On May 13, the U.S. Court of Appeals for the 2nd Circuit affirmed the dismissal of all claims brought by a Puerto Rican offshore banking entity challenging the Federal Reserve Bank of New York’s termination of its master account. The plaintiff, an “International Banking Entity” operating under a Puerto Rican offshore charter, had its master account with the Federal Reserve Bank of New York (FRBNY) closed after the FRBNY concluded that the plaintiff had systemic compliance deficiencies related to anti-money laundering safeguards, which posed undue money-laundering or illicit-activity risk under the Federal Reserve’s account-access guidelines. In response, the plaintiff challenged the closure, arguing that it had a statutory entitlement to its master account under the Federal Reserve Act, as amended by the DIDMCA. The court noted that the case was the latest in a series of challenges over master account access brought by nontraditional banking institutions, including credit unions, fintech payment processors, and cryptocurrency custody banks.

The court held that the Federal Reserve Act’s provision that Reserve Banks “may receive” deposits from member banks and other depository institutions confers discretionary — not mandatory — authority over master account access, citing a century-old Supreme Court precedent interpreting the same statutory language as “words of authorization merely.” The court further concluded that a separate provision of the statute requiring that Fed services “shall be available” to nonmember depository institutions is best read as a non-discrimination pricing principle directed at the Fed, rather than an entitlement to a master account for every eligible institution. The court observed that Congress reinforced this discretionary framework through the 2022 Toomey Amendment, which expressly contemplates Reserve Banks “rejecting” master account requests from all categories of eligible institutions. The court further reasoned that because Reserve Banks’ supervisory and enforcement tools available to regulate member banks do not extend to nonmember banks, the ability to grant or deny master account access is their “primary power” to manage risks posed by nonmember banks.

The court rejected the plaintiff’s APA, mandamus, due process, and state-law contract claims, finding no nondiscretionary obligation on the part of the FRBNY, no constitutional standing to assert claims against the Fed, and no plausible breach of contract given the account agreement’s express “at any time by notice” termination provision. The court noted that it joined the 10th Circuit (previously covered by InfoBytes here) and every district court to have addressed the question in holding that Reserve Banks possess discretionary authority over master account access.