By Luc Cohen

NEW YORK The Federal Reserve Bank of New York on Wednesday defended its plan to cut off a Puerto Rican lender's access to the U.S. central banking system following a federal crackdown on banks with links to Venezuela.

In July, Banco San Juan Internacional (BSJI) sued the New York Fed to halt the looming termination of its "master account," which lets banks access the Fed's electronic payment system, because of concerns about its compliance with U.S. sanctions and anti-money laundering rules.

BSJI said it had improved compliance during a previous 22-month suspension of its master account between 2019 and 2020. That followed a federal probe into credit agreements it had with state oil company Petroleos de Venezuela, which is subject to U.S. sanctions.

The bank said the suspension "decimated" its customer relationships.

In court papers on Wednesday, the New York Fed said BSJI processed transactions that had "multiple red flags for money laundering or other illicit activity."

It said that as of June, BSJI served only 13 customers, most based in Curacao and including close family members of the bank's owner Marcelino Bellosta.

The New York Fed also said BSJI could still seek to access the U.S. financial system through a third-party correspondent bank.

A lawyer for BSJI declined to comment.

BSJI has said Bellosta, a Venezuelan national, has lived in the United States and Europe for much of the last 25 years.

The bank in 2020 paid $1 million to resolve the PDVSA probe, while maintaining that the credit agreements were lawful, and federal authorities returned $53 million in seized funds.

Puerto Rico's banking industry has historically had close ties to Venezuela, an OPEC member.

In 2019, the New York Fed said it would stop approving master accounts for some Puerto Rican banks because of U.S. sanctions aimed at ousting Venezuela's socialist President Nicolas Maduro, Reuters reported at the time.

(Reporting by Luc Cohen in New York; editing by Jonathan Oatis)