El Salvador Short Form Report - March 2018

El Salvador Short Form Report - March 2018

ANTI-MONEY LAUNDERING

FATF Status

El Salvador is not on the FATF List of Countries that have been identified as having strategic AML deficiencies

Compliance with FATF Recommendations

The last Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in El Salvador was undertaken by the Financial Action Task Force (FATF) in 2010. According to that Evaluation, El Salvador was deemed Compliant for 11 and Largely Compliant for 12 of the FATF 40 + 9 Recommendations. It was Partially Compliant or Non-Compliant for 2 of the 6 Core Recommendations.

US Department of State Money Laundering assessment (INCSR)

El Salvador is categorised by the US State Department as a Country/Jurisdiction of Primary Concern in respect of Money Laundering and Financial Crimes.

OVERVIEW

El Salvador’s main money laundering vulnerability is the lack of an independent FIU, which is currently barred from sharing information with the United States, and an investigation process that prevents other bodies from accessing financial intelligence. Additionally, the lack of supervision of DNFBPs leaves this sector vulnerable to abuse.

Current capacity-building efforts are improving El Salvador’s ability to investigate and prosecute more complex money laundering; however, the legislature recently attempted to weaken the asset forfeiture law in ways that would benefit corrupt officials.

VULNERABILITIES AND EXPECTED TYPOLOGIES

El Salvador is geographically vulnerable to the transit of South American cocaine destined for the United States. This, and the existence of some close business and political relationships with Venezuela, make its financial institutions vulnerable to money laundering activities.

The U.S. dollar is the official currency in El Salvador, and the country’s dollarized economy and geographic location make it a potential haven for transnational organized crime groups, including human smuggling and drug trafficking organizations. Money laundering is primarily related to proceeds from illegal narcotics and organized crime activity.

The Central America-Four Agreement among El Salvador, Guatemala, Honduras, and Nicaragua allows for the free movement of their citizens across the respective borders. Several trade-based and black market currency schemes have been identified in El Salvador as a result of lax border/customs security.

Organized crime groups launder money through the use of front companies, travel agencies, remittances, the import and export of goods, and cargo transportation. Illicit activity includes the use of smurfing operations, whereby small amounts of money are transferred in a specific pattern to avoid detection. Many of these funds come from narcotics activities in Guatemala

As of December 2017, there were 17 FTZs operating in El Salvador. The FTZs are comprised of more than 200 companies operating in areas such as textiles, clothing, distribution centers, call centers, business process outsourcing, agribusiness, agriculture, electronics, and metallurgy. FTZs are particularly vulnerable to illicit activity such as TBML and bulk cash smuggling.

KEY AML LAWS AND REGULATIONS

The Superintendent of the Financial System (SSF) supervises only those accountants and auditors with a relationship with a bank or bank holding company. Following a 2015 reform and its implementation on January 4, 2016, the SSF now supervises all MSBs, including those not related to a bank or a bank holding company.

On July 18, 2017, the legislature amended the asset forfeiture law to provide substantial protections to public officials. The Supreme Court temporarily enjoined these changes pending a final decision that is expected by mid-2018.

El Salvador is a member of the CFATF, a FATF-style regional body.

AML DEFICIENCIES

The regulatory institutions charged with AML supervision are weak and lack human resources and sufficient regulatory powers. Independent entities are not subject to any supervision, nor are other DNFBPs. The FIU lacks administrative power to enforce compliance with suspicious activity reporting requirements.

Information sharing between El Salvador and FinCEN, the U.S. FIU, was frozen in 2013, following an unauthorized disclosure of information by El Salvador’s FIU. Politicization of the FIU was addressed following a change in administration at the Attorney General’s office, but the FIU remains barred from accessing FinCEN, impeding the FIU’s ability to investigate transactions with a U.S. nexus.

El Salvador maintains limited membership in the Egmont Group, due to the suspension of U.S. information sharing. Egmont continues to work with Salvadoran authorities to improve compliance.

ENFORCEMENT/IMPLEMENTATION ISSUES AND COMMENTS

Authorities are currently working on legislation to improve regulation of DNFBPs to better comply with CFATF commitments.

According to the Attorney General’s office, authorities seized assets worth over U.S. $17 million in 2017, while the specialized court finalized the forfeiture of more than U.S. $3 million, including 129 vehicles and 70 real estate properties. The asset forfeiture legislation allows the government to sell property seized in criminal investigations and redirect up to 35 percent of the revenue to the Attorney General’s Office for anti-organized crime efforts.

The FIU brought money laundering charges against Jose Adan Salazar Umaña (also known as Chepe Diablo), seizing a major grain company, seven hotels, seven gas stations, and 13 residences tied to a U.S. $215 million money laundering scheme.

El Salvador’s major money laundering convictions to date relate to bulk cash smuggling and isolated transactions. The Attorney General’s office recently lost a money laundering case where three individuals had approximately U.S. $20 million in suspicious transactions.

SANCTIONS

There are no international sanctions currently in force against this country.

BRIBERY & CORRUPTION

INVESTMENT CLIMATE

Economy

The smallest country in Central America geographically, El Salvador has the fourth largest economy in the region. With the global recession, real GDP contracted in 2009 and economic growth has since remained low, averaging less than 2% from 2010 to 2014, but recovered somewhat in 2015. Remittances accounted for 17% of GDP in 2014 and were received by about a third of all households.

In 2006, El Salvador was the first country to ratify the Dominican Republic-Central American Free Trade Agreement, which has bolstered the export of processed foods, sugar, and ethanol, and supported investment in the apparel sector amid increased Asian competition. In September 2015, El Salvador kicked off a five-year $277 million second compact with the Millennium Challenge Corporation - a US Government agency aimed at stimulating economic growth and reducing poverty - to improve El Salvador's competitiveness and productivity in international markets.

The Salvadoran Government maintained fiscal discipline during post-war reconstruction and rebuilding following earthquakes in 2001 and hurricanes in 1998 and 2005, but El Salvador's public debt, estimated at 65% of GDP in 2015, has been growing over the last several years. Total external debt was nearly 60% of GDP in 2015.

Agriculture - products:

coffee, sugar, corn, rice, beans, oilseed, cotton, sorghum; beef, dairy products

Industries:

food processing, beverages, petroleum, chemicals, fertilizer, textiles, furniture, light metals

Exports - commodities:

offshore assembly exports, coffee, sugar, textiles and apparel, gold, ethanol, chemicals, electricity, iron and steel manufactures

Exports - partners:

US 47.1%, Honduras 13.9%, Guatemala 13.6%, Nicaragua 6.6%, Costa Rica 4.5% (2015)

Imports - commodities:

raw materials, consumer goods, capital goods, fuels, foodstuffs, petroleum, electricity

Imports - partners:

US 39.4%, Guatemala 9.6%, China 8.1%, Mexico 7.4%, Honduras 5.7% (2015)

Investment Climate

El Salvador is located on the Pacific Coast of Central America. The government of El Salvador (GoES) is eager to attract greater foreign investment and is taking steps to improve its investment climate. In recent years, El Salvador has lagged behind the region in attracting foreign direct investment (FDI). The Salvadoran Central Reserve Bank (“Central Bank”) estimated FDI inflows of $428.7 million in 2015, significantly less compared to the almost $1 billion average to other countries in the region. Political uncertainty, burdensome commercial regulations, a sometimes ineffective judicial system, and widespread violent crime are often cited as elements that impede investment in El Salvador.

In 2011, El Salvador and the United States initiated the Partnership for Growth (PFG), a new cooperative development model, to help improve El Salvador’s economy and investment climate. November 2015 marked the fourth anniversary of the PFG implementation, which has included measures to foster a more favorable environment for business and investment, and improve human capital and infrastructure.

On September 9, 2015, El Salvador’s second Millennium Challenge Corporation (MCC) Compact entered into force. With its “More Investment, Less Poverty” theme, the $277 million Compact (plus $88.2 million from El Salvador in counterpart funding) includes projects to improve the investment climate ($42.4 million from MCC, $50 million from El Salvador), logistical infrastructure ($109.6 million from MCC, $15.7 million from El Salvador), and human capital ($100.7 million from MCC, $15 million from El Salvador) over the next five years. Compact projects will follow MCCs guidelines and policies, including those that emphasize the environment, social inclusion and dialogue, gender, fiscal accountability, transparency, and citizen participation.

For Fiscal Year 2016, the U.S. Congress has made available up to $750 million for the United States to implement its Strategy for Engagement in Central America in support of the Northern Triangle Countries’ Alliance for Prosperity Plan, and other regional priorities. The goal of the Alliance for Prosperity is an economically-integrated Central America that is more democratic, provides greater economic opportunities to its people and effective public institutions, ensuring the security of its citizens. The success of the Alliance for prosperity will depend greatly on the political will of the Central American governments.

CAFTA-DR, the free trade agreement among Central American countries, the Dominican Republic, and the United States, entered into force for the United States and El Salvador in 2006. El Salvador also has free trade agreements with Mexico, Chile, Panama, Colombia, and Taiwan. El Salvador, jointly with Costa Rica, Guatemala, Honduras, Nicaragua, and Panama, signed an Association Agreement with the European Union that includes the establishment of a Free Trade Area. El Salvador is also negotiating trade agreements with Canada, Peru, Belize, and South Korea.

The GoES continues to take measures to improve the business climate. In January 2015, in its five-year planning document (Plan Quinquenal), the government identified 44 geographic areas for prioritized economic development efforts. During the course of the year, the Legislative Assembly passed relevant legislation, e.g., better regulation and oversight of remittances, strengthening penalties against bulk cash smuggling, and increasing financial inclusion by improving access to financial services and “e-money” for individuals and small/medium enterprises. The Assembly also approved an electronic signature law and reformed the country’s fiscal incentive law in order to promote increased investment in renewable energy. The Ministry of Economy took steps to facilitate access to and improve both its physical and online “one-stop window” for investors that facilitate the processing and approval of required permits necessary to set up new businesses. New taxes on telecommunications transactions and income over $500,000, however, have been identified as barriers to new investment by the private sector.

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