IIEffective Insolvency and Creditor Rights Systems
A 2009 U.S. Country Commercial Guide for El Salvador reports that the legal framework for insolvency in the country is comprised of the Commercial Code, Code of Mercantile Processes, and the Banking Act. The country does not use a separate bankruptcy code or specialized courts for bankruptcy proceedings. The policy objective under Salvadoran bankruptcy law is the payment of creditors, rather than favoring restructuring and consequently protection of the company. Thus, the company continues in operation only if that decision is in line with the creditors' interests or else it is forced into liquidation. Furthermore, according to the Americas Restructuring and Insolvency Guide 2008/2009, protections given to secured creditors and the judicial proclivity towards receivership leaves creditors with little reason to resort to bankruptcy. As a result, the report points out that despite having a basic legal framework for bankruptcy in El Salvador, there have only been two corporate bankruptcy proceedings conducted in the last twenty years. Beyond this observations, however, there is insufficient information publicly available as to El Salvador's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank.
Read More
IDInternational Financial Reporting Standards
A 2005 World Bank review of the accounting and auditing environment in El Salvador notes that since 2000, El Salvador has been gradually moving towards adoption of International Financial Reporting Standards (IFRSs). In December 2000, the Accounting and Auditing Oversight Board (CVCA) issued a resolution requiring all companies to apply international accounting standards starting January1, 2002. However, this deadline has been moved several times. Moreover, the CVCA adopted the 2003 version of IFRSs, and, according to a paper by Shah, H. et al., as of 2007 the most recent version of IFRSs still had not been adopted. In December 2004, the CVCA issued a resolution exempting banks and insurance companies from applying IFRSs. Although the World Bank commended El Salvador for the efforts to bring financial reporting framework in line with the international best practices, it pointed out to the slow pace of adoption which resulted from the deficiencies in the regulatory framework and lack of capacity in the audit profession and business community. Based on the conclusions and recommendations of the World Bank assessment, in April 2008 the FIRST Initiative approved a project aimed at improving the quality of financial reporting in El Salvador, with the expected completion date of June 2009. Among the main outputs of the project, are the implementation of the ROSC’s recommendations, development of a detailed and formal transition plan to the adoption of the most recent version of IFRSs, analysis of the existing legislative framework for financial reporting, and assisting the CVCA and the Superintendency of Corporate Obligations in strengthening their enforcement mechanisms.
Read More
NCPrinciples of Corporate Governance
A 2005 Booz Allen Hamilton report and a 2007 IMF working paper by Shah et al. find corporate governance relatively weak in El Salvador, mainly due to lack of transparency, insufficient minority shareholder protection, lack of public awareness of corporate governance, as well as a dedicated corporate governance code, and ineffective legal enforcement. The Commercial Code provides the main framework for corporate governance in the country, while the Law on the Securities Market of 1994 is considered outdated. Various recommendations are made by both reports. Shal et al. recommends that a code of corporate governance be developed, disclosure requirements be strengthened, the securities law be updated, and full implementation of the IFRSs be required. The 2005 Booz Allen Hamilton report suggests incorporating the protection of minority shareholders and corporate governance principles into the Commercial Code in line with international best practices. Training programs for business people, lawyers, judges and government officials are also recommended, as well as promotional campaigns for the public to increase awareness of corporate governance. Moreover, the report highlights the need to pass regulations to better discipline and supervise the legal profession.
Read More
NCInternational Standards on Auditing
The 2005 World Bank review of the accounting and auditing environment in El Salvador reports that in 2000, International Standards on Auditing (ISAs) were incorporated into the country’s legal framework. However, since the World Bank assessment, the International Auditing and Assurances Board has revised some of the ISAs and there is no indication that those changes have been adopted by the CVCA. Under Salvadoran law all joint stock companies and limited liability companies are mandated to prepare audited annual financial statements. This requirement, according to the World Bank, places excessive reporting burden on Small and Medium-size Enterprises, which should not be required to have their financial statements audited. It was also indicated that listed companies, banks, insurance companies, and pension funds are subject to additional reporting regulations prescribed by the three respective supervisory Superintendencies. As far as the enforcement of auditing standards is concerned, the World Bank cautioned that the CVCA does not monitor compliance with ISAs, although it stated its intent to introduce periodic quality control. The three Superintendencies, on the other hand, enforce auditing rules to a varying degree. The World Bank pointed out that the CVCA adopted a Code of Ethics for Public Accountants in May 2005, based on the 1998 version of the International Federation of Accountants’ (IFAC) Code of Ethics. The IFAC Code was subsequently amended, and the World Bank recommended that the CVCA adopt those revisions. El Salvador is not a member of the IFAC.
Read More
IDAnti-Money Laundering/Combating Terrorist Financing Standard
El Salvador has one of the largest banking systems in Central America; its banks maintain important financial contacts with those of neighboring countries - Mexico, the Caribbean, and the United States. A 2009 report by the U.S. Department of State (DoS) suggests that the growth of El Salvador's financial sector and the increase in narcotics trafficking in the region continue to make it vulnerable to money laundering. The report pointed out that, in 1998, El Salvador enacted an anti-money laundering (AML) law which criminalized money laundering. In 2006, the Government of El Salvador passed counterterrorism legislation which, according to the DoS report, defines acts of terrorism and imposes penalties for committing such acts. However, the DoS concludes that the government of El Salvador has not taken any significant steps during 2008 "to improve its ability to detect, investigate, and prosecute money laundering and financial crimes." In addition, its financial intelligence unit (FIU) lacks institutional investigative capacity, and is not utilized sufficiently. On June 5, 2009, El Salvador was suspended as a member of the Egmont Group of FIUs. Despite the lack of a detailed assessment on El Salvador's AML/combating the financing of terrorism regime against the Financial Action Task Force's (FATF) requirements, the country is named as one of the jurisdictions that have undertaken to implement the FATF's 40+9 recommendations, according to the organization's 2007-2008 annual report.
Read More
IDCore Principles for Systemically Important Payment Systems
Based on the results of the World Bank’s 2008 Global Payment Systems Survey, Cirasino and Garcia’s 2008 report evaluates a country's compliance with four distinct sub components which are broadly based on the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems. The component, "large value payment systems" addresses aspects of Core Principles (CP) III through CP X and the 2008 report by Cirasino and Garcia concludes that El Salvador achieves a "low level of development” for this component. El Salvador achieves “medium-high level of development” for the legal and regulatory framework component, which covers CP I and to some extent CP II. Finally the third component of interest in the Cirasino and Garcia report is the payment system oversight component for which El Salvador achieves a “low level of development.” The report also indicates that no real-time gross settlement (RTGS) system is available in El Salvador, and a check clearing system is the only existing large-value payment system in the country. A RTGS system for large-value inter-bank settlement is envisioned as part of the Central Bank of El Salvador’s (BCR) strategy to modernize payment systems, and is expected to begin operation in 2009, according to the BCR’s 2008 Annual Report. The system is supposed to be in line with international standards promoted by the Bank for International Settlements, the World Bank and the IMF. The Banking Act, the Organic Law on the BCR, the Commercial Code, and BCR regulations provide the main legal framework for payment systems in El Salvador. Cash is the primary payment instrument in El Salvador, and check is the major non-cash payment instrument. ATMs, debit and credit cards are also available to bank customers, and have grown more accessible in recent years.
Read More
