Financial Crime World

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El Salvador Adopts Risk-Based Approach to Anti-Money Laundering

San Salvador, El Salvador - A Bid to Mitigate Financial Crime Risks

In a bid to maximize the benefits and minimize the risks associated with financial innovation, El Salvador has taken a significant step towards adopting a risk-based approach to anti-money laundering (AML) in its virtual assets (VAs) ecosystem.

Progress Made by El Salvador

According to a joint report by the Vance Center and Global Financial Integrity (GFI), El Salvador’s regulatory landscape regarding Bitcoin and VAs has undergone significant changes since the country became the first nation to adopt Bitcoin as legal tender in 2021. The report highlights progress made by El Salvador, including:

  • Establishment of a Regulatory Framework: El Salvador has established a comprehensive regulatory framework encompassing the Bitcoin Law, Digital Assets Issuance Law, and Innovation and Manufacture of Technologies Promotion Law.
  • Strengthened AML/CFT Measures: The report assesses the effectiveness of current regulations in preventing financial crime and recommends policy reforms to strengthen AML/CFT measures.

Challenges Remaining

However, the report also identifies remaining challenges that need to be addressed, including:

  • Additional Areas Requiring Regulation: Due to the dynamic nature of the subject matter, there are additional areas that require regulation.
  • Identifying and Understanding Money Laundering Risks: The Financial Action Task Force (FATF) emphasizes the need for countries to identify and understand money laundering risks they are exposed to.

Financial Crime Risks

The report analyzes financial crime risks related to specific operational features or developments within El Salvador’s VA ecosystem, including predicate offenses such as:

  • Drug Trafficking: Financial crime risks associated with drug trafficking in the VA ecosystem.
  • Extortion: Extortion and its implications on the VA ecosystem.
  • Migrant Smuggling: Migrant smuggling and its connection to financial crimes.
  • Misappropriation of Public Funds (Peculado): Misuse of public funds and its impact on the VA ecosystem.

Recommendations

The report concludes with several key recommendations aimed at helping El Salvador maximize the benefits and minimize the risks associated with financial innovation:

1. Strengthen AML/CFT Measures

  • Policymakers should urgently adopt reforms strengthening AML/CFT measures.
  • Robust oversight over VAs is crucial in preventing financial crime.
  • The Government of El Salvador, and specifically the Central Reserve Bank (BCR) and National Commission of Digital Assets (NCDA), should engage with the legal and business community to develop 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 and 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.

By implementing these recommendations, El Salvador can take significant strides in mitigating financial crime risks associated with its virtual assets ecosystem while promoting innovation and growth in the country.