Chinese money laundering scheme boosts drug trafficking in US

Over the last five years, the world was oblivious to a dramatic shift in international money laundering, which occurred when one criminal organization ceded management of its revenue stream to another. This was a bloodless coup, which is why it went unnoticed. However, the implications are profound for law enforcement and compliance departments throughout the private sector.   

The clandestine shake up: Chinese organized crime has taken over money laundering for the Mexican drug cartels, providing a more efficient system for transferring drug sales profits to Mexico. This has increased net profits for the cartels and empowered them to expand their operations.   

To understand the gravity of this shift, imagine offering a multinational corporation the ability to assign all its accounts receivable to a subcontractor that would absorb all collection risk. This subcontractor could also provide funding and do so in a few hours as opposed to days or weeks. No accounts receivable department and markedly improved access to capital: these are the innovations brought by Chinese Money Laundering Organizations (MLOs).    

Around 2016, government analysts noticed declining use of the traditional method of laundering narcotics proceeds, the black-market peso exchange (BMPE). The Mexican and Colombian cartels, which controlled the BMPE through extreme violence, typically accepted a transaction cost of between 7 and 10 percent and waited at least a week to access clean funds. The Chinese MLOs, however, had perfected a cheaper, quicker process. They offered seamless and untraceable methods of moving funds in a fast, reliable, and virtually risk-free environment. Because of their efficiency, Chinese MLOs are now entrenched as the dominant global money launderers.

And it was all an unintended consequence of legislation in the Peoples’ Republic of China, so-called “Capital Flight” laws, which imposed an annual limit of $50,000 on funds transferred out of China. Wealthy Chinese who sought to access their money outside of China turned to the black market to circumvent the law and acquire U.S. dollars.

Every day in the United States, Chinese money brokers pick up narcotics proceeds — from sales of fentanyl, heroin, cocaine, and methamphetamine — in the form of bulk U.S. cash from their customers. The customer might be a street gang in New York that owes payment to the Mexican cartel that supplied the drugs the gang sold. This cash is then sold to Chinese customers who want to spend money in the U.S., acquiring real estate, paying college tuition, or making other investments. These Chinese customers pay in China for the cash they receive abroad. The proceeds in China are used to buy items for export to Mexico or South America, where the goods are sold by the brokers to recoup their funds.

Throughout the process, the Chinese MLOs employ technology to their advantage, advertising the sale of dollars to Chinese customers in internet chat rooms and communicating via popular encrypted messaging networks. 

The Chinese MLOs are successful because there are few restrictions on, or compliance programs that target, bank-to-bank transfers in China. Since no funds leave China, there are no international transactions to monitor. Similarly, the U.S. transactions are made in cash, outside the banking system, meaning there are no indications of potential money laundering for compliance officers to identify. Divorced from the modern banking system, this method of laundering money is extremely difficult to detect and track.   

With the Chinese MLOs assuming all risk, currency laundering has never been faster. What took a week now takes hours or, at most, a day. And with a huge customer base, the Chinese MLOs offer immediately available cash at a transaction fee of 1 to 2 percent with no waiting for assets to be deposited into clean accounts.   

In April 2022, federal prosecutors brought charges against a Chinese MLO in Flushing, Queens, that allegedly laundered several million dollars over four years. To appreciate the magnitude of the problem, one must extrapolate, imagining dozens of sophisticated Chinese money brokers organizing hundreds, if not thousands, of cash pick-ups and drops throughout the U.S. every day.   

Addressing this new reality requires a dramatic shift by U.S. and Chinese financial institutions. U.S. compliance efforts should focus on cash deposits and the issuance of cashier’s checks where Chinese MLOs are known to operate. A substantial increase in the issuance of cashier’s checks — key to some laundering cycles — is a hallmark of the new method.   

Another way is through attacking its efficiency by creating doubts about its reliability. Law enforcement must impose new barriers. The December 2021 executive order implementing sanctions on those in the narcotics trade should be used to deny involved parties access to the international financial network. One reason the Chinese MLOs are successful is because they are trusted. Remove trust in the network and the house of cards will fall.

Christopher Urben is a managing director based in the Washington, D.C., office of Nardello & Co., a global investigations firm. He previously worked for 25 years with the U.S. Drug Enforcement Administration, where he was responsible for developing and leading sensitive global undercover DEA operations that dismantled several of the most significant transnational criminal organizations.