Reported by Nate Sibley of Hudson Institute

How Cartels Launder Money Now

Fake pills containing fentanyl. Photo Credit: DEA

For decades, cartels laundered money primarily by smuggling bulk cash across the border or using the Black Market Peso Exchange. The latter involved using drug profits to purchase goods in the United States, shipping them across the border, and then reselling them in Mexico so that cartels received the value in local currency.

But the rise of fentanyl has transformed the illicit financial networks fueling the illegal drug trade. New financial technology, chemical precursors from China, and Chinese money laundering organizations (CMLOs) using ambitious new techniques have also made following the money harder than ever.

In August 2019, the Treasury Department issued a detailed advisory warning US banks about specific types of transactions that might indicate a “red flag” for fentanyl-related money laundering. In addition to traditional bank transfers, the Treasury emphasized the increased use of digital currencies and money services businesses (MSBs). MSBs are a broad category of non-bank financial institutions including everything from currency exchanges to online payment apps. Like banks, they all have anti-money laundering responsibilities under US law.

The Drug Enforcement Administration (DEA) identified CMLOs as playing a key role in laundering drug profits in its 2020 National Drug Threat Assessment. The report notes the common use of front companies, underground banking services for Chinese elites, and “mirror” transactions involving simultaneous transfers in multiple jurisdictions.

DEA Administrator Anne Milgram, testifying before the US Senate in February 2023, also highlighted CMLOs and their use of trade-based money laundering (TBML) and bulk cash movement to facilitate the exchange of foreign currency.

Two recent high-profile cases demonstrate how these elements come together in practice.

Li Xizhi

Li Xizhi’s rise to prominence, which ProPublica recently reported in detail, illustrates the CMLO’s revolutionary process. “At no time in the history of organized crime is there an example where a revenue stream has been taken over like this, and without a shot being fired,” a veteran DEA agent told reporters.

Li’s complicated model used near-simultaneous mirror transactions in the United States, Mexico, and China while engaging new partners to provide a better deal than Colombian money launderers could offer. It also allowed him to largely circumvent the US anti-money laundering regime and avoid triggering “red flags” that might alert US law enforcement to his activities.

Cartel operatives would begin by physically handing over US dollars, in bulk cash, to Li’s operatives in the United States. From bank accounts in Mexico, he would then transfer an equivalent sum in pesos to the cartels, charging a commission of just one or two percent.

Li could offer this service at a low cost because he then “sold” the US dollars to wealthy Chinese who wanted to circumvent China’s strict capital controls and acquire foreign currency. They transferred the equivalent sum, in yuan, to Li’s accounts in China. Li charged a more significant commission at this stage, which is where he began to make a profit.

In the final stage, Li would “sell” the yuan back to Mexicans who needed local currency to buy goods in China (including fentanyl precursor chemicals), again with a heftier commission.

The DEA ultimately caught Li following a major sting operation, and he was sentenced to 15 years’ imprisonment in 2021. He may have been singularly innovative—but his role, and methods, were far from unique.

Gan Xianbing

Gan Xianbing’s scheme was simpler than Li’s but demonstrates how CMLOs can easily circumvent anti-money laundering checks by accessing the Chinese financial system. He was also ultimately ensnared by the DEA and sentenced to 14 years’ imprisonment in 2021.

Gan enlisted the owners of several US cash-driven businesses as accomplices. Representatives of these businesses would meet cartel operatives, with Gan’s courier, to receive US dollars in bulk cash. They would take the cash and, using a burner phone, initiate a transfer within China of the equivalent value from their account to Gan’s. Gan’s courier, also using a burner phone, would then transfer the funds from another of Gan’s accounts in China to accounts in Mexico controlled by the cartels. 

The funds only entered the US financial system, with its rigorous anti-money laundering safeguards, as cash deposited by seemingly unrelated businesses that dealt primarily in cash—arousing little suspicion and proving untraceable to the cartels even if they did. As a senior DEA agent told Reuters, “I can’t emphasize this enough, the involvement of the Chinese has really complicated all of these schemes.”

These and other prosecuted cases are likely the tip of the iceberg but illustrate how integral China is to the US fentanyl trade—not only as the source of chemical precursors but also as a money laundering hub that facilitates and incentivizes those involved. This is why, as US prosecutors observed during Gan’s trial, the new generation of CMLOs has “come to dominate international money laundering markets.”

Read full report: https://www.eurasiareview.com/15042023-defunding-the-deadly-fentanyl-trade-analysis/