NY Fed can cut off Puerto Rican bank in Venezuela-related crackdown -US judge

By Jonathan Stempel

NEW YORK (Reuters) -A U.S. judge on Friday refused to block the Federal Reserve Bank of New York from terminating a Puerto Rican bank’s access to the U.S. central banking system, as part of a crackdown on lenders with links to Venezuela.

U.S. District Judge John Koeltl in Manhattan said Banco San Juan Internacional (“BSJI”) failed to show it would suffer irreparable harm if he failed to issue a preliminary injunction.

The bank said it plans to appeal.

BSJI sued in July to stop the New York Fed from terminating its “master account,” which lets banks access the Fed’s electronic payment system, over concerns it was not complying with U.S. sanctions and anti-money laundering rules.

It said it had improved compliance during a 22-month suspension in 2019 and 2020, following a probe into its credit agreements with state-run oil company Petroleos de Venezuela, which is subject to sanctions. Venezuela is an OPEC member.

The bank said that suspension cost it more than 90% of its customers, and it was “unlikely to survive” the termination of its account.

But in a 33-page decision, Koeltl dismissed the warning as “self-serving speculation,” and found “no likelihood” the New York Fed acted arbitrarily or capriciously given the “significant number of red flags” it had found.

“Accepting deposits from and providing financial services to a financial institution with BSJI’s record of noncompliance exposes the FRBNY and the financial system to risk,” Koeltl wrote. “Granting BSJI’s motion for emergency relief would place the public in harm’s way.”

The New York Fed agreed to keep the bank’s master account open until Koeltl ruled on the preliminary injunction motion.

In a statement, the bank said Koeltl’s decision “departs from decades of uniform consensus evidencing BSJI’s entitlement to a master account.” It also said multiple independent experts have found its compliance program “comprehensive and effective.”

The New York Fed declined to comment.

Puerto Rico’s banking industry has historically been close to Venezuela.

In 2019, the New York Fed said it would stop approving new master accounts for Puerto Rican offshore banks because of sanctions aimed at ousting Venezuela’s socialist President Nicolas Maduro.

The case is Banco San Juan Internacional Inc v Federal Reserve Bank of New York et al, U.S. District Court, Southern District of New York, No, 23-06414.

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