NY Fed defeats Puerto Rican bank's appeal tied to Venezuela-related cutoff

• The court ruled 3-0 that the Federal Reserve Act does not entitle nonmember banks to master accounts, which provide access to the Fed's electronic payment system
• BSJI's 11-year-old account was closed as part of a 2019 crackdown on Puerto Rico's offshore banking industry due to Venezuela sanctions concerns
• The court found no 'discriminatory animus' supporting BSJI's claim it was targeted because the bank was owned by a Venezuelan national

Summary

The Federal Reserve Bank of New York successfully defended against an appeal by Puerto Rican lender Banco San Juan Internacional (BSJI) regarding the termination of its access to the U.S. central banking system. On May 13, the 2nd U.S. Circuit Court of Appeals unanimously (3-0) rejected BSJI's claim that it was legally entitled to maintain a "master account" providing access to the Fed's electronic payment system.

Key Details:

• BSJI's 11-year-old account was closed in 2023 due to concerns over non-compliance with U.S. sanctions and anti-money laundering rules
• The closure was part of a broader crackdown on lenders with Venezuela connections
• The bank is owned by a Venezuelan national and alleged discriminatory treatment, but the court found no "discriminatory animus"

Legal Ruling:

Circuit Judge Denny Chin determined that regional Federal Reserve banks have discretion in awarding master accounts as part of their mandate to promote financial system stability. The court distinguished between member banks (which the Fed can supervise with targeted powers) and nonmember banks, where account access/denial serves as the Fed's "primary power" and "blunt instrument" for risk management.

Market Context:

Puerto Rico's banking industry has historically maintained close ties to Venezuela. BSJI argued its termination represented a broader "de-banking" campaign affecting businesses connected to cryptocurrency and cannabis. The case referenced a 2019 Reuters report on the New York Fed's actions against Puerto Rico's offshore banking sector due to sanctions targeting Venezuela's Nicolas Maduro, who now faces criminal charges in the U.S.