Financial Crime World

El Salvador’s Financial Regulation Updates Receive Scrutiny Amidst Growing Virtual Asset Market

A recent report by Global Financial Integrity (GFI) and the Cyrus R. Vance Center for International Justice has shed light on El Salvador’s legal framework for virtual assets, highlighting both progress made and remaining challenges that need to be addressed.

The Report’s Findings

The report, titled “The Virtual Assets Ecosystem in El Salvador: Strengthening Financial Integrity and Transparency,” analyzes El Salvador’s regulatory landscape, identifying areas that require additional regulation. Despite significant steps taken by the country in embracing digitalization, more transparency is needed to ensure virtual assets are not used for nefarious purposes.

The Need for Transparency

Tom Cardamone, President and CEO of GFI, emphasized the importance of transparency in the virtual asset sector, stating, “Transparency enhances accountability.” Jaime Chavez-Alor, Vance Center Latin America Policy Director, highlighted the need for information, transparency, and integrity to build trust around the virtual assets ecosystem and allow society to make informed decisions.

Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT)

The report’s second half focuses on virtual assets from an AML/CFT perspective. It analyzes financial crime risks related to common predicate offenses in El Salvador, including:

  • Drug trafficking
  • Extortion
  • Migrant smuggling
  • Misappropriation of public funds

The report also assesses risks associated with specific operational features within El Salvador’s virtual asset ecosystem.

Policy Recommendations

The report concludes with policy recommendations aimed at maximizing the benefits and minimizing the risks associated with financial innovation. Key recommendations include:

  • Adopting reforms to strengthen AML/CFT measures
  • Ensuring robust oversight over virtual assets and virtual asset service providers (VASPs)
  • Engaging with the legal and business community in developing regulations and technical standards

Additionally, the report calls for:

  • Greater transparency and access to public information, including contractual and operational processes, fraud and mismanagement investigations, and the use of public funds
  • Government agencies increasing supervision over virtual asset ATMs, particularly those operating in high-risk jurisdictions
  • The Financial Intelligence Unit (FIU) of El Salvador and other government authorities providing education and training opportunities to the financial sector and other obligated entities regarding identification of red flag indicators in crypto transactions

Conclusion

As El Salvador continues to navigate its growing virtual asset market, policymakers must prioritize transparency, accountability, and effective regulation to ensure that this innovative sector does not contribute to illicit activities. By implementing these policy recommendations, El Salvador can maximize the benefits of financial innovation while minimizing the risks associated with it.