The Canadian Press - ONLINE EDITION

Puerto Rican bank, US territory's government caught up in bitter fight over $230 million

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SAN JUAN, Puerto Rico - Puerto Rico's government and one of the island's biggest banks are locked in a heated battle over $230 million as both sides struggle to regain their financial footing in a wobbly economy.

The dispute between the Treasury Department and Doral Financial Corp. escalated this month when the government announced it was nullifying a multimillion-dollar agreement with the bank, leading a former top U.S. economic official advising the bank to warn on Tuesday that such a move would further spook investors.

"It's not an option for the government of Puerto Rico to issue that refund. They are legally, politically and morally obliged to do so," said economist Robert Shapiro, who was undersecretary of commerce in President Bill Clinton's administration and is now an adviser for Doral Bank.

Barbara Morgan, a spokeswoman for the Treasury Department, declined to comment. She said the agency does not publicly discuss tax-related claims and disputes with taxpayers.

The dispute comes as the U.S. territory enters its eighth year in recession and struggles to pay down $70 billion in public debt.

Doral Bank says it is owed a $230 million refund in overpaid taxes and has criticized the government for announcing that the agreement was no longer valid.

Melba Acosta, Puerto Rico's treasury secretary, has said the government was nullifying the 2012 agreement in part because the statute of limitations had run out and because the deal was not recognized in the government's accounting books at the end of that fiscal year. The government also has said the bank did not provide any evidence proving it is owed that amount for overpaid taxes.

U.S. regulators have said Doral Bank can no longer include that amount on its balance sheet. In December, the $230 million accounted for about one-third of the $679 million in the bank's Tier 1 capital, which is an indicator of a bank's financial health.

Shapiro said the bank has several options, including raising more capital or reaching an agreement with the U.S. Federal Deposit Insurance Corporation.

"Puerto Rico has been suffering from a very seriously underperforming economy for some time," Shapiro said. "There are already issues of liquidity arising in respect to Puerto Rico, and placing at risk another major financial institution on the island certainly is not what an economist would recommend."

Doral Bank has approximately 300,000 clients and is Puerto Rico's third-largest bank in assets.

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