).
Banco San Juan Internacional Inc. (BSJI), a bank based in Puerto Rico, received its master account over a decade ago. Under the Federal Reserve’s guidelines, Master account applicants are placed into three tiers of scrutiny and reviewed for different types of risks. Prior to approval, BSJI was categorized in the high-risk tier because the bank is not federally supervised or insured. BSJI is organized under Puerto Rico laws as an International Banking Entity (IBE). IBEs are offshore financial institutions that federal authorities view as high risk for money laundering. In 2019, BSJI had its master account suspended for 22 months following a federal probe into credit agreements it had with state oil company, Petroleos de Venezuela. BSJI contended it improved its compliance during the suspension. However, FRBNY terminated BSJI’s master account following a federal crackdown on banks with links to Venezuela.
BSJI sued to prevent FRBNY from terminating its master account. BSJI argued FRBNY improperly targeted the bank because it was founded by a Venezuelan national more than 12 years ago, which BSJI asserted is patently unreasonable and unlawful. FRBNY contended it had the right to close BSJI’s master account, and the bank’s continued account access would create an unacceptable risk of facilitating illicit activity.
BSJI filed a motion for preliminary injunction, claiming it has a statutory right to have a master account, and FRBNY’s actions violated the Administrative Procedure Act. BSJI also claimed closing its master account and terminating its access to the Federal Reserve System’s services would cause the bank irreparable harm.
Judge John Koetl of the Manhattan federal court denied BSJI’s motion for preliminary injunction, ruling BSJI was not likely to succeed on the merits. The court emphasized Section 342 of the Federal Reserve Act makes clear that Federal Reserve banks are authorized to maintain master account but are not required to do so. The court also explained FRBNY executed a Master Account Agreement and Supplemental Terms with BSJI, and both agreements gave FRBNY the contractual right to close BSJI’s master account.
The court also concluded BSJI’s claim that it would suffer irreparable harm was based on speculation rather than concrete evidence. BSJI alleged it would lose its customers without the existence of a master account. In support, BSJI highlighted the 22-month period in which its master account was suspended and alleged the loss of access caused enormous reputational and financial harm. The court explained BSJI’s current small customer base consists of only 14 account holders comprised almost exclusively of close family members of the owner and the offshore entities they control. Further, the court concluded the bank’s account base remained with the bank despite its prior lengthy existence without a master account. As a result, the court concluded the allegations that BSJI would lose its current customers were “self-serving speculation.”
Bottom Line: BSJI filed to appeal the denial. The bank will seek “interim relief” from the Second Circuit.