Last October, the Justice Department unsealed an indictment in Alexandria, Virginia that charged six individuals with conspiring on American soil to launder $30 million in illicit proceeds for Latin American drug cartels.
According to the authorities, the sophisticated crimes were perpetrated with fake identities, shell companies and a network of brokers who — for a fee — found ways to move the illicit money from the streets of America, where the drugs were sold, to drug trafficking organizations in Latin America.
In a statement released at the time of the announcement, Wendy Woolcock, a special agent at the U.S. Drug Enforcement Administration (D.E.A.), said the group “went to great lengths to conceal their alleged criminal activities and further schemes that enabled drug cartels to push their poisons on our communities and launder their illicit proceeds.”
But one feature stood out in the indictment: the six individuals all had close ties to China, helping underscore what American investigators say is a new front in the nation’s war on drugs — the rise of a growing network of Asian crime groups, often centered in China, that act as money laundering conduits for some of the world’s most notorious drug cartels.
They profit, investigators say, by tapping Chinese businesses and the growing clout of China’s currency, the renminbi, to launder money for drug traffickers headquartered in Mexico, Colombia, Guatemala and elsewhere.
In the past few years, for example, U.S. law enforcement authorities in at least four states have made arrests of Chinese nationals suspected of working with Latin American drug cartels. And last year, in the D.E.A.’s National Drug Threat Assessment, the agency made its most explicit reference to China yet, saying that Asian transnational criminal organizations “play a key role in the laundering of illicit drug proceeds” in the U.S.
Analysts say that Chinese money brokers have been laundering drug money for at least a decade but got little notice from the government. “It’s just now coming to the forefront,” says John Cassara, a former Treasury Department special agent and author of Money Laundering and Illicit Financial Flows: Following the Money and Value Trails.
You had Chinese organized crime people in Vancouver giving hockey bags of cash to the whales…
Kim Marsh, a former money laundering expert with Canada’s federal police and president of Marsh Advisory
Alarmed by the developments, lawmakers in Washington have passed legislation that would compel the U.S. Treasury to study China’s role in global money laundering and develop a strategy to combat it.
And in Canada, which has also seen a spike in drug trafficking and money laundering linked to Chinese organized crime, the authorities are taking notice too. Last year, British Columbia set up a commission to study the topics, largely over concerns that Chinese organized crime groups were using casinos to launder illicit proceeds.
Experts say that the province has become a hotbed for money laundering linked to China.
“You had Chinese organized crime people in Vancouver giving hockey bags of cash to the whales,” an industry term for high-rollers, says Kim Marsh, a former money laundering expert with Canada’s federal police and president of Marsh Advisory. The practice was so common that money laundering experts started calling the method of washing Chinese money through casinos “the Vancouver model.”
Canadians got a reminder of the dangers involved last September, when 44-year-old Jian Jun Zhu was gunned down, organized crime style, while dining at a Vancouver area restaurant. He had been accused by Canadian prosecutors of laundering hundreds of millions of dollars through China, some of it tied to drug kingpins in Colombia and Mexico.
The activity is not confined to the Americas. There are also growing concerns in the United Kingdom, where the authorities say Chinese money laundering networks have laundered British pounds for drug trafficking organizations in the United Kingdom, Albania and Brazil. And in India last August, tax authorities raided Chinese businesses suspected of laundering $135 million in U.S. and Hong Kong dollars using a series of dummy corporations.
Why are Asian money laundering networks aiding Latin American drug traffickers? Experts say tighter regulations imposed on international money transfers by both Washington and Beijing have given Chinese money brokers a competitive edge in the business of black market currency exchanges.
In recent years, for example, regulators in Beijing have made it more difficult to move money offshore or into a foreign currency, partly in an effort to stem the flow of what the authorities deemed speculative capital. As a result, many Chinese seeking to spend overseas, whether to buy a house, pay for college or start a business, needed to find a way to buy foreign currency outside the formal financial system.
Meanwhile, with the U.S. and other nations adopting stricter anti-money laundering measures, transnational criminal organizations have faced the opposite challenge: turning piles of dollars, euros, and pounds they earned overseas into the currency of their home country, without catching the eye of money laundering watchdogs.
Experts say the Chinese money brokers help both groups meet their needs. They buy U.S. dollars from Mexican cartels, for example, and sell them to Chinese business people and students in exchange for renminbi in China, which is transferred over apps like Alipay and WeChat, or by a bank transfer. Then, the money brokers send those funds to Mexico using real or dummy trades by Chinese businesses that routinely transact with Mexico. The brokers then give the revenue from the goods, now in pesos, to the cartel.
To further obscure the deals, the groups might use “burner phones,” encrypted communication devices, offshore casinos, networks of shell companies and fake identities to transfer funds.
The Chinese brokers collect fees from the drug trafficking organizations that are often well below the six percent rate that law enforcement officials say had been typical for Latin American money brokers. They also charge the Chinese buyers of dollars fees that can top ten percent.
China has also begun to scrutinize illicit money flows. Regulators in Beijing have long struggled with shadow banking and black market finance. Gambling, for example, is illegal in mainland China and yet it has become a common way to get money into foreign currency. Currency brokers have popped up on ecommerce platforms like Pinduoduo, posing as vendors and transferring renminbi into digital poker chips on offshore sites. In the first nine months of this year, for instance, the Chinese authorities have arrested more than 60,0000 people associated with over $150 billion in illegal gambling transactions, according to Caixin magazine.
Still, one challenge in combating illegal money laundering is a lack of cooperation between the U.S. and China. With few exceptions, U.S. law enforcement officials say they are unable to track criminal activity across China’s borders.
“It’s difficult to obtain financial data on bank transfers in China, and even obtaining financial data from Chinese banks operating in the US is just as challenging,” says Donald Im, a special operations division assistant special agent in charge at the Drug Enforcement Administration. “That’s one of the most challenging areas.”
Mr. Im says that even communications between suspected money launderers are tough to crack because the U.S. doesn’t have any access through law enforcement means to request information from WeChat, which is owned by the Chinese internet giant Tencent. Law enforcement officials typically are only able to obtain evidence when they seize phones during an arrest or through an informant.
For that reason, analysts say, Chinese money laundering networks have an edge. The groups understand there is little cooperation between the Chinese and Western countries, except in very important cases that may offer a political advantage, says Bill Majcher, president of Emidr, a corporate risk advisory firm in Hong Kong, who worked on money laundering cases as a Canadin federal police inspector.
“Bad guys are taking advantage of the geopolitics,” he says. “They’ve always thought that way.”
Eli Binder is a New York-based staff writer for The Wire. He previously worked at The Wall Street Journal, in Hong Kong and Singapore, as an Overseas Press Club Foundation fellow. @ebinder21