Articles Banco San Juan Internacional, Inc. Takes Second Shot at Federal Reserve Bank of New York’s Decision to Close Master Account March 22, 2024 Banco San Juan Internacional, Inc.’s (“BSJI”) high stakes battle with the Federal Reserve Bank of New York (“FRBNY”) has entered its second round. In April 2023, the FRBNY informed BSJI that its master account would be terminated, citing what the FRBNY described as certain “compliance deficiencies[.]” Challenging the FRBNY’s decision, BSJI now has filed an Amended Complaint aggressively advocating its position that the FRBNY overstepped its authority and improperly terminated the account on purely pretextual grounds. The BSJI-FRBNY battle is only part of a growing movement challenging the Federal Reserve System’s master account processes. In round one of Banco San Juan Internacional, Inc. v. The Federal Reserve Bank of New York, et al., 1:23-cv-06414-JGK, in the United States District Court for the Southern District of New York, BSJI sought a preliminary injunction to require the FRBNY and the Board of Governors of the Federal Reserve System (the “Board”) to maintain the master account pending a final judgment in the case. BSJI disputed (and it continues to dispute) the purported factual basis for the positions advanced by the FRBNY and the Board. Among other things, BSJI maintained that the FRBNY arbitrarily closed the master account; that the FRBNY’s decision to terminate the master account contradicts the statutory duty of the FRBNY and the Board to provide access to master accounts; that BSJI has a non-discretionary statutory right to a master account; that the FRBNY’s decision to terminate the master account ignored precedent restricting executive branch agencies from unilaterally expanding the scope of their regulatory powers; and that the reasons the FRBNY proffered for terminating the master account ignored the steps BSJI had taken to upgrade its compliance program as well as the opinions of BSJI’s outside auditors regarding the adequacy of those steps. The Honorable John G. Koeltl denied BSJI’s injunction application in a decision filed October 27, 2023. See Banco San Juan Internacional, Inc. v. Federal Reserve Bank of New York, 2023 W. 7111182 (S.D.N.Y. Oct. 27, 2023). BSJI appealed to the Second Circuit Court of Appeals, maintaining that Judge Koeltl afforded an undue and improper level of deference to the FRBNY and the Board. BSJI subsequently withdrew its appeal and, instead, filed its Amended Complaint in the underlying action on February 29, 2024. In its Amended Complaint, BSJI now incorporates allegations against the FRBNY and the Board for breach of contract and violation of its rights under the Fifth Amendment Due Process Clause by launching a bad faith and unlawful campaign leading to the account closure. BSJI claims the master account closure was arbitrary and contravened the statutory duty that both the FRBNY and the Board owe legally eligible depository institutions to provide access to master accounts and Federal Reserve services. Moreover, BSJI alleges that the FRBNY’s decision to terminate the account ignored precedent restricting executive branch agencies from unilaterally expanding the scope of their regulatory powers. BSJI’s claim is premised on the Federal Reserve Act’s directive to make services available to all depository institutions, including state-chartered non-insured institutions. BSJI now seeks over $150 million dollars in damages from both the FRBNY and the Board. BSJI is one of a number of State-chartered depository institutions challenging the Federal Reserve System’s master account review processes. Other Tier 3 novel chartered banks, including Wyoming’s crypto-chartered Custodia Bank Inc., feel the agency is stalling innovation, progress, and competition. Like BSJI, Custodia also notes that the Board’s denial of its membership application severely undercuts its chances of receiving master account access from a regional bank. See Custodia Bank Inc. v. Federal Reserve Board of Governors, et al., 1:22-cv-00125 – SWS (USDC D. Wy.). Interestingly, in the Custodia Bank matter, former United States Senator Patrick J. Toomey submitted a “friend of the court” brief opposing the Federal Reserve Bank of Kansas City and the Board’s position that the National Defense Authorization Act for Fiscal Year 2023 Amendment to the Federal Reserve Act bolsters their discretion to reject master account applications from statutorily eligible depository institutions. Congress too has become increasingly frustrated with the Federal Reserve System’s disparate account opening procedures, the objectivity of its internal investigations, lack of transparency, knee-jerk regulatory efforts, and unilateral expansion of its statutory authority. To this end, bipartisan legislation introduced thus far has threatened the Federal Reserve System with reducing the regional banks to nine, opening public access to its decision making through Freedom of Information Act requests, requiring presidential appointment of the Board’s Inspector General, and restricting its encroachment into issues outside its statutory authority, mission, and expertise. Regional banks are also in the spotlight for their prolonged and inconsistent master account application review processes. Just last month, by letter dated February 26, 2024 addressed to Chairman Jerome Powell of the Board and President John Williams of the FRBNY, The Narrow Bank sought reconsideration, based on a factual assessment of its application, of the FRBNY’s decision to deny it master account access after the FRBNY deliberated on its application for more than six years. Commentators have also suggested that the Board be required to provide clarity behind the master account denial process. But while the Board is quick to issue press releases highlighting its role in approving bank mergers, it fails to shed any light on why Tier 3 master account applications are routinely denied. Only after Congress threatened increased master account oversight, did the Board agree to publish a list of depository institutions with master accounts and a list identifying the institutions whose account applications are still pending. The database, accessible through federalreserve.gov, shows that since December 23, 2022, only one Puerto Rican Tier 1 institution has been granted master account access, five international entities withdrew their applications in 2023, and one of nine Tier 3 institutions pending resolution has been waiting for a response since May 2020. The outcome of BSJI’s amended complaint remains to be seen. But BSJI’s Amended Complaint, along with the myriad lawsuits and public pressure, highlights the issues the FRBNY and Board are currently facing concerning master account access by non-traditional banking entities. 4860-8812-2032, v. 1
Banco San Juan Internacional, Inc. Takes Second Shot at Federal Reserve Bank of New York’s Decision to Close Master Account March 22, 2024 Banco San Juan Internacional, Inc.’s (“BSJI”) high stakes battle with the Federal Reserve Bank of New York (“FRBNY”) has entered its second round. In April 2023, the FRBNY informed BSJI that its master account would be terminated, citing what the FRBNY described as certain “compliance deficiencies[.]” Challenging the FRBNY’s decision, BSJI now has filed an Amended Complaint aggressively advocating its position that the FRBNY overstepped its authority and improperly terminated the account on purely pretextual grounds. The BSJI-FRBNY battle is only part of a growing movement challenging the Federal Reserve System’s master account processes. In round one of Banco San Juan Internacional, Inc. v. The Federal Reserve Bank of New York, et al., 1:23-cv-06414-JGK, in the United States District Court for the Southern District of New York, BSJI sought a preliminary injunction to require the FRBNY and the Board of Governors of the Federal Reserve System (the “Board”) to maintain the master account pending a final judgment in the case. BSJI disputed (and it continues to dispute) the purported factual basis for the positions advanced by the FRBNY and the Board. Among other things, BSJI maintained that the FRBNY arbitrarily closed the master account; that the FRBNY’s decision to terminate the master account contradicts the statutory duty of the FRBNY and the Board to provide access to master accounts; that BSJI has a non-discretionary statutory right to a master account; that the FRBNY’s decision to terminate the master account ignored precedent restricting executive branch agencies from unilaterally expanding the scope of their regulatory powers; and that the reasons the FRBNY proffered for terminating the master account ignored the steps BSJI had taken to upgrade its compliance program as well as the opinions of BSJI’s outside auditors regarding the adequacy of those steps. The Honorable John G. Koeltl denied BSJI’s injunction application in a decision filed October 27, 2023. See Banco San Juan Internacional, Inc. v. Federal Reserve Bank of New York, 2023 W. 7111182 (S.D.N.Y. Oct. 27, 2023). BSJI appealed to the Second Circuit Court of Appeals, maintaining that Judge Koeltl afforded an undue and improper level of deference to the FRBNY and the Board. BSJI subsequently withdrew its appeal and, instead, filed its Amended Complaint in the underlying action on February 29, 2024. In its Amended Complaint, BSJI now incorporates allegations against the FRBNY and the Board for breach of contract and violation of its rights under the Fifth Amendment Due Process Clause by launching a bad faith and unlawful campaign leading to the account closure. BSJI claims the master account closure was arbitrary and contravened the statutory duty that both the FRBNY and the Board owe legally eligible depository institutions to provide access to master accounts and Federal Reserve services. Moreover, BSJI alleges that the FRBNY’s decision to terminate the account ignored precedent restricting executive branch agencies from unilaterally expanding the scope of their regulatory powers. BSJI’s claim is premised on the Federal Reserve Act’s directive to make services available to all depository institutions, including state-chartered non-insured institutions. BSJI now seeks over $150 million dollars in damages from both the FRBNY and the Board. BSJI is one of a number of State-chartered depository institutions challenging the Federal Reserve System’s master account review processes. Other Tier 3 novel chartered banks, including Wyoming’s crypto-chartered Custodia Bank Inc., feel the agency is stalling innovation, progress, and competition. Like BSJI, Custodia also notes that the Board’s denial of its membership application severely undercuts its chances of receiving master account access from a regional bank. See Custodia Bank Inc. v. Federal Reserve Board of Governors, et al., 1:22-cv-00125 – SWS (USDC D. Wy.). Interestingly, in the Custodia Bank matter, former United States Senator Patrick J. Toomey submitted a “friend of the court” brief opposing the Federal Reserve Bank of Kansas City and the Board’s position that the National Defense Authorization Act for Fiscal Year 2023 Amendment to the Federal Reserve Act bolsters their discretion to reject master account applications from statutorily eligible depository institutions. Congress too has become increasingly frustrated with the Federal Reserve System’s disparate account opening procedures, the objectivity of its internal investigations, lack of transparency, knee-jerk regulatory efforts, and unilateral expansion of its statutory authority. To this end, bipartisan legislation introduced thus far has threatened the Federal Reserve System with reducing the regional banks to nine, opening public access to its decision making through Freedom of Information Act requests, requiring presidential appointment of the Board’s Inspector General, and restricting its encroachment into issues outside its statutory authority, mission, and expertise. Regional banks are also in the spotlight for their prolonged and inconsistent master account application review processes. Just last month, by letter dated February 26, 2024 addressed to Chairman Jerome Powell of the Board and President John Williams of the FRBNY, The Narrow Bank sought reconsideration, based on a factual assessment of its application, of the FRBNY’s decision to deny it master account access after the FRBNY deliberated on its application for more than six years. Commentators have also suggested that the Board be required to provide clarity behind the master account denial process. But while the Board is quick to issue press releases highlighting its role in approving bank mergers, it fails to shed any light on why Tier 3 master account applications are routinely denied. Only after Congress threatened increased master account oversight, did the Board agree to publish a list of depository institutions with master accounts and a list identifying the institutions whose account applications are still pending. The database, accessible through federalreserve.gov, shows that since December 23, 2022, only one Puerto Rican Tier 1 institution has been granted master account access, five international entities withdrew their applications in 2023, and one of nine Tier 3 institutions pending resolution has been waiting for a response since May 2020. The outcome of BSJI’s amended complaint remains to be seen. But BSJI’s Amended Complaint, along with the myriad lawsuits and public pressure, highlights the issues the FRBNY and Board are currently facing concerning master account access by non-traditional banking entities. 4860-8812-2032, v. 1