How Chinese networks clean dirty money on a vast scale
It is rare these days for America and China to co-operate on anything. During a threeday visit to Beijing and Shanghai, beginning on April 24th, America’s secretary of state, Antony Blinken, will press his hosts to stop sending weapons-related materials to Russia’s defence industries. He will be lucky to get much more than a polite smile. So it is noteworthy that the two countries have recently decided to boost mutual support in another domain: the fight against money-laundering. This month they launched a new bilateral forum to discuss the problem. Unlike Russia, it is a big one for both of them.
The menace has grown in recent years, fuelled by underground Chinese networks equipped with new technologies that can enable dirty money to be washed clean in minutes. For transnational criminal gangs across the world, these shadowy “banks” are becoming the financiers of choice. Suppressing them requires the two great powers to talk. On that, at least, they agree.
In America the threat is a matter of life and death. In the 12 months to November 2023 more than 105,000 Americans were killed by overdosing on drugs, mainly fentanyl and other synthetic opioids smuggled into the country from Mexico. That is twice as many fatalities as in the year to November 2015. Chinese underground banks play a crucial role in this by enabling the Mexican cartels to launder proceeds swiftly and at very low cost.
In a paper published in 2021 by the American Intelligence Journal, Virginia Kent of the State Department and Robert Gay of the National Intelligence University in Maryland wrote of a “bloodless coup” by Chinese money-handling organisations, noting how, in recent years, they have largely displaced home-grown ones in Mexico that were previously used for this purpose. The authors (expressing their personal views) called these Chinese operators “a new and more challenging moneylaundering foe”.
The American government has been sounding the alarm. In its “National Money Laundering Risk Assessment” of 2022, America’s Treasury Department highlighted the involvement of Chinese illicit finance, saying that drug traffickers were making increasing use of it. The latest such report, published in February, said that Chinese money-laundering organisations had since become “more prevalent” and were now “one of the key actors laundering money professionally in the United States and around the globe”.
Other authorities have been chiming in, too. In 2019 Europol, the European Union’s police agency, said moneylaundering by Asian criminal groups, particularly Chinese ones, presented a “growing threat to Europe”. It called the Chinese gangs “extremely flexible”, saying they were handling “substantial proceeds” from a variety of criminal activity on the continent. In January the UN Office on Drugs and Crime (UNODC) reported on a “revolution” under way in South-East Asia’s “underground banking architecture”, involving everything from casinos to cryptocurrency. The details it provided suggested that Chinese gangs were at the forefront.
China’s anxiety is evident, too. It worries about the conduit provided by underground banks for evading the country’s strict foreign-exchange controls (capital flight, even by legitimate means, is a persistent headache). Mainland Chinese are not allowed to send more than $50,000 a year out of the country. For many rich Chinese, that is far from enough.
Chinese often turn to illicit financiers not to launder cash, but to move some of their wealth abroad. Such demand is only likely to grow as China’s economy falters. Some of them are criminals, including corrupt officials who want to park their ill-gotten gains somewhere beyond the reach of China’s police. They have reason to be nervous: China’s leader, Xi Jinping, has been waging a ferocious war against graft. In 2022 China’s chief prosecutor’s office said antimoney-laundering efforts were part of “a major national strategy for maintaining the country’s political and financial security”. According to state media, China is working on the biggest changes to its anti-money-laundering law since it came into force in 2007. These are likely to include new provisions relating to cryptocurrencies, the trading of which was completely banned in China three years ago.
Several forces are making the problem much harder to deal with. First is the rapid evolution of a centuries-old culture of informal banking based on what is often known as the feiqian (“flying money”) system. Its origins have nothing to do with crime. It began as a way for traders to settle accounts without the need to carry cash over long distances. Like the hawala system that is popular in the Middle East and South Asia, feiqian depends on trust: a sum of money exchanged between two parties in one location is matched by an equivalent transaction in another.
In China, especially among businesses along the coast, feiqian has remained in common use as a way of getting international deals done quickly, without the encumbrance of bureaucratic banks. Chinese workers abroad often use such methods to send remittances home. The near-universal use among Chinese globally of WeChat, a messaging app that is often linked to people’s bank accounts, has turbocharged the feiqian system.
The epidemic in America of opioid addiction has given it a further boost. Some of the billions of dollars in cash generated by drug demand is smuggled back, at considerable risk, to the cartels in Mexico. Some is handed over to Mexican money-launderers, who charge high commissions: usually between 8% and 12%, according to the paper by Ms Kent and Mr Gay. Chinese launderers provide a much cheaper option, even virtually free.
This is made possible both by the feiqian system and the huge needs of Chinese wanting access to more dollars than their government allows. The Chinese money-launderers take the drug money and sell it for yuan at a high profit: feiqian enables a buyer in America to send the specified equivalent in yuan from their bank account in China to one or more accounts in China controlled by the launderers. With no money crossing borders, this kind of swap is extremely difficult for America’s investitheir gators to spot. The sums are often broken up into smaller amounts that do not draw the attention of China’s enforcers, either. The yuan in China may then be used there to buy goods that are shipped to Mexico and sold for pesos that are handed over to the cartels. So efficient is the process that delivery of the pesos follows nearly instantly after the receipt of the dirty dollars.
Traffickers in Europe are picking up on this idea, too. In October police in Italy arrested 33 people for alleged involvement in laundering more than €50m ($53m) for drug traffickers including the ‘Ndrangheta, an Italian mafia gang that controls much of Europe’s multi-billion-dollar cocaine business. Among those detained were seven Chinese citizens. An Italian officer in charge of the operation suggested to Reuters, a news agency, that the amount handled by the alleged launderers was probably far greater than the police had managed to detect. Also that month, police in Italy and Spain arrested 78 people for alleged participation in a cannabis-trafficking network. Europol said the syndicate had involved people of several nationalities, including Albanians and Moroccans. Payments for drug shipments were handled by Chinese feiqian bankers.
In South-East Asia, governments face “unprecedented challenges” from transnational organised crime, according to the UNODC. Ask Singapore, which has been rocked in recent months by its biggest money-laundering scandal. It has involved the seizure or freezing of more than $2bn held in bank accounts or as assets such as luxury properties, cars and gold. This month a court in Singapore sentenced two of ten Chinese citizens (some of them holding other passports as well) who were arrested in connection with the case. The pair have been given terms of 13 months and 14 months in prison. One forfeited assets worth more than $120m.
The UNODC says organised crime in the region has flourished thanks to “record levels” of the production of synthetic drugs in the “Golden Triangle” of Laos, Myanmar and Thailand. They have been served by fast-growing underground banking networks that use casinos, online betting platforms and cryptocurrencies to launder the traffickers’ money. China’s efforts to prevent its citizens’ access to all of these (warning, for example, that visiting casinos abroad may be considered illegal by Chinese police) have not ended the problem. “It has never been easier to set up an online casino operation with limited technical expertise and overhead capital, irrespective of gambling laws within a given jurisdiction,” the UNODC said.
It is also easy to hook up with the Chinese brokers. Offers of their services abound on social media such as Facebook and WeChat. Underground bankers (often referred to online as chedui, or motorcades) use such internet platforms to recruit people as “money mules”, as those who allow their bank accounts to be used for laundering are known. They often target Chinese students abroad, who may be attracted by commissions and unaware of the risks of being caught by police or scammed. In December Europol announced it had identified nearly 11,000 mules and 500 recruiters in 26 countries, leading to the arrest of more than 1,000 people around the world.
In 2022 China’s police launched a three-year campaign against money-laundering that has so far brought more than 2,300 people to court. One case, announced in December, involved the arrest of 74 people in 17 provinciallevel administrations suspected of handling nearly 16bn yuan ($2.1bn) in feiqian-style deals. They allegedly moved money through more than 1,000 bank accounts, each with an average daily turnover of 3m yuan. This is the tip of the iceberg, America says more than $150bn in illicit proceeds moves through China annually.
China’s agreement with America to boost co-operation in the fight against moneylaundering was announced by America’s Treasury secretary, Janet Yellen, during a visit to Beijing earlier this month. Her country, she said, “cannot do it alone”. She said weaknesses in financial regulatory regimes in China and other countries were helping criminal gangs involved in everything from human trafficking to fraud. But even with the best will in the world it would be hard to control a global problem so large, complex and easily hidden as professional moneylaundering has become. For officials in two mutually wary countries that have little experience of joint law enforcement, it will be harder still.