Located on the Pacific coast of the Central American isthmus, El Salvador has one of the largest and most developed banking systems in Central America. The most significant financial contacts are with neighboring Central American countries, as well as the United States, Mexico, and the Dominican Republic. The January 2001 adoption of the U.S. dollar as legal tender, together with the size and growth rate of the financial sector, makes the country a potentially fertile ground for money laundering. In 2003, more than $2 billion in remittances will likely be sent to El Salvador through the financial system. Most will be sent from Salvadorans working in the United States to family members. Additional remittances flow back to El Salvador via other methods such as visiting relatives and regular mail.

Most money laundering is related to narcotics trafficking, and, to a lesser degree, kidnapping, corruption, counterfeiting, fraud, and contraband. Criminal proceeds laundered in El Salvador are primarily from domestic criminal activity. There is no significant black market for smuggled goods. Most money laundering occurs through fund transfers between local banks and banks in the United States, the Dominican Republic, and Europe. El Salvador’s financial institutions engage in currency transactions that include large amounts of U.S. currency and could involve the proceeds of international narcotics trafficking. It is believed that money laundering proceeds may be controlled by narcotics-traffickers or organized crime.

Decree 498 of 1998, the “Law Against Laundering of Money and Assets,” criminalizes money laundering related to narcotics trafficking and any other serious crimes. The law also establishes the Unidad de Investigación Financiera (UIF), El Salvador’s financial intelligence unit (FIU), which is located within the Attorney General’s Office. The UIF has been operational since January 2000. The Policía Nacional Civil (PNC) and the Central Bank also have their own anti-money laundering units.

By law, financial institutions, intermediaries and alternative remittance systems must identify their customers, maintain records for a minimum of five years, train personnel in identification of money and asset laundering, and establish internal auditing procedures. Also, the aforementioned institutions must report all suspicious transactions and transactions that exceed approximately $57,000 to the UIF. The law includes a safe harbor provision to protect all persons who report transactions and cooperate with law enforcement authorities and “banker negligence” provisions making individual bankers responsible for money laundering at their institutions. Bank secrecy laws do not apply to money laundering investigations.

To address the problem of international transportation of criminal proceeds, Salvadoran law requires all incoming travelers to declare the value of goods, cash, or monetary instruments they are carrying in excess of approximately $11,400. Falsehood, omission, or inaccuracy on such a declaration is grounds for retention of the goods, cash or monetary instruments, and the initiation of criminal proceeding. If, following the end of a 30-day period, the traveler has not proved the legal origin of said property, the Salvadoran authorities have the authority to confiscate it. The UIF has proposed legal reforms to require all travelers, both entering and departing from El Salvador, to report the value of goods or cash in excess of approximately $11,400.

Since January 1, 2003, there have been no arrests for money laundering or terrorist financing. However, two persons were prosecuted on charges of money laundering in 2003. One was convicted and sentenced to serve a prison term of seven years. This was the first conviction for money laundering under the 1998 law.

The Government of El Salvador (GOES) has established systems for identifying, tracing, freezing, seizing, and forfeiting narcotics-related and other assets of serious crimes, including the financing of terrorism. The UIF and PNC have adequate police powers to trace and seize assets, but the PNC lacks the resources to do so. If a legitimate business was established using proceeds from criminal activities, it may be seized. Forfeited money laundering proceeds are deposited in a special fund used to support law enforcement, drug treatment and prevention, and other related government programs, while funds forfeited as the result of other criminal activity are deposited into general government revenues. Law enforcement agencies are allowed to use certain seized assets while a final sentence is pending. In 2003, the dollar amount of assets seized and forfeited totaled $4.23 million, mostly derived from narcotics trafficking. This amount was almost 10 percent greater than the $3.85 million seized and forfeited in 2002, and eight times greater than the $508,712.14 seized and forfeited in 2001. There exists no legal mechanism to share seized assets with other countries.

Salvadoran law currently provides only for the judicial forfeiture of assets upon conviction (criminal forfeiture), and not for civil or administrative forfeiture. A draft law under consideration to reform Decree 498 includes a proposal to expand the existing law to include certain types of civil forfeiture of assets. The proposed law would also incorporate the Financial Action Task Force (FATF) Eight Special Recommendations on Terrorist Financing, and include the OAS Inter-American Drug Abuse Control Commission’s model regulatory reforms for the laundering of assets.

El Salvador’s anti-money laundering law covers all serious crimes, including terrorism and terrorist financing. There is no evidence that any charitable or nonprofit entity has been used as a conduit for terrorist financing. The GOES has the authority to freeze and seize suspected assets associated with terrorists and terrorism. The GOES has provided financial institutions with the names of all individuals and entities listed by the UNSCR 1267 Sanctions Committee. These institutions are required to search for any assets related to the individuals and entities on the UNSCR 1267 Sanctions Committee’s lists. Bank accounts belonging to a female companion of a former Red Brigade terrorist arrested in Argentina in 2002 have been frozen. Both had previously resided in El Salvador. The woman’s accounts, totaling $22,000, were frozen pending the completion of Italy’s investigation into the former Red Brigade member.

El Salvador has signed several agreements of cooperation and understanding with supervisors from other countries to facilitate the exchange of supervisory information, including permitting on-site examinations of banks and trust companies operating in El Salvador. El Salvador is a party to the Treaty of Mutual Legal Assistance in Criminal Matters signed by the Republics of Costa Rica, El Salvador, Honduras, Guatemala, Nicaragua, and Panama. Salvadoran law does not require the UIF to sign agreements in order to share or provide information to other countries. The GOES signed the Inter-American Convention on Mutual Assistance on Criminal Matters, which obligates parties to cooperate in tracking and seizing assets. The UIF is also legally authorized to access the databases of public or private entities. The GOES has cooperated with foreign governments in financial investigations related to narcotics, money laundering, terrorism, terrorism financing, and other serious crimes. In 2003, the UIF cooperated in important cases with the U.S. Government, including 17 investigations involving 220 persons or entities related to terrorist activities.

El Salvador is a member of the OAS Inter-American Drug Abuse Control Commission Experts Group to Control Money Laundering (OAS/CICAD). El Salvador hosted the third regular session of the OAS Inter-American Committee Against Terrorism in January 2003, and assumed leadership of the committee. In March 2003, El Salvador became a member of the Caribbean Financial Action Task Force. The UIF joined the Egmont Group in June 2001. The GOES is party to the OAS Inter-American Convention Against Terrorism, and ratified the UN International Convention for the Suppression of the Financing of Terrorism on May 15, 2003. On December 10, 2003, El Salvador signed the UN Convention Against Corruption. El Salvador is party to the 1988 UN Drug Convention, and has signed, but not yet ratified, the UN Convention against Transnational Organized Crime, which entered into force internationally on September 29, 2003. El Salvador is also a signatory to the Central American Convention for the Prevention and Repression of Money Laundering Crimes Related to Illicit Drug Trafficking and Related Crimes.

The growth of El Salvador’s financial sector, the increase in narcotics trafficking, the large volume of remittances and the use of the U.S. dollar as legal tender make El Salvador vulnerable to money laundering. The GOES should continue to expand and enhance its anti-money laundering policies and strengthen its ability to seize and share assets. The GOES should criminalize the support and financing of terrorists and terrorist organizations.