Banco San Juan Internacional, Inc. v. The Fed. Reserve Bank of N.Y.

• Docket Number: 23-cv-6414 (JGK)
• Decision Date: 24 October 2023
• Parties: BANCO SAN JUAN INTERNACIONAL, INC., Plaintiff, v. THE FEDERAL RESERVE BANK OF NEW YORK, ET AL., Defendants.
• Court: U.S. District Court — Southern District of New York

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BANCO SAN JUAN INTERNACIONAL, INC., Plaintiff, v. THE FEDERAL RESERVE BANK OF NEW YORK, ET AL., Defendants.

No. 23-cv-6414 (JGK)

United States District Court, S.D. New York

October 24, 2023

MEMORANDUM OPINION AND ORDER

JOHN G. KOELTL, DISTRICT JUDGE

The plaintiff, Banco San Juan Internacional, Inc. (“BSJI”), a Puerto Rico international banking entity, seeks a preliminary injunction to require the Federal Reserve Bank of New York (“FRBNY”) and the Board of Governors of the Federal Reserve System (“Board”) to maintain the Master Account of BSJI with the FRBNY pending a final judgment in this case.

BSJI filed this action together with its motion for a preliminary injunction pursuant to Federal Rule of Civil Procedure 65 on July 24, 2023. ECF Nos. 1, 5. BSJI contends that closing BSJI's Master Account and terminating access to the Federal Reserve System's services would cause BSJI irreparable harm. ECF No. 7. Because BSJI has failed to meet the requirements for obtaining a preliminary injunction against the FRBNY, the motion is denied. See Monserrate v. New York State Senate, 599 F.3d 148, 154 (2d Cir. 2010). And because BSJI cannot demonstrate that its claimed injury “will be redressed by a favorable disposition” with respect to the Board BSJI's motion seeking relief from the Board is dismissed as moot. See Lujan v Defenders of Wildlife 504 U.S. 555, 560 (1992) .^[1] The Court now makes the following findings of fact and reaches the following conclusions of law pursuant to Federal Rules of Civil Procedure 52(a)(2) and 65.

I.

The following facts, drawn from the complaint and the parties' affidavits on this motion, constitute the Court's findings of fact. See Park Irmat Drug Corp v. Optumrx, Inc., 152 F.Supp.3d 127, 132 (S.D.N.Y. 2016) (“In deciding a motion for preliminary injunction, a court may consider the entire record including affidavits and other hearsay evidence.”).

i.

The Federal Reserve System was established in 1913 by the Federal Reserve Act. 12 U.S.C. § 221 et seq (“FRA”). It consists of the Board, the Federal Open Market Committee, and twelve regional Federal reserve banks that serve financial institutions in their respective districts. Id. § 222. Federal reserve banks, including the FRBNY, are federal instrumentalities, incorporated pursuant to the FRA. 12 U.S.C. § 221; United States ex rel. Kraus v. Wells Fargo & Co., 943 F.3d 588, 592 (2d. Cir. 2019) (“Kraus”). Congress authorized Federal reserve banks to carry out certain banking functions, 12 U.S.C. §§ 341-361, including the authority to accept or reject deposits from depository institutions, id. § 342. Federal reserve banks maintain such deposits in accounts called “Master Accounts” held in the name of the financial institutions. As deposit accounts, Master Accounts are governed by 12 U.S.C. § 342, which provides that “[a]ny Federal reserve bank may receive from any of its member banks, or other depository institutions . . . deposits of current funds in lawful money[.]”

Federal reserve banks issue Operating Circulars, which govern the relationship between a reserve bank and a Master Account holder. Brennan Decl., Ex. 3, ECF No. 52-3 (Operating Circular No. 1). Pursuant to the terms of Operating Circular No. 1, account holders create a Master Account by executing a Master Account Agreement(“MAA”). Id.; Brennan Decl., Ex. 2, ECF No. 522 (MAA for BSJI). The MAA sets the terms under which a Master Account can be operated, including the Federal reserve bank's right to terminate a Master Account “at any time.” Brennan Decl., Ex. 3, ECF No. 52-3 at 11.

In addition to the terms set forth in Operating Circular No. 1, a subset of high-risk account holders, including BSJI, agree to enhanced risk-mitigation provisions. Brennan Decl., Ex. 4, ECF No. 52-4. BSJI agreed that “to limit the Risks the customer poses to the [FRBNY], the [FRBNY] may suspend or terminate the Customer's access to one or more Financial Services [or] close the Customer's Master Account at any time by giving written notice to the Customer.” Id. at 11. Risk, in this context, is defined as the “the existence of, or the possibility of, financial, legal, compliance, operational, reputational, or other harm to the Bank . . . posed by the Customer.” Id. at 3.

ii.

In contrast to the powers vested in the Federal reserve banks, the Board does not have the authority to provide services relevant to banking. See, e.g., 12 U.S.C. §§ 342, 343, 347, 347c, 347d, 355(1). Instead, the Board provides general oversight of the activities of the reserve banks, including guidance with respect to Master Accounts. In providing this guidance, the Board is not authorized to open or terminate a Master Account and does not handle the administration of any institution's Master Account. See 12 U.S.C. §§ 248(j), 342. Rather, the Board sets forth principles to guide “the level of due diligence and scrutiny to be applied by reserve banks to different types of institutions.” 87 Fed.Reg. 51109.

In August 2022, the Board published Guidelines for Evaluating Account and Service Requests (“Guidelines”), enumerating six categories of risk. 87 Fed.Reg. 51099. The Board issued these Guidelines after public Notice and Comment, based on its general supervision authority over the operations of the Federal reserve banks. 12 U.S.C. § 248(j). According to these Guidelines, institutions not federally insured and that operate outside the scope of the federal banking agencies' supervisory framework -- such as BSJI -- are subject to the strictest level of review. 87 Fed. Reg 51110.

iii.

Puerto Rican law provides for the establishment of International Banking Entities (“IBEs”), Act No. 52 of 1989, and International Financial Entities (“IFEs”), Act No. 273. BSJI is an IBE that does not accept deposits from any person in the United States. Brennan Decl., Ex. 4, ECF No. 52-4 (BSJI Certificate of Registry). BSJI is owned by Marcelino Bellosta-Varady, id., Ex. 14, ECF No. 52-15 at 17, and its customer base is almost exclusively comprised of his close family members and offshore entities they control, Benvenuto Decl., ¶ 10, ECF No. 51. In May 2023, BSJI had 14 account holders that maintained a total of 15 deposit accounts. Laursen Decl., ¶ 33, ECF No. 1021.

BSJI opened a Master Account with the FRBNY in April 2012. Brennan Decl., Ex. 14, ECF No. 52-14 at 2-3. Because BSJI is not federally insured, nor subject to prudential federal supervision, BSJI is subject to the strictest level of review under the Board's Guidelines in addition to its obligation to adhere to the FRBNY's Account and Financial Services Handbook (the “Handbook”). Id. at 3. For continued account access, BSJI must demonstrate that it has implemented an effective compliance program through “the submission of independent consultants' assessment reports of BSJI's compliance program” that meet the Handbook's requirements. Id. To satisfy these requirements, BSJI retained an independent consultant, K2 Integrity (“K2”), to complete the assessment reports. Id. at 7.

iv.

On February 6, 2019, the Federal Bureau of Investigation (“FBI”) investigated BSJI's transactions and its compliance. Benvenuto Decl., ¶ 6, ECF No. 51. The United States District Court for the District of Puerto Rico issued a seizure warrant that instructed the FRBNY to transfer a substantial portion of the funds in BSJI's account to the United States Marshals, id., and the FRBNY suspended BSJI's account, id.

On February 11, 2020, the United States Attorney's Office for the District of Puerto Rico announced that BSJI had agreed to pay a fine and improve its anti-money-laundering policies. On March 16, 2020, BSJI and the FRBNY executed the “Supplemental Terms,” requiring enhanced risk-mitigation measures and reconfirming the FRBNY's right to close BSJI's account. Brennan Decl., Ex. 4, ECF No. 52-4 at 11. BSJI agreed as follows:

In addition to the Bank's rights under OC 1 and other operating circulars, to limit the Risks the Customer poses to the Bank, the Bank may suspend or terminate the Customer's access to one or more Financial Services, close the Customer's Mater Account, impose conditions that must be satisfied before the Bank will process certain or all types of Financial Services transactions, or restrict or otherwise adopt risk-management measures with respect to Financial Services or the Customer's Master Account at any time by giving written notice to the Customer.

Id. at 11. Pursuant to the settlement agreement, the FRBNY restored BSJI's account access in December 2020. Benvenuto Decl., ¶ 7, ECF No. 51.

Then, in July 2022, the FRBNY notified BSJI that BSJI had breached the Supplemental Terms by failing to submit on time three mandated assessments attesting to the effectiveness of its compliance programs. Brennan Decl., Ex. 15, ECF No. 52-15 at 2. The FRBNY explained: “Consistent with the New York Fed's practices of assessing, managing, and mitigating risk under the Handbook . . . we have concluded BSJI poses undue risk to the New York Fed due to, among other things, this noncompliance.” Id. For this reason, the FRBNY informed BSJI that it would be closing BSJI's account in September 2022. Id.

In response, BSJI submitted its required reports, id. Ex. 17, ECF No. 52-17 at 2, and the FRBNY suspended closure, id. at 2-3. In the months that followed, the FRBNY sent BSJI requests for information, BSJI provided its responses, and anti-money-laundering specialists, including the FRBNY's Compliance Function (“Compliance”), evaluated the risks posed by BSJI's continued account access. Id. Ex. 14, ECF No. 52-14 at 12-17.

In 2023, the FRBNY's “first-line of defense” -- the Reserve Bank Accounts and Services Function (“RBAS”) -- requested that Compliance provide its views on the...