Federal Court Denies Bank’s Request to Block Closure of Master Account

The U.S. District Court for the Southern District of New York recently denied a Bank’s motion for a preliminary injunction to block the Federal Reserve Bank of New York (FRBNY) from cancelling its Master Account.

Having a Master Account with the FRBNY allows financial institutions to access various payment systems and services offered by the Federal Reserve which are useful for conducting financial transactions.  Here, FRBNY allegedly notified the Bank, which is classified as an International Banking Entity (IBE) under Puerto Rican law, that it had breached the terms of its Master Account agreement by failing to submit on time three mandated assessments attesting to the effectiveness of the Bank’s compliance programs.  After an investigation, FRBNY concluded that the Bank’s compliance programs were insufficient to reduce the high-risk nature of the Bank’s transaction activity, and that the Bank posed undue risk under Federal Reserve guidelines. 

Upon notice that FRBNY would close its Master Account, the Bank sought a preliminary injunction from the court, claiming that closure of its Master Account would cause the Bank to lose its customers and result in irreparable harm.  The court rejected the Bank’s claims, noting that the Bank’s current customer base primarily consisted of close family members of the owner and was unlikely to change.  Further, a recent loss of customers was a strategic reduction designed to decrease the Bank’s high-risk profile, and not the result of the FRBNY’s actions.

The court also denied the Bank’s additional requests for relief, holding among other things that the Federal Reserve Act, which gives Federal Reserve banks like FRBNY the authority to grant Master Accounts, does not mandate that they do so.  In turn, the Bank had no statutory right to a Master Account under that statute.