Financial Crime World

Financial Inclusion and Anti-Money Laundering in El Salvador: Challenges and Opportunities

Introduction

Two years after becoming the first country to adopt Bitcoin as legal tender, El Salvador is poised to become a leading proponent of emerging technologies. However, the country’s regulatory framework regarding virtual assets (VAs) and anti-money laundering (AML)/counter-terrorism financing (CFT) measures still require attention.

Embracing Technological Innovation

El Salvador has taken significant steps towards embracing technological innovation through laws such as:

  • Bitcoin Law: aims to provide a supportive environment for individuals and businesses engaging in transactions involving digital currencies
  • Digital Assets Issuance Law: fosters innovation and technology manufacturing
  • Innovation and Manufacture of Technologies Promotion Law: promotes the development of innovative technologies

Challenges and Opportunities

Despite these efforts, the report identifies areas that may still require regulation due to the dynamic nature of the subject matter and ongoing international standardization efforts. The report also notes that El Salvador’s regulatory framework should be strengthened to ensure robust oversight over VAs and address AML/CFT concerns.

Anti-Money Laundering and Counter-Terrorism Financing

From an AML/CFT perspective, the report approaches these issues from the perspective of the Financial Action Task Force (FATF), which emphasizes the need for countries to identify and understand the money laundering and terrorism financing risks they are exposed to. Understanding risks enables countries like El Salvador to take mitigating measures and deploy limited resources effectively.

Policy Recommendations

The report assesses financial crime risks related to specific operational features or developments within El Salvador’s VA ecosystem, including:

  • Drug trafficking
  • Extortion
  • Migrant smuggling
  • Misappropriation of public funds (peculado)

To maximize the benefits and minimize the risks associated with financial innovation, policymakers in El Salvador are recommended to take the following steps:

Key Recommendations:

  1. Strengthen AML/CFT measures: Urgently adopt reforms ensuring robust oversight over VAs.
  2. Develop regulations and technical standards: Engage with the legal and business community in developing regulations and technical standards according to need and practice for the Bitcoin Law and Digital Assets Issuance Law.
  3. Enhance compliance mechanisms: Lawyers and law firms advising companies wanting to operate in El Salvador should enhance compliance mechanisms to verify client backgrounds to prevent criminal actors from entering the national financial system.
  4. Ensure transparency and access to public information: All relevant government agencies should ensure transparency and access to public information, including contractual and operational processes, fraud and mismanagement investigations, and the use of public funds.
  5. Incorporate information on government Bitcoin purchases: The BCR should incorporate information on government Bitcoin purchases into the Balance of Payments and other similar documents.
  6. Collect information on legal persons opening Chivo Wallet accounts: The Superintendence of the Financial System (SSF) should require that Chivo Wallet collect information on legal persons opening Chivo Wallet accounts in line with the requirements for legal persons to open other types of financial accounts.

By implementing these recommendations, El Salvador can leverage the benefits of technological and financial innovation while mitigating risks associated with VAs.