By Jonathan Stempel
NEW YORK (Reuters) - A U.S. judge on Wednesday dismissed a Puerto Rican bank's lawsuit challenging the Federal Reserve Bank of New York's decision to cut off its access to the U.S. central banking system in a crackdown on lenders with links to Venezuela.
U.S. District Judge John Koeltl in Manhattan rejected Banco San Juan Internacional's ("BSJI") claim the Federal Reserve Act entitled it to a "master account," which lets banks access the Fed's electronic payment system.
BSJI sued the New York Fed in July 2023 after learning its 11-year-old account would be closed over concerns it was not complying with U.S. sanctions and anti-money laundering rules.
The bank said it had improved compliance after an earlier probe into its work with state-run oil company Petroleos de Venezuela, and was unlikely to survive an account cutoff.
But in a 69-page decision, Koeltl said the Federal Reserve Act's language gave the New York Fed discretion to close master accounts, and that BSJI's due process rights were not violated.
Koeltl also highlighted the New York Fed's conclusion that BSJI's "heightened risk profile and noncompliance" created undue risk and justified closing its account.
"Nothing in the amended complaint plausibly suggests that the FRBNY failed to provide an adequate basis for the account-closure decision or committed a clear error of judgment," the judge wrote.
Koeltl also said BSJI lacked standing to pursue a related claim against the Federal Reserve's Board of Governors.
He gave BSJI until Jan. 27 to file an amended complaint, and said the bank has indicated it might do so.
"The issue is a serious one," Kelly Librera, a lawyer for BSJI, said in an email. "The agency's interpretation serves to negate the role of state regulators, something with which we believe this Supreme Court will not agree."
Lawyers for the New York Fed did not immediately respond to requests for comment.
Puerto Rico's banking industry has historically been close to Venezuela.
In 2019, the New York Fed halted approvals of new master accounts for Puerto Rican offshore banks because of sanctions aimed at ousting Venezuela's socialist President Nicolas Maduro.
The case is Banco San Juan Internacional Inc v Federal Reserve Bank of New York et al, U.S. District Court, Southern District of New York, No, 23-06414.