Chinese Intermediaries Launder Cartels' Drug Proceeds in the United States

From the U.S. to China to the cartels

By Andrew R. Arthur on December 8, 2020


In a post last week on drugs and the border, I referenced the following quote from the DEA: "Due to China's currency control restrictions, Asian TCOs [transnational criminal organizations] have taken advantage of the availability of U.S. dollars belonging to Mexican and Colombian TCOs in the United States by acquiring the U.S. dollars in exchange for the payment of Colombian/Mexican pesos in the respective drug source country." A recent federal court conviction in Chicago and a Reuters article on that case explain how the scheme works, at least on a small scale.

The DOJ press release on that case explains that one "Xianbing Gan" was convicted on three counts of money laundering and one count of operating an unlicensed money transmitting business, in a scheme to move drug proceeds from the Windy City to China, and then on to drug traffickers in Mexico.

Reuters fleshes out the scheme. Moving vast sums of illicit drug money out of the United States is a difficult — and for the perpetrators, dangerous — task, as the article explains:

The only thing tougher than moving illegal drugs across borders is getting the profits back to Mexico's cartels, U.S. officials said. Cash is heavy, and transporting it exposes traffickers to lots of risk. Putting it into the banking system is perilous, too. The U.S. and Mexican financial systems have been geared to detect dirty money.

The scheme described bypassed all of those impediments. Gan's case was premised on the testimony of one of his conspirators, a Singapore national working out of New York named Lim Seok Pheng, who became a cooperating witness for the government after she was arrested in May 2018 at JFK on suspicion of laundering money.

Lim would collect vast sums of cash (between $150,000 and $1 million at a clip) from contacts in the cartels in New York and Chicago (as well as other cities, apparently), using burner phones and contact information. She would then work with U.S.-based Chinese merchants to convert the money to yuan in banks in China in real time. Lim would hand the merchants the cash, and they would transfer the money from their accounts in China to Gan's account in that country.

Why would those merchants be willing to do this? The Chinese government limits the amount of cash that its citizens can transfer out of the country to $50,000 per year, but authorities in that country would (likely) think that there was nothing amiss in transfers between two bank accounts in China. Oh, and the merchants got a premium on the money that they transferred, but there is no evidence that they were aware of the provenance of the cash they received.

To get the money from China to Mexico, Gan allegedly would then engage in the same sort of transfer on the southern side of the border. Cash would be transferred from Gan's account to those of Chinese merchants with access to pesos in Mexico.

Gan (who ran a seafood business out of Guadalajara, Mexico, exporting jellyfish to China) contends that he was a patsy for another Chinese national named Pan Haiping, who duped him into using his Chinese account to launder the money. Haiping is in custody in Mexico awaiting extradition to the United States on money laundering charges (using Gan's and other Chinese bank accounts) handed down by a grand jury in March 2019. According to U.S. authorities, the laundered money was then transferred to Mexican drug cartels.

Reuters reports that Chinese money brokers in Mexico have avoided the conflicts amongst the cartels themselves, and have (according to an unnamed DEA agent) "coordinat[ed] money contracts with both the Sinaloa and Jalisco New Generation cartels on the same day" — no mean feat.

If all of this sounds familiar, it is akin to a "hawala" scheme, in which (overly simply) money is paid to a broker in the United States (a "hawaladar"), and a similar amount in local funds is provided to another individual abroad.

As the Treasury Department and INTERPOL have explained, hawalas are cost-effective (much more so than converting dollars into the local currency and then having it delivered abroad), efficient (taking one to two days — at most), reliable, avoid bureaucracy, and largely untaxable. Best of all — from the prospective of a drug TCO — hawalas leave no paper trail.

Hawalas came to the fore in the wake of the September 11 attacks. The report of the National Commission on Terrorist Attacks upon the United States (the "9/11 Commission") explained:

Al Qaeda frequently moved the money it raised by hawala. ... In some ways, al Qaeda had no choice after its move to Afghanistan in 1996: first, the banking system there was antiquated and undependable; and second, formal banking was risky due to the scrutiny that al Qaeda received after the August 1998 East Africa embassy bombings, including UN resolutions against it and the Taliban. Bin Ladin relied on the established hawala networks operating in Pakistan, in Dubai, and throughout the Middle East to transfer funds efficiently.

Note that hawalas and other similar informal schemes rely on "trust" between the remitter and the hawaladar, but the drug scheme described did not necessarily require such an archaic notion. To the degree that any trust was involved: (1) the scheme was lucrative for all involved, and they would necessarily have an interest in its viability; and (2) Mexican TCOs have their own means of ensuring compliance.

Interestingly, as per Reuters, such Chinese money launderers are undercutting their Mexican and Colombian competition by as much as half, because they can charge big fees (up to 10 percent) on Chinese nationals who are seeking to avoid that country's restrictive currency controls. This, in turn, "allows the Chinese money brokers ... to charge traffickers nominal fees of just a few percentage points. The money launderers still turn a handsome profit while locking in a steady supply of coveted dollars and euros from cartel customers."

The money is good. Lim, in her 2019 plea agreement on money laundering, admitted that she laundered approximately $48 million in drug cash with Gan and Pan Haiping from 2016 to September 2017, taking (according to the government) a .5 percent commission (or in the neighborhood of $240,000; Gan was convicted of laundering more than $530,000 in cartel cash).

Nor were they alone. Charges are pending in Virginia and Oregon against two other alleged Chinese money laundering groups.

That said, Reuters reports that this is not the only method that Mexican cartels use to launder their money, sometimes opting for "trade-based money laundering schemes". For example, that outlet explains that Mexico's Financial Intelligence Unit said publicly in July that Chinese nationals who were laundering money for the Jalisco New Generation cartel used drug proceeds in order to buy bulk orders of shoes from China, which they would then resell in Mexico to get cash.

In any event, cartel money laundering by Chinese rings is a big problem for law enforcement. There is little or no visibility into the Chinese banking system for outsiders (the article describes the country as "a veritable black hole for U.S. and Mexican authorities", although the Chinese government contends it is willing to help, while "stress[ing] the need for the two countries to work on the 'principle of respecting each other's laws, equality and mutual benefit'"), and the sentencing memorandum in Gan's case (cited by Reuters) suggests that "Chinese money brokers based in Mexico 'have come to dominate international money laundering markets'".

Growing Chinese expat communities in the United States and Mexico — desperate to access their money back home — and cartels sitting on piles of dollars from illicit drug sales in the United States are creating opportunities for themselves. And problems for law enforcement.