El Salvador’s Financial Crime Research Papers: A Roadmap for Regulatory Framework Development
As El Salvador approaches its second year as a pioneer in adopting Bitcoin as legal tender, researchers have published a comprehensive report analyzing virtual assets (VAs) from both a legal and regulatory perspective, as well as an anti-money laundering (AML) and counter-terrorism financing (CFT) viewpoint.
Background
El Salvador has made significant progress in embracing technological innovation, including the digitalization of its financial system. The country has established a robust regulatory framework encompassing the Bitcoin Law, Digital Assets Issuance Law, and Innovation and Manufacture of Technologies Promotion Law. These laws aim to foster a supportive environment for individuals and businesses engaging in transactions involving digital currencies while promoting innovation and technology manufacturing.
Challenges
Despite this progress, the report identifies areas that require further regulation due to the dynamic nature of the subject matter and ongoing efforts to standardize these frameworks internationally.
AML/CFT Perspective
The report emphasizes the importance of understanding risks to deploy limited resources effectively. It analyzes financial crime risks associated with common predicate offenses for money laundering in El Salvador, including:
- Drug trafficking
- Extortion
- Migrant smuggling
- Misappropriation of public funds
The report also assesses financial crime risks related to specific operational features or developments within El Salvador’s VA ecosystem.
Recommendations
To maximize the benefits and minimize the risks associated with financial innovation, policymakers in El Salvador are advised to:
Urgent Reforms
- Strengthen AML/CFT frameworks
- Ensure robust oversight over VAs
Engagement and International Best Practices
- Engage with the legal and business community in developing regulations and technical standards for the Bitcoin Law and Digital Assets Issuance Law
- Follow international best practices
Enhancing Compliance
Lawyers and law firms advising companies operating in El Salvador are encouraged to:
- Enhance compliance mechanisms to verify client backgrounds and prevent criminal actors from entering the national financial system
- Ensure transparency and access to public information, including:
- Contractual and operational processes
- Fraud and mismanagement investigations
- Use of public funds
Conclusion
The report concludes with a series of policy recommendations aimed at helping El Salvador leverage the benefits of technological innovation while mitigating risks.