Puerto Rican bank seeks $150 million in damages in Fed lawsuit

Bloomberg News

A Puerto Rican bank that filed a lawsuit against the Federal Reserve System last year is now seeking $150 million in damages from the central bank.

In an amendment filed in the U.S. District Court for the Southern District of New York last week, Banco San Juan Internacional claims that actions by the Federal Reserve Board of Governors and the Federal Reserve Bank of New York caused it to experience a "precipitous loss of business and clients."

Representatives from the Board and New York Fed both declined to comment on the amended complaint on Monday. 

The litigation stems from the New York Fed's decision last year to terminate Banco San Juan's master account — which provided access to national payments systems and the Fed's other financial services — due to money laundering concerns. The bank argues that such concerns are baseless and "pretextual," belying what they argue is the Fed's true concern: nontraditional banking models.

Based in Guaynabo, Puerto Rico, Banco San Juan Internacional, or BSJI, is chartered as an international banking entity, or IBE, a classification that is unique to the U.S. territory. The license, which is issued by Puerto Rico's regulator, the Oficina del Comisionado de Instituciones Financieras, or OCIF, limits the bank to taking deposits from non-residents. 

The OCIF is BSJI's sole regulator, it is not supervised by a federal agency. In its latest filing, the bank argues that the Fed has overstepped its bounds in recent years by exerting regulatory authority over state- and territory-chartered banks, a departure from its longstanding approach to payments access.

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"With no accountability, transparency or oversight, the Fed upended a century of public policy underpinning our financial system," said Eric Bloom, BSJI's general counsel, in a press release. "Congress requires a level playing field — every eligible depository institution is entitled to a master account. This is based on critical U.S. policy considerations that are not up to the Fed to ignore."

BSJI is one of several non-federally regulated banks to sue the Fed in recent years over master account access, though most other challengers are novel charters attempting to obtain master accounts for the first time. Wyoming-based digital asset bank Custodia and Idaho-based PayServices Inc. both have pending lawsuits over their inability to obtain a master account. The Narrow Bank, a Connecticut-based firm that sued the central bank in 2019, recently had its master account bid rejected more than six years after its initial application.

BSJI, on the other hand, was granted a master account in 2012 and operated without issue until 2019, when the New York Fed — which has jurisdiction over Puerto Rico — suspended its account, citing concerns about a federal probe into a pair of loan facilities issued by the bank. The account was reopened the following year after BSJI was cleared of any wrongdoing, only to be suspended again in 2022.

The New York Fed cited insufficient controls for money laundering, noting that a significant portion of the bank's deposits came from individuals in high-risk jurisdictions like Venezuela. But BSJI has argued that it has voluntarily subjected itself to a more rigorous oversight process than what is called for by OCIF. In its filings, the bank notes that it worked with the New York Fed to devise Bank Secrecy Act and Anti-Money Laundering controls on par with what federal regulators require.

Without access to the federal payments system, BSJI cannot settle transactions with other banks directly. Because of this, the bank states, it has had to shrink its business considerably. 

"Without a master account, BSJI has suffered substantial injury," its latest filing says. "BSJI has experienced a precipitous loss of business and clients. In order to recover from this situation, BSJI is incurring millions of dollars in otherwise unnecessary expenses and an inability to develop its business and implement opportunities."