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How the NY Fed cracked Puerto Rico Banks and Venezuelan Owners

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New York Fed’s Response To Venezuela Sanctions Lousy News For Puerto Rico Banks

Puerto Rico’s offshore banking industry is worth more than $50 billion, and now the New York Fed is making life hard for the industry as it attempts to comply with US sanctions against Venezuela. Since Puerto Rico is a US territory, its banks can open accounts directly with the Fed, while its competitors from jurisdictions like the British Virgin Islands have to use expensive third-party correspondent banks.

 

Many of the Puerto Rico banks are owned by citizens of the embattled nation of Venezuela, so the Fed is blocking them from opening accounts with the Fed, which would provide them with access to the US financial system.  As of February 27th, 2019, the Fed is no longer opening accounts for Puerto Rico offshore banks and financial institutions, ostensibly as it is updating its systems to make it harder for these institutions to get access.

 

The Fed did not offer any explanations for this move, but it comes after two Puerto Rico banks with open accounts were linked to federal money laundering investigations and sanction evasion allegations related to Venezuela.  Even the Fed has to protect its reputational exposure, explained a former Treasury Official.

 

This tightening of access will only affect Puerto Rico banks with pending applications. The more than seventeen Puerto Rico offshore banks with open Fedwire accounts, will not be affected.

 

It is apparent that US sanctions aimed at unseating President Maduro of Venezuela hurts Puerto Rico’s offshore strategy to garnish economic growth to cope with its massive debt load, and the devastation caused by Hurricane Maria (2017).

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The crux of offshore banking is that it offers individuals and companies the opportunity to deposit money outside their countries of residence to lower their tax bills despite allegations by criminal investigators and multilateral organizations that it is also all about tax evasion and money laundering.  The same goes for the U.S. Virgin Island offshore banks, which also falls under the jurisdiction of the New York Fed.

 

Puerto Rico

The commissioner of Puerto Rico’s banking regulator remains mute, except for reiterating that the island’s regulators follow precisely the same standards federal authorities do in banking supervision, and, added commissioner Joyner, money laundering is a priority. We “share everything that we find in our examinations, and we share it with all the federal agencies.”

 

Joyner also declined to say how many pending applications there were, but Venezuela citizens own at least sixteen of the 80 offshore banking and financial service firms in Puerto Rico, according to Reuters – and many of these firms market directly to Venezuelan clients or had dealt with the Venezuelan government in the past.

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Laundering

Did the recent investigations into Puerto Rican money laundering on behalf of Venezuela play a role in the Fed’s decision?  No one can say for sure, but Joyner sums it up when he responds that “it certainly did not help.”

 

The 2018 case against Marcelo Gutierrez, alleges that he conspired to launder money embezzled from Venezuela State Oil Company PDVSA, via a bank in Puerto Rico. Gutierrez, at the time, was a director of Vestin Bank International in Puerto Rico.

 

In February this year, the FBI raided another Puerto Rican offshore bank, Banco San Juan International (BSJI).  The investigation is also related to Venezuela-related sanction evasion and money laundering.  In 2016, BSJI provided the PDVSA with a credit line of more than $300 million, and BSJI has an account with the Fed.

 

Both the BSJI and lawyers for Gutierrez insist that they complied with all laws and are innocent of all and any charges.  Critics of the Fed suggest that it instead approach applications on a case-by-case basis.  “Why punish an entire sector for the actions of a few bad actors?” Joyner offers Puerto Rico’s point of view.

 

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

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