Money Laundering Narco OpSec

Shadow Banker EXCLUSIVE: Leaked DEA, HSI, and FBI Report Exposes ‘New Fusion’ of Mexican Cartels Contracting Chinese Money Laundering Organizations in Chicago

A leaked intelligence report jointly authored by the Chicago branches of three separate federal law enforcement agencies documents a ‘new fusion’ between Mexican cartels and Chinese money-laundering organizations.

This April 2020 report was among the BlueLeaks dump of unclassified, but sensitive, law enforcement data that was posted online in June by transparency collective Distributed Denial of Secrets.

Chicago branches of the Drug Enforcement Administration, the Federal Bureau of Investigation, and Homeland Security Investigations co-authored the report.

Collated law enforcement intelligence cites four cases where money brokers contracted by the Cartel Jalisco Nueva Generación, the Sinaloa Cartel, the Beltran-Leyva Organization, and the Rafael Caro Quintero organization could be linked to Chinese money-laundering networks.

Chicago’s New Fusion: Chinese Money Laundering Organizations Partnering with Mexican Transnational Criminal Organizations, source: DEA, HSI, and FBI

The report says Chinese laundering groups “began working with Mexican cartels around 2016 and began moving larger quantities of money” in 2017. “Chinese money laundering organizations (CMLOs) in the Chicago area of responsibility (AOR) likely operate as diffuse networks to launder drug proceeds from Mexican transnational criminal organizations (TCOs) through a variety of methods,” says the document.

These methods include trade-based money laundering, mirror transactions, contract courier pick-ups, and mobile money-transfer applications, according to the report. But “the organization and tradecraft” of these methods is likely “compartmentalized so that no one individual oversees the entire process, thereby inhibiting law enforcement detection,” the report says.

This distributed laundromat hinges on the so-called Chinese underground banking system, an informal method of value transfer that connects buyers and sellers of dollars and Yuan.

Used by Chinese nationals trying to circumvent the country’s strict capital controls, including the $50,000 annual threshold of foreign-exchange purchases per citizen that Beijing enacted in 2007, the CUBS industry processed $137 billion in 2016, according to China’s Ministry of Public Security.  

But “while the use of CMLOs increased dramatically from 2016 to 2019, that activity has leveled off, likely due to enforcement activity and a shift in CMLO tactics,” says the law-enforcement report.

However, it is the report authors’ medium-confidence assessment that Mexican cartels will continue to contract Chinese laundering groups given their “speed and reliability.” The agencies also believe “CMLOs have very likely engaged in other criminal activities beyond money laundering.”

Spokespersons for the DEA, HSI, and the FBI did not respond to Shadow Banker’s request for comment. Meanwhile, a spokesperson for the Central Intelligence Agency was nice enough to reply but noted that the Company doesn’t “have any guidance on this.”

Four Narco-Laundering Investigations

The four cases highlighted by the feds provide unique insight into the distributed mechanism design of transnational Sino-laundering crews.

Chinese laundering groups linked to Mexican cartels “maintain a vast presence in major U.S. cities, as well as various countries, including China, Mexico, Belize, and Hong Kong” and do not appear to have allegiances to any particular narco-organization, notes the report.

Never ones to overconcentrate their risk exposure, Mexican cartels use Chinese laundering organization to “further diversify how they launder their drug proceeds,” the report says.

The first investigation cited by the report highlights intelligence collected by the feds between February 2018 about the Rafael Caro Quintero drug trafficking organization, whose patriarch gained infamy for his role in the torture and murder of DEA agent Kiki Camarena in 1985.

“A known money broker who operated a money laundering network in Mexico City coordinated several pickups of the DTO’s drug proceeds in multiple U.S. cities, including Chicago, to be returned to Mexico,” says the report.

Rafa Caro-Quintero fugitive bulletin, source: DEA

The money broker was associated with a U.S. person who wired money from the U.S. to Hong Kong through several Chinese companies. This information was “acquired both directly and indirectly through law enforcement liaison activities and an official information exchange with foreign officials,” according to the report.

In the second case, the report documents another February 2018 case where “an identified individual coordinated and participated in multiple cash pickups of suspected drug proceeds in the Chicago area for an unidentified” Mexican cartel.

“The pickups ranged in value from thousands to several hundred thousand dollars at a time,” says the report. The courier packed “bulk-wrapped currency into a duffel bag” and then delivered cash to other co-conspirators, “including a Chinese man who he typically met in the Chinatown area of Chicago,” feds say.

Thirdly, July 2018 FBI intelligence cites a group of Chinese men in Chicago’s Chinatown district, who “laundered money for every cartel, including CNJG and the Sinaloa and Durango cartels.” While the Mexican state of Durango has previously been reported to have been a battleground between two warring factions of the Sinaloa cartel, recent news indicates it remains firmly in the control of the parent organization.

Regardless, the Chinese group “serviced money laundering contracts” for Mexican cartels, amounting to $200,000 to $300,000 per transaction, and charged a fee “as high as 20 percent—an unusually high rate,” according to the report.

However, the cartel or cartels engaged in those high-fee contracts were cool with the price “due to the speed with which the money transfer took place,” feds say. FBI investigative reporting says the Chinese group “operated out of a small hotel on a side street and condominium buildings in Chinatown.”

And fourthly, November 2019 DEA intelligence reports that Chinese groups “willingly” launder sums greater than the $350,000-per-transaction threshold imposed by their Mexican launderer counterparts.

Chinese laundering groups typically charge an overall commission rate to move money from Chicago to Mexico City that ranges from ‘7 percent to 7.5 percent,’ according to DEA intelligence. “The commission charged in Chicago recently increased due to several seizures of bulk currency by law enforcement,” says the report.

Additionally, the report says Chinese brokers based in Mexico, “received between 1.5 percent and 2 percent of the 7 percent to 7.5 percent charged.”  Meanwhile, “some of the Chinese couriers in Chicago earned up to 1 percent of the 7 percent to 7.5 percent charged, if they picked up and delivered the money to the Chinese person who would then continue to launder the money further,” according to DEA investigative reporting.

Better Pricing & Vancouver Models

Mexican Cartels “appear to prefer” Chinese laundering organization over others, “as they reliably expedite the laundering process at a much lower transaction rate than the traditional Mexican money laundering groups” on which cartels have historically relied, the report said.

This assessment of superior pricing offered by Chinese laundering groups generally aligns with views expressed by the DEA’s acting financial investigations section chief, David Olesky, save for one semantic caveat.

Olesky spoke with Shadow Banker last Fall, when our protagonist was writing pure Escama for a crypto-news site that didn’t value his work, and said, “money-broker networks” are a more accurate way to describe these organizations. “They simply provide the pickup of drug dollars in the United States and they pay out pesos in Mexico,” he said.

“What gets challenging for DEA is that those networks of brokers also then resell those dollars” to Chinese nationals seeking to denominate their capital in non-Chinese currency and circumvent Beijing’s strict capital controls, said Olesky, highlighting another dimension to China’s underground banking system.

Therefore, Chinese money brokers are able to profit both “from the drug-trafficking side, but also from reselling the drug dollars,” enabling Chinese nationals to buy U.S. properties, or to pay for their child’s college tuition, he added.  

The threat posed by Chinese underground banking has also sparked a massive scandal in Canada, where it was christened the ‘Vancouver model’ of money laundering by independent investigator and financial crime expert Peter German.

German reported that $5 billion was laundered by Vancouver-based criminal groups through real estate in 2018 alone. A separate report authored by three Canadian university professors conservatively pegged the total amount of money laundered in Vancouver in 2018 at $7.4 billion.

“In the Vancouver Model, Chinese citizens wish to relocate some of their wealth from China to Canada. To do so, they agree to accept cash in Canada from a lender. At that point, a settling of accounts occurs, app to app, between the person making the loan and an underground banker in China. The catch is that the provenance of the cash loaned in Canada is unclear,” writes German in his 2018 “Dirty Money” report.

German also writes that “a complex network of criminal alliances has coalesced” in Vancouver with underground banks at the center. “Money is laundered from Vancouver into and out of China and to other locations, including Mexico and Colombia. Illegal drug networks in North America are supplied by methamphetamines and precursor chemicals from China and cocaine from Latin America,” writes German.

Both Olesky and German concur that the Triads, the historic name for the Chinese mafia, are not clearly or consistently represented in these money-broker networks. But German notes that a modern view is needed to “look at Asian-based organized crime much as we do organized crime elsewhere. It is about alliances focused on generating money.”

Other Methods

Beyond cheaper commissions and underground banking-enabled value transfer, Chinese money brokers also offer bulk currency transfers, cross-border TBML operations, the use of mirror transactions, and mobile money transfer applications, according to the Chicago report.

One TBML conspiracy identified by HSI in the report was observed between February and April of 2019. A Chinese money courier in Chicago muled bulk cash shipments to the owner of a small cellphone repair shop. HSI considers this individual to be a “cell phone broker” and implies that they are of Arab descent.

“The broker then shipped stolen cell phones to businesses in Hong Kong or Dubai that were linked” to the Chinese money-laundering network, says the report. The cellphone repair shop owner received over $200,000 during the three-month period documented by HSI.

As evidenced by a geographic targeting order, renewed in 2015 and issued by the Financial Crimes Enforcement Network against Miami-based electronics exporters, cell phones are commonly cited as goods that pose a heightened risk for money laundering.

The Chicago report also cites intelligence collected by DEA agents in October 2019, highlighting Chinese launderers’ use of mirror transactions to “conduct money transfers from one country to another.” Mirror transactions appear to be the same as the informal hawala, money-broker system that is commonplace in the Middle East.

The laundering cycle here was initiated when a Mexican customer, typically a money broker working on behalf of a Mexican cartel, “called the CMLO associate with a contract. The contract consisted of the amount of money the customer needed to move, and the location. The CMLO associate then reached out to his/her network of contacts to find a courier in the specified location that could conduct the pick-up,” says the report.

The Chinese group then provided their courier with a photograph showing a U.S. dollar bill serial number that the Mexican bagman would have to produce at the drop to confirm their identity, says the report.  “Once the money was picked up and the amount was verified, the CMLO then directed a courier to deliver the same amount of money (minus the commission fee) in Mexico,” according to DEA intelligence.

HSI and DEA reporting also said this same group offered their clients wire-transfer services to Chinese bank accounts domiciled in Mexican branches. In this scenario, Chinese laundering network operative would deposit suspect funds into a U.S. account.

From there, the money was wired to the Chinese bank account in Mexico. Once the money arrived in Mexico, a Chinese courier paid the appropriate cartel in pesos, minus the laundering fee, according to DEA intelligence. At that point, HSI reporting says the Chinese agent in the U.S. confirmed receipt of narco dollars to the Chinese broker in Mexico.

But it’s the distributed nature of these operations that present the real challenge for law enforcement. November 2019 HSI reporting framed Chinese money-broker network structures as “informal and disconnected.”

“The CMLO was made up of brokers in Mexico; CMLO agents who received the bulk cash from the TCO money courier in the United States; businessmen who served as intermediaries between customers conducting mirror financial transfers; and agents who initially received the bulk cash” from cartel money couriers in Chicago, according to the report.

Risk Mitigation

The document also cites a lower risk of interdiction by law enforcement for cartels when they work with Chinese laundering groups, relative to other illicit financiers.

This is primarily due to the fact that Chinese organizations “never physically transport bulk cash across the Southwest border.” Thus, there is a reduced risk of bulk-cash detection by law enforcement at the U.S.-Mexico border.

In general, the rise of Chinese laundering organizations and the transnational money-broker and cyber-enabled alternative methods they employ highlight a decade-long trend observed by the DEA in its 2019 National Drug Threat Assessment: a decline in bulk cash seizures.

“Since 2010, bulk cash seizures have been declining, likely due to the Mexican government imposing strict limits on deposits of physical U.S. banknotes into the Mexican financial system, and a large, global financial institution’s exit from the repatriation market,” notes the NDTA report.

The multinational financial institution not named by the DEA report is HSBC, the largest bank in Hong Kong, which was fined nearly $2 billion in 2012 for a litany of egregious anti-money-laundering violations that spanned years.

A key figure in that case was Zhenli Ye Gon, a wealthy Chinese-Mexican citizen and pharmaceutical executive who is believed by U.S. and Mexican authorities to have laundered tens of millions for the Sinaloa Cartel through gambling and other activity.

In March 2007, the Mexican Government, in a joint operation with the DEA, seized “over $205 million in U.S. dollars, $17 million in Mexican pesos, firearms, and international wire transfer records” at Ye Gon’s mansion in Las Lomas de Chapultapec, according to a 2012 Senate report.

After nine years in U.S. custody, Ye Gon was extradited to Mexico where he is currently serving a sentence related to drug, firearm, and money laundering charges.

Over a Decade in the Game

While the Chicago feds describe the fusion of Mexican cartels and Chinese launderers as some tectonic shift in narco-finance, the Sino-Latin American cartel nexus has been well-established for over a decade, according to ex-DEA and Customs undercover agent Robert Mazur.

Mazur, who infiltrated both the Medellin and Cali cartels as a money launderer in the 80s and 90s, said “it only took the government five years to wake up to this.” Mazur points to the so-called ‘Guangzhou Enterprise’ case, which was punctuated in 2015 with the arrest of three Colombians and international money launderers in Panama, Colombia, and Hawaii.

Despite the unsealing of the indictment in 2015, the alleged conspiracy began in 2004, according to a Department of Justice press release published after the Colombians were captured. The Guangzhou Enterprise was an “international organization of money launderers and drug trafficking organizations” that “conspired to carryout trade-based money laundering activities in China, Colombia, the United States, Spain, Ecuador, Venezuela, and elsewhere,” said the DOJ. 

Over nearly 12 years, the Guangzhou Enterprise laundered at least $5 billion that the DOJ was able to identify.

This group was “led by Colombian nationals based in Guangzhou, China (the Guangzhou Enterprise). The Guangzhou Enterprise laundered money through bank accounts in Hong Kong and China on behalf of drug trafficking organizations in Mexico and Colombia to fund purchases of counterfeit goods in China, which were then shipped to Colombia and elsewhere for resale.”

Mazur, who now teaches seminar classes on money laundering to law enforcement and financial services compliance professionals mused, “maybe one of the FBI or DEA types sat in on one of my presentations during the past 5 years and actually tried to connect the dots.” 

Beyond laundering commissions, Mazur says professional Chinese laundering networks and others “want dollars so they can clear dollar transfers without using methods that come through U.S. jurisdiction.”

Using the underground banking system and other TBML typologies, called ‘Daigou’ there, Chinese gangsters are able to process all of their dollars through CHATS, the interbank payment system in Hong Kong for clearing and settling USD transactions.   

Meanwhile, China appeals to drug cartels for more than its abundant and largely unregulated precursor chemical supply chains. Massive free trade zones, a flourishing counterfeit industry, and opaque frameworks for legal recordkeeping make it an optimal jurisdiction for Mexican and other ethnic drug cartels to operate.

Stemming the Tide of Blood Money in ‘Chiraq’

The Windy City report says that in late 2019, “both DEA Chicago and HSI Chicago observed a decrease in reporting on the use of CMLOs” by Mexican cartels.

“This could be attributed to a reticence by Mexican TCOs to use CMLOs after a number of large-scale law enforcement actions targeting different CMLOs in 2019,” according to the report.

One 2019 operation targeting Chinese laundering groups took place in Oregon last October, with the indictment of three Chinese nationals who laundered an estimated $20 million for Mexican drug traffickers, according to the DOJ press release.

In the future, Chicago feds believe “CMLOs will change how they operate due to these law enforcement operations and will begin operating more clandestinely than before.” But as of now, there has been a decline in the use of Chinese money laundering groups by Mexican cartels in Chicago, says the report.

Ultimately, “DEA Chicago, FBI Chicago, and HSI Chicago assess Chinese money laundering groups will likely improve tradecraft employed to evade law enforcement detection and interdiction of illicit activity over the next six months,” according to the report.

Chinese launderers operating in Chicago “may limit the maximum amount of money they launder in a single transaction and the overall number of transactions processed to reduce law enforcement visibility and risk,” says the report.

The feds also believe their Chinese laundering targets may have “observed the divided structure the U.S. Government relies on to investigate and police money laundering crime and transnational organized crime activity, and may adapt their tradecraft accordingly to take advantage of this structure.”

Regardless, Chinese money brokers may not be the only means that Mexican cartels “use to launder money going forward,” concludes the report.

In fact, a source at Washington DC-based strategic advisory firm Financial Integrity Network-K2 Intelligence, who requested anonymity, said Don Rafa likes to buy up hospitals and sanitize his money there.

And who knows, maybe El Mencho will make an OnlyFans account and start disrupting transaction laundering, just like he disrupted feminine hygiene in the ‘Agave Azul’ caper.

For now, however, Washington needs to map and freeze out the illicit transnational liquidity streams brewing the drug-funded gang violence that has turned Chicago into ‘Chiraq.’