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 made limited progress in combating money laundering (ML) during 2021. 

However, poor regulatory oversight and enforcement continue to make El Salvador vulnerable to money laundering.  The introduction of the cryptocurrency bitcoin as legal tender will only further complicate anti-money laundering/combating the financing of terrorism (AML/CFT) efforts.  El Salvador transitioned its membership from the Caribbean Financial Action Task Force to the Financial Action Task Force (FATF) of Latin America (GAFILAT) in December 2021.

Egmont Group

On 27 September 2018, the Heads of FIU also decided to suspend UIF El Salvador due to a continuous lack of compliance with Egmont Group principles relating to operational independence and autonomy. UIF El Salvador is now excluded from all Egmont Group events and activities.

Rating                                                                           (100-Good / 0-Bad)

Transparency International Corruption Index                           31

World Governance Indicator – Control of Corruption             28

El Salvador’s location, preferential trade terms under the Central American Dominican Republic Free Trade Agreement (CAFTA-DR), use of the U.S. dollar as legal tender, and recent improvements in the business environment are strengths as an investment destination. Significant levels of sovereign debt, the legacy of decades of gang violence and a lack of transparency in rulemaking are weaknesses.

GDP rebounded strongly from the pandemic to 11.2 percent growth in 2021. The economy grew 2.6 percent in 2022. The IMF forecasts real GDP will grow 2.4 percent in 2023.

Public debt is on an unsustainable path and creates uncertainty about El Salvador’s ability to honor its future commitments. El Salvador has engaged in negotiations with the International Monetary Fund (IMF) on a new lending agreement but to date those discussions are at an impasse.

For the last thirty years, El Salvador has lagged its regional peers in attracting foreign direct investment (FDI). This is attributed in part to widespread, gang-related crime and extortion. In March 2022, the Government of El Salvador (GOES) initiated a State of Exception (SOE) that suspended certain constitutional rights. The subsequent arrest of over 67,000 alleged gang members has significantly reduced gang-related activity. The implementation of the SOE has raised concerns about the rule of law and human rights of prisoners. Nonetheless, the SOE enjoys broad public support and is contributing to improved consumer confidence and optimism about economic conditions. Domestic companies and the Salvadoran diaspora have increased investment because of the safer environment, mainly in tourism, construction, wholesale, and retail sectors. Security improvements have not yet translated into significant new FDI. How the government will wind down the SOE and restore constitutional rights is not clear at this time.

In 2021 El Salvador became the first country in the world to adopt Bitcoin as legal tender (alongside the U.S. dollar). This brought significant publicity to El Salvador and has contributed to El Salvador’s increasing popularity as a tourist destination but has otherwise had minimal impact on the Salvadoran economy. Few Salvadorans use Bitcoin. Low levels of adoption have mitigated potential risks associated with Bitcoin. The IMF has recommended that El Salvador remove Bitcoin’s status as legal tender. El Salvador also enacted a Digital Assets Issuance Law that would allow the government to issue a sovereign blockchain-based digital asset and establishes a framework to regulate issuers of digital assets and digital assets services providers.  The implications of the legislation will depend on implementing regulations still under development.

Sectors with the largest investment are textiles and retail establishments. Investment in energy has increased in the last five years. The Bukele administration has planned several large infrastructure projects which could provide opportunities for U.S. companies. Project proposals include enhancing road connectivity and logistics, expanding airport capacity, and improving access to water and energy, as well as sanitation. Given limited fiscal capacity for public investment, the GOES seeks to use Public-Private Partnerships (PPPs) for infrastructure projects.

A small country with no Atlantic coast, El Salvador relies on trade. The United States is El Salvador’s top trading partner. Proximity to the U.S. market is a competitive advantage. As most Salvadoran exports travel by land to Guatemalan and Honduran ports, regional integration is crucial for competitiveness. In 2018, El Salvador officially joined the Customs Union between Guatemala and Honduras. Progress on completing the Customs Union between the three countries has been slow, with differences existing on customs procedures, sanitary and phytosanitary standards, standards, quota management, and intellectual property rights. Senior GOES officials have expressed a strong desire to resolve all outstanding issues and expeditiously complete the full Customs Union. Completing the full implementation of the Customs Union would enhance El Salvador’s attractiveness as an investment destination.

The Bukele administration has attempted to reduce cumbersome bureaucracy. In 2019, the GOES relaunched the National Trade Facilitation Committee (NTFC). The NTFC has produced three jointly developed private-public action plans to reduce trade barriers, with measures focused on simplifying procedures, reducing trade costs, and improving connectivity and border infrastructure. The NTFC reported the implementation of 26 (out of 29) measures of its 2022 action plan.

In March 2023, the Ministry of Economy and the Secretariat of Commerce and Investment launched the first-ever trade facilitation strategy to attract investment and create jobs. The five-year strategy developed by the NTFC aims to digitize procedures, modernize the trade-related legal framework, improve logistical infrastructure, and coordinate border management to enhance competitiveness. The GOES intends to invest $140 million to implement the strategy.

On April 19, 2023, the National Assembly passed the “Law for the Promotion of Innovation and Manufacture of Technology.” The law grants a 15-year exemption from income and capital gains taxes, municipal taxes on company net assets, and duties and taxes on imports of raw materials, machinery, equipment, and tools needed for new technology-related investments. Qualifying activities include software programming, cloud development services, big data analytics, distributed ledger technology, artificial intelligence, and cybersecurity solutions, as well as the manufacture and assembly of hardware for technology equipment, semiconductors, robotic parts, nanotechnology, and drones.  Companies with existing investments in El Salvador are not eligible for the new tax breaks, but existing companies can create new corporate entities for new investment and will be eligible. Companies already benefitting from special tax regimes under the International Services Law and the Free Trade Zone Law are not eligible for the new tax breaks.  President Bukele signed the bill into law on May 4, 2023.

The principal complaint of businesses is that laws are passed and implemented quickly without meaningful, formalized consultation or assessing the impact on the business climate. The Legislative Assembly is not required to publish draft legislation and opportunities for public engagement are limited. Salvadoran law provides for greater opportunity for businesses to consult on implementing regulations, but businesses also complain that opportunities are infrequent for genuine two-way dialogue on the potential impact of regulations.

Country Links

Financial Investigation Unit El Salvador (UIF - El Salvador)

Superintendencia del Sistema Financiero