Financial Institutions on High Alert as El Salvador’s AML Compliance Regime Faces Scrutiny
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El Salvador’s decision to make Bitcoin legal tender has raised concerns about the ease of money laundering and potential for financial instability, sending shockwaves throughout the financial sector.
Key Risks and Challenges
El Salvador’s anti-money laundering (AML) compliance regime is facing intense scrutiny from international bodies and regulators. Several key risks and challenges need to be addressed urgently:
- Dollar economy: The use of the dollar as the main currency alongside Bitcoin has created an environment conducive to bulk cash smuggling.
- Cryptocurrency volatility: Fluctuations in Bitcoin’s value have raised concerns about financial stability, creating regulatory challenges for financial institutions.
- Chinese influence: Significant Chinese investment in El Salvador has driven key corruption and money laundering risks, particularly with regards to layering transactions.
- Political interference: Despite anti-corruption rhetoric from President Bukele’s administration, the government has terminated cooperation with the OAS anti-corruption body and prohibited banks from closing accounts of people being investigated for financial crimes.
Financial Institutions on High Alert
As a result of these challenges, financial institutions in El Salvador are on high alert. The country’s main money laundering laws need to be updated rapidly to address these risks:
- Law on Money and Asset Laundering: Requires updates to address AML challenges.
- Special Law Against Acts of Terrorism: Needs revisions to prevent the financing of terrorism.
- Banking Law: Must ensure financial institutions comply with KYC procedures.
- Law on Citizen Participation: Should be revised to promote transparency and accountability.
- Law on Access to Public Information: Needs updates to facilitate public access to information.
- Bitcoin Law: Requires regulatory framework for Bitcoin.
Regulatory and Compliance Difficulties
Regulatory and compliance difficulties around the Bitcoin law and KYC procedures threaten El Salvador’s international reputation and could result in grey listing by the FATF. The lack of beneficial ownership transparency, anti-corruption efforts being rolled back, investigations and prosecutions by the country’s authorities being woefully inadequate, and only 10% of financial crime and corruption cases referred to the country’s prosecutor resulting in action have created a toxic environment for financial institutions.
International Cooperation and Support
Despite these challenges, El Salvador works closely with the US in training judges and improving efficiency in the judicial process. The US also offers assistance and development to El Salvadoran municipalities, and the government has requested technical assistance from the World Bank to develop a regulatory framework for Bitcoin.
Financial institutions operating in El Salvador or planning to expand into the country need to be aware of these risks and challenges and take steps to ensure they are compliant with AML regulations. This includes:
- Conducting thorough risk assessments
- Reviewing client due diligence
- Implementing robust KYC procedures
By doing so, financial institutions can minimize their exposure to money laundering risks and avoid reputational damage.
Additional Resources
For more information on the key AML challenges and issues in El Salvador, as well as a country-by-country assessment of AML risks and laws, download VinciWorks’ free guide to compliance in Latin America and the Caribbean.