Financial Crime World

EL SALVADOR TAKES STEPS TO ENHANCE ANTI-MONEY LAUNDERING FRAMEWORK IN BITCOIN SECTOR

El Salvador Adopts Risk-Based Approach to Regulate Bitcoin and Virtual Assets

October 18, 2023 - El Salvador has taken a significant step forward in strengthening its anti-money laundering (AML) and counter-terrorism financing (CFT) framework by adopting a risk-based approach to regulate the use of Bitcoin and other virtual assets in the country. This move comes two years after El Salvador became the first country in the world to adopt Bitcoin as legal tender.

Progress Made, Challenges Remain

Since adopting Bitcoin as legal tender, El Salvador has undergone significant technological change and growth, but also faced operational and regulatory challenges. The country’s AML/CFT framework is still evolving, with additional areas requiring regulation due to the dynamic nature of the subject matter.

Key Areas for Regulation

The report highlights the following key areas that require regulation:

  • Drug Trafficking: El Salvador has struggled with high levels of drug-related violence and money laundering.
  • Extortion: Extortion is a common crime in El Salvador, often linked to organized gangs.
  • Migrant Smuggling: The country’s proximity to Mexico makes it a hub for migrant smuggling.
  • Misappropriation of Public Funds (Peculado): Corruption and embezzlement are significant concerns in the public sector.

Recommendations for Policymakers

To maximize benefits and minimize risks associated with financial innovation, key recommendations include:

  • Strengthen AML/CFT Reforms: Policymakers in El Salvador should urgently adopt reforms strengthening AML/CFT and ensuring robust oversight over virtual assets.
  • Engage with the Legal and Business Community: The Government of El Salvador 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, following international best practices.
  • Enhance Compliance Mechanisms: Lawyers and law firms advising companies operating in El Salvador should enhance compliance mechanisms to verify client backgrounds to prevent criminal actors from entering the national financial system.
  • 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, per domestic laws and international standards.

Conclusion

By adopting a risk-based approach to AML/CFT in the Bitcoin sector, El Salvador can leverage the benefits of technological and financial innovation while mitigating risks associated with money laundering and terrorism financing.