A district court ruling last week solidified the ability of regional reserve banks to close
John Koeltl, a judge in the U.S. District Court for the Southern District of New York, denied a motion from Banco San Juan Internacional, Inc. — a Guaynabo, Puerto Rico-based financial institution — that would have preserved
The New York Fed closed Banco San Juan's account last year after discovering numerous transactions by the bank that raised concerns about money laundering and compliance with the Bank Secrecy Act, according to court filings.
The bank had sought an injunction from the court that would have enabled it to keep its account open. It argued that the closure would cause "irreparable" harm to its business. In his ruling, Koeltl rejected the argument, noting that the bank had not lost any customers when its master account was suspended in 2019 over similar concerns.
Koeltl's ruling also went a step further by refuting the bank's claim that the New York Fed had violated its "statutory right" to a master account. The judge stated that the Federal Reserve Act "does not require the federal reserve banks to grant to any bank a master account," a missive that cuts to the core of two other ongoing master account lawsuits between non-federally regulated banks and their regional reserve banks.
Cheyenne, Wyoming-based Custodia Bank has been battling the Federal Reserve Board of Governors and Kansas City Fed in court for more than a year over its
Similarly, Idaho-based PayServices, Inc. sued the Board and the San Francisco Fed last June, asserting that it was wrongfully denied an account. PayServices went a step further than the others, arguing that the Fed's new framework for assessing master account applicants — which divides them into three tiers based on their level of risk and regulatory oversight — effectively discriminates against state-chartered institutions.
Julie Hill, vice dean at the University of Alabama law school and an expert in payments regulation, said the question of master account entitlement is central to all three challenges and it is possible that the judges in Wyoming and Idaho look to their New York counterpart for guidance. But, she noted, neither are required to do so.
"Neither the Federal District Court for the District of Wyoming nor the Federal District Court for the District of Idaho is required to follow a decision from the Federal District Court for the Southern District of New York," Hill said. "Because there are no cases previously deciding this issue in either … the judges in the Custodia and PayServices cases can make their own interpretations of the Federal Reserve Act."
Hill added that Koeltl shared little analysis of the rationale behind his decision, so the Banco San Juan ruling does not necessarily spell doom for Custodia or PayServices.
Banco San Juan's issues with the Fed are nothing new. The central bank first suspended its account four years ago after being informed about a federal investigation into suspicious activity at the bank.
According to court documents, Banco San Juan has just 14 account holders, all of whom are friends or family members of the bank's owner. Several of them are located in jurisdiction deemed high risks for money laundering and/or sanctions evasion, including Venezuela.
After the 2019 probe, the bank instituted new money laundering and BSA compliance rules. It also agreed to enhanced reporting standards and signed an agreement with the Fed acknowledging that its master account could be terminated at any time, according to court documents.
In 2020, the New York Fed lifted its suspension of Banco San Juan's account. But, two years later, a delay in compliance reporting and several flagged transactions caused the reserve bank to move to close the account for good. The closure was held off by a temporary injunction from the court, but that order is set to expire on Nov. 9.
Lawyers for Banco San Juan did not respond to requests for comment Tuesday. The bank's representative filed an appeal of Koeltl's decision on Monday.
The New York Fed declined to comment on the case.
