How China came to dominate the black market for money laundering

When Rosario D’Onofrio strolled into Milan’s colourful Chinatown quarter in March 2020, he was allegedly carrying €180,000 in cash.

The Italian football referee, who has been accused of moonlighting as a drug trafficker known as “Rambo”, was there to meet a Chinese money launderer who could help him pay suppliers in Spain for a shipment of hashish, prosecutors claim.

Once the money was handed over, it didn’t go abroad. Instead, all D’Onofrio’s contact had to do was send a text message to an associate in Spain, who was told to pay the same amount to the supplier there.

This effective transfer – known as a “mirror transaction” – left no direct trail for police to follow. D’Onofrio only paid the Chinese launderer €2,700 euros, a commission of just 1.5pc.

The March 2020 incident, revealed by Italian anti-mafia prosecutors, is an example of a growing problem for authorities in Europe, North America and Latin America as criminal gangs increasingly tap into a vast network of Chinese fixers to clean their dirty cash. 

(D’Onofrio was arrested by Italian police last November. His lawyer declined to comment to Reuters on the case last month.)

The influence of China over the money laundering industry looms so large that some experts believe Chinese-controlled entities and individuals are now responsible for as much as half of the industry.

Even Mexican and Colombian drug cartels, who previously kept such activities “in house”, are now using Chinese launderers to service their empires, US lawmakers heard last month.

In the UK, meanwhile, the National Crime Agency (NCA) has warned that some Chinese students have become “mules” for gangs moving illicit cash in and out of the country.

China and its citizens have emerged as a major fixer in the global flow of dark money by moving to fill a market gap left by a crackdown on other methods of cleaning cash.

“Criminals will always adapt, in the same way governments do,” says Maria Nizzero, a financial crime researcher at the Royal United Services Institute (RUSI).

Money laundering is what keeps the wheels of organised crime turning. Without it, criminals cannot easily spend their illicit gains.

By definition, the practice is fiendishly difficult to detect. Most experts assume the equivalent of 2pc to 5pc of global GDP is laundered each year, or $2 to $5 trillion, according to the World Bank.

Much of this is linked to the drugs trade. Mexican and Colombian cartels have long relied on the black market peso exchange and bulk cash smuggling for their needs.

However, this has become harder after Mexico restricted US dollar bank deposits to $4,000 a month and Colombia imposed strict new anti-laundering laws, forcing the cartels to find new avenues.

Increasingly, criminals in Latin America are turning to Chinese gangs, who offer near-instantaneous money transfers for rock-bottom fees. Where other brokers charge 10pc to 15pc commission, the Chinese may charge up to 6pc and sometimes nothing at all.

Fees are lower because these groups see drug money as a side hustle. Their main profits come from helping Chinese politicians and elites get their money offshore, away from the prying eyes of Beijing. 

Under China’s currency controls, people cannot send the equivalent of more than $50,000 abroad per year. As a result, elites who wish to spend freely abroad may struggle to source cash. The dollars amassed by cartels in the US offer a useful liquidity pool.

“It’s a symbiotic relationship,” explains Channing Mavrellis, director of illicit trade at Global Financial Integrity, a Washington-based think tank. “The Chinese and the cartels each have what the other wants.”

To move money internationally, the launderers rely on age-old techniques such as trade-based money laundering (TBML), according to John Cassara, who served as an intelligence officer for the CIA and as a special agent at the US Treasury.

TBML involves over or under charging for shipments of everything from watches and gold to cheap widgets, effectively settling debts with the value of other goods.

The scope for TBML has only become larger as Chinese trade with the world has boomed. Customs policing is also relatively light-tough when compared to banking regulation.

“I think people are only just starting to understand the magnitude of Chinese transnational crime,” Cassara says. “These are systems that have been around for a long time, but which effectively bypass our anti-money laundering countermeasures.”

Another of the most distinctive techniques used by Chinese gangs is fei-chien, or “flying money”.

A kind of underground banking, it relies on trusted bonds between family, friends and business partners and has long been used, legitimately, by millions of Chinese labourers to send wages home when working abroad.

“The recordkeeping procedures of the underground banking system are nearly nonexistent, with coded messages, “chits,” and telephone calls used to transfer money from one country to another,” according to the US Justice Department.

This system is open to abuse, with gang-affiliated brokers offering services to cartels, labourers and wealthy clients alike.

Nate Sibley, a research fellow at the Hudson Institute in Washington, says criminal proceeds in the US are often washed by gang-controlled Chinese businesses that are cash-generative, such as restaurants, casinos and dry cleaners.

This means the cash is easily disguised and can be deposited in legitimate bank accounts with minimal suspicion.

“Many of these businesses are hard-working Chinese Americans but the gangs exploit them,” Sibley points out.

Once the dollars are safely in a bank account, the launderers can sell them to a Chinese elite, or buy property and pay college tuition fees on their behalf. In exchange, the elite sends the corresponding amount of renminbi – plus a fee – from their Chinese bank account to the gang’s account in China. No money leaves either the US or China.

A 2019 report by the NCA found things work similarly in the UK, where gang operatives duped Chinese students into helping by telling them they needed to use their bank account on behalf of a fellow student or unbanked Chinese worker who wanted to send money home.

Some students knowingly help and – for a fee – collect criminal cash and distribute it into “mule” accounts. In one case, a gang gained control over 600 mule accounts at a single bank, the NCA said.

Many of those who play along are on short visas and run a low risk of being caught, says Laurence Howland, a former investigator at HM Revenue and Customs who worked as a UK government liaison in China and is now director of compliance at Buckles Solicitors.

“It is a major problem,” he adds, “and as Chinese business opportunities grow internationally, the opportunities for criminals to move money do as well.”

Most western experts agree that more specialist resources are needed to tackle the problem, as well as cooperation from the Chinese government, which often provides only minimal support.

With so many transactions – many of them brokered on platforms such as WeChat and Alipay – Global Financial Integrity’s Mavrellis says it is not clear whether Chinese authorities could easily thwart the gangs.

But Cassara claims Beijing cannot be ignorant of what is happening. He refers collectively to the Chinese criminal networks as “Chinese Communist Party Incorporated”.

“The government cracks down very efficiently on websites and social media that they judge is a threat against the CCP regime. They could crack down on this too if they want to.”

China insists it “has never been, is not, and will never become a global hub for money laundering”.