Defunding The Deadly Fentanyl Trade – Analysis


By Nate Sibley*

The fentanyl crisis is not only a public health emergency but also a growing national security threat. Around 20,000 Americans reportedly died from synthetic opioid overdoses in 2010. This number rose steadily to 40,000 in 2019 before surging to 80,000 in 2021. In 2022, US law enforcement seized enough fentanyl to kill every man, woman, and child in the United States.

Beyond the US death toll, the most powerful cartels are rapidly destabilizing Mexico with serious implications for border security.

The ease with which fentanyl can be produced and distributed, relative to other illegal drugs, presents US law enforcement with unprecedented challenges. Unlike cocaine or heroin, cartels produce fentanyl with chemical precursors from China in Mexican laboratories that can be easily disguised or moved. Fentanyl’s potency, some 50 times that of heroin, is such that it can be transported in smaller volumes, making interdiction at the border extremely difficult. A year’s supply of pure fentanyl powder for the entire US market would fit in the beds of two pickup trucks.

Given these obstacles, targeting other aspects of the illegal drug trade—the profit incentives and financial dealings of money launderers, corrupt officials, and complicit professionals who facilitate the cartels—assumes new importance. But these challenges also present a new set of obstacles for US law enforcement.

How Cartels Launder Money Now

For decades, cartels laundered money primarily by smuggling bulk cash across the border or using the Black Market Peso Exchange. The latter involved using drug profits to purchase goods in the United States, shipping them across the border, and then reselling them in Mexico so that cartels received the value in local currency.

But the rise of fentanyl has transformed the illicit financial networks fueling the illegal drug trade. New financial technology, chemical precursors from China, and Chinese money laundering organizations (CMLOs) using ambitious new techniques have also made following the money harder than ever.

In August 2019, the Treasury Department issued a detailed advisory warning US banks about specific types of transactions that might indicate a “red flag” for fentanyl-related money laundering. In addition to traditional bank transfers, the Treasury emphasized the increased use of digital currencies and money services businesses (MSBs). MSBs are a broad category of non-bank financial institutions including everything from currency exchanges to online payment apps. Like banks, they all have anti-money laundering responsibilities under US law.

The Drug Enforcement Administration (DEA) identified CMLOs as playing a key role in laundering drug profits in its 2020 National Drug Threat Assessment. The report notes the common use of front companies, underground banking services for Chinese elites, and “mirror” transactions involving simultaneous transfers in multiple jurisdictions.

DEA Administrator Anne Milgram, testifying before the US Senate in February 2023, also highlighted CMLOs and their use of trade-based money laundering (TBML) and bulk cash movement to facilitate the exchange of foreign currency.

Two recent high-profile cases demonstrate how these elements come together in practice.

Li Xizhi

Li Xizhi’s rise to prominence, which ProPublica recently reported in detail, illustrates the CMLO’s revolutionary process. “At no time in the history of organized crime is there an example where a revenue stream has been taken over like this, and without a shot being fired,” a veteran DEA agent told reporters.

Li’s complicated model used near-simultaneous mirror transactions in the United States, Mexico, and China while engaging new partners to provide a better deal than Colombian money launderers could offer. It also allowed him to largely circumvent the US anti-money laundering regime and avoid triggering “red flags” that might alert US law enforcement to his activities.

Cartel operatives would begin by physically handing over US dollars, in bulk cash, to Li’s operatives in the United States. From bank accounts in Mexico, he would then transfer an equivalent sum in pesos to the cartels, charging a commission of just one or two percent.

Li could offer this service at a low cost because he then “sold” the US dollars to wealthy Chinese who wanted to circumvent China’s strict capital controls and acquire foreign currency. They transferred the equivalent sum, in yuan, to Li’s accounts in China. Li charged a more significant commission at this stage, which is where he began to make a profit.

In the final stage, Li would “sell” the yuan back to Mexicans who needed local currency to buy goods in China (including fentanyl precursor chemicals), again with a heftier commission.

The DEA ultimately caught Li following a major sting operation, and he was sentenced to 15 years’ imprisonment in 2021. He may have been singularly innovative—but his role, and methods, were far from unique.

Gan Xianbing

Gan Xianbing’s scheme was simpler than Li’s but demonstrates how CMLOs can easily circumvent anti-money laundering checks by accessing the Chinese financial system. He was also ultimately ensnared by the DEA and sentenced to 14 years’ imprisonment in 2021.

Gan enlisted the owners of several US cash-driven businesses as accomplices. Representatives of these businesses would meet cartel operatives, with Gan’s courier, to receive US dollars in bulk cash. They would take the cash and, using a burner phone, initiate a transfer within China of the equivalent value from their account to Gan’s. Gan’s courier, also using a burner phone, would then transfer the funds from another of Gan’s accounts in China to accounts in Mexico controlled by the cartels. 

The funds only entered the US financial system, with its rigorous anti-money laundering safeguards, as cash deposited by seemingly unrelated businesses that dealt primarily in cash—arousing little suspicion and proving untraceable to the cartels even if they did. As a senior DEA agent told Reuters, “I can’t emphasize this enough, the involvement of the Chinese has really complicated all of these schemes.”

These and other prosecuted cases are likely the tip of the iceberg but illustrate how integral China is to the US fentanyl trade—not only as the source of chemical precursors but also as a money laundering hub that facilitates and incentivizes those involved. This is why, as US prosecutors observed during Gan’s trial, the new generation of CMLOs has “come to dominate international money laundering markets.”

The Chinese Communist Party’s Role

China agreed, under significant pressure from the United States, to add fentanyl and fentanyl precursors to its list of controlled narcotic drugs in 2019. But Beijing has also ceased what little cooperation there was with US law enforcement amid rising political tensions.

US officials have accused the Chinese Communist Party of, at best, turning a blind eye to the fentanyl crisis—and at worst, tacitly supporting the crisis as a matter of policy in order to weaken the United States. Admiral Craig Faller, former commander of US Southern Command, toldProPublica that the CCP operates “the world’s largest and most sophisticated state security apparatus. So there’s no doubt that they have the ability to stop things if they want to. They don’t have any desire to stop this.” Corruption and cronyism remain rife within the CCP, and officials with ties to organized crime may even profit directly from bribes or kickbacks.

Fundamentally, the CCP’s domestic misgovernance creates demand for US dollars among Chinese elites. This demand has pushed Chinese brokers to seek an illicit supply—one that Mexican cartels with mountains of dirty cash to launder can meet.

This demand for US dollars may seem strange given the current tensions between the United States and China. But it stems from rising dissatisfaction with CCP policies such as Zero-COVID, the tech and business crackdowns, and strict capital controls that have made many elites desperate to escape Xi Jinping’s increasingly autocratic rule.

The number of wealthy Chinese fleeing to other countries—notably Singapore—has surged since China’s draconian COVID-19 lockdown ended. Their mass-migration creates ever more illicit demand for the most secure, valuable, and widely accepted global currency.

The financial bridge CMLOs have created between Chinese elites and Mexican cartels has also resulted in a growing nexus between drug trafficking and the illegal wildlife trade. There is enormous demand for rare wildlife products in China, making them not only a valuable form of payment for CMLOs but also a convenient way of circumventing anti-money laundering checks in Mexico’s financial system. 

This trade has not gone unnoticed. In March 2023, the Convention on International Trade in Endangered Species sanctioned Mexico for failing to protect wildlife from growing predation, effectively suspending its ability to legally trade wildlife products with 184 signatory countries.

Policy Recommendations

The United States needs a stronger approach to detecting, disrupting, and dismantling the illicit financial networks fueling the fentanyl crisis. This change can come from stronger oversight of the routinely exploited areas of the US financial system, new financial transparency tools to assist law enforcement and the private sector, and more robust action against those responsible for perpetuating this deadly trade.

The measures below will probably not, in themselves, be enough to stop the cartels and their CMLO partners. But raising the costs of money laundering can increase the pressure on cartel operations and put a dent in their profits. It could even drive out the growing number of smaller criminal enterprises altogether, freeing up resources so that law enforcement can focus on the major players.

1. Pressure the Chinese Communist Party.

The United States can do much more to hold the CCP accountable for its role in fueling the fentanyl trade—not only for its refusal to cooperate with US law enforcement but also for its failure to crack down internally on precursor manufacturers, CMLOs, and banks and MSBs with deficient anti-money laundering systems.

When discussing the causes of the fentanyl crisis, US officials could be far more forthright than they have been about the CCP’s culpability. But while doing so, they should seek to build a stronger international coalition. Europol stated in 2019 that CMLOs “present a growing threat to Europe.” In Italy alone, anti-mafia officials have launched at least six investigations into Chinese brokers using payment apps to avoid anti-money laundering checks. This model may have been pioneered in the United States, but it will also transform the illegal drugs trade in other regions if left unchecked. Transnational threats can only be defeated by international cooperation.

However, the United States should also be prepared to take serious steps unilaterally if necessary. Imposing sanctions on implicated Chinese officials, companies, and criminal organizations may initially be only symbolic, as they may not have significant assets outside China. But if the CCP refuses to change course, the US can incrementally expand sanctions to target entire cities or regions identified as centers for production and money laundering.

Even powerful sanctions rarely change the course of an ideologically determined adversary. But faced with mounting economic consequences amid broader tensions, the CCP may conclude that further antagonizing the United States over this particular issue is not worth the trouble.

2. Target corrupt Mexican officials.

The United States and Mexico both stand to benefit from enhanced cooperation against the cartels, which have killed or “disappeared” tens of thousands of Mexicans and have increasingly threatened the Mexican government’s control over swathes of its territory.

Unfortunately, President Andrés Manuel López Obrador has shown little of his predecessor’s willingness to confront the cartels. His hands-off approach to enforcement, adopted in the hope that reducing pressure on the cartels would induce them to become less violent, has simply permitted their unopposed expansion. Obrador has instead blamed this situation on US demand for illegal drugs—a claim that is demonstrably false in the case of fentanyl.

The enduring systemic obstacle to collaboration, however, is the cartels’ pervasive corruption of the Mexican government and bureaucracy. This problem means US officials have trouble trusting or working with their counterparts, even under a willing Mexican administration. While emphasizing the benefits of cooperation through diplomatic channels is important, should Mexico’s leaders continue to prove unwilling to act, US policymakers can consider more aggressively indicting or sanctioning compromised Mexican officials.

3. Designate the cartels as foreign terrorist organizations.

Besides the much more serious debate over authorizing US military force against the cartels, designating them as foreign terrorist organizations would allow the US to bring criminal charges against corrupt Mexican officials and others providing them with “material support.” Again, this move would give US law enforcement a powerful new tool to deter and prosecute those who facilitate the financial networks underpinning the fentanyl trade.

4. Strengthen the supervision of payment apps.

The cases of Li Xizhi and Gan Xianbing showed how Chinese mobile payment apps are often the key facilitators of mirror schemes in which cartel profits are laundered between the United States, China, and Mexico—all at the click of a button on a burner phone.

Payment apps operating within the United States are required to register as MSBs with the Financial Crimes Enforcement Network (FinCEN) at the Treasury Department. This obligates them to maintain an anti-money laundering compliance program and file suspicious activity reports (SARs) with FinCEN if they identify clients or transactions that may indicate criminal activity.

Unlike banks, the 23,460 MSBs registered with FinCEN are not inspected for anti-money laundering compliance by what is known as a “single federal functional regulator.” (In most cases, FinCEN effectively delegates this task to the Office of the Comptroller of the Currency.) Instead, state regulators inspect MSBs for compliance. This process obviously leaves more room for discrepancies in approach and enforcement.

The administration can take steps to ensure that Chinese-owned payment apps operating in the United States fulfill their anti-money laundering obligations. Congress can also contact these companies or their US partners to request more information, or even require FinCEN to provide details of whether they are filing SARs effectively.

It is worth noting that in 2021 President Donald Trump attempted to prohibit transactions with Chinese tech firms that included the owners of WeChat and AliPay, the two most prominent payment apps, citing data protection and privacy concerns. But the ban faced legal challenges, and President Joe Biden rescinded the measure before it came into effect.

5. Target jurisdictions and banks facilitating money laundering.

Under Section 311 of the 2001 USA PATRIOT Act, the Treasury Department can identify foreign banks, companies, or even entire countries as “primary money laundering concerns.” It can then take steps that range from requiring US banks to undertake enhanced record-keeping, to cutting the entity off entirely from access to the US dollar—what is sometimes known as the financial “death sentence.”

The Biden administration has not used this authority, and it should be deployed sparingly to avoid damaging confidence in the US dollar. But judicious use against the most egregious facilitators of cartel money laundering—whether in China, Mexico, or elsewhere—would send a clear message to foreign governments, banks, and other participants that complicity carries potentially catastrophic financial consequences.

Section 311 was designed for a different era when traditional banks dominated the financial system. While it is still a potent weapon in the Treasury Department’s arsenal, Congress could update the legislation to reflect the rise of new technology and services—the prolific use of payment apps being a good example.

6. Empower law enforcement to follow the money.

Analyses of the US anti-money laundering regime consistently identify three major weaknesses: the ability to incorporate shell companies anonymously, the relatively narrow scope of “financial institutions” required to report suspicious transactions, and opacity in real estate ownership.

To address the widespread abuse of US shell companies for money laundering, Congress passed the bipartisan Corporate Transparency Act (CTA) in 2021. This mandates the creation of a beneficial ownership register, administered by FinCEN and accessible to law enforcement and financial institutions for criminal investigations and customer due diligence respectively. However, FinCEN has yet to implement the CTA, and its proposed plans currently fall short of Congress’ intentions. A robust beneficial ownership register is a critical and long-overdue measure to prevent abuse of the US financial system.

Being focused on shell companies, the CTA did not address the problem of front companies outwardly engaged in legitimate business activities. Congress could address this by amending the CTA to require beneficial ownership disclosure by all US companies, as is the case in the European Union and elsewhere.

US anti-money laundering laws and regulations currently impose rigorous requirements on US banks, but they do not cover other sectors that can also handle client funds. So CMLOs and others can easily circumvent anti-money laundering safeguards altogether.

By extending regulations to include legal firms, investment funds, real estate professionals, and other high-risk sectors, Congress could enable FinCEN to capture a far broader snapshot of the money laundering ecosystem than is currently possible.

7. Tackle Trade-Based Money Laundering

CMLOs and other cartel brokers continue to rely on trade-based money laundering (TBML). This refers to a wide range of schemes involving the misrepresentation of the price, quantity or quality of exports and imports in order to transfer value across borders without engaging the financial sector’s anti-money laundering systems.

A Government Accountability Office study on TBML recommended that the administration establish an inter-agency taskforce to facilitate information sharing between relevant departments and agencies, as well as studying new approaches to this complicated problem. For example, Senator Bill Cassidy has suggested that public distributed ledger technology could help law enforcement and the private sector to detect irregularities in shipping manifest and financial information in real-time. Congress could also assist by authorizing streamlined information sharing between law enforcement agencies.

8. Fortify asset forfeiture.

When a defendant is convicted of a financial crime, US courts can order the confiscation of any assets up to the value of any criminal profit. However, civil asset forfeiture proceedings take place against assets themselves that are believed to represent proceeds of crime.

This tool has provided US law enforcement with a powerful means of confiscating bulk cash carried by cartel couriers. But it also allows for the seizure of mansions, supercars, and other luxury assets owned by high-level fentanyl traffickers within the United States.

Seizing the assets of someone who has not been convicted of a crime obviously does not sit comfortably with civil liberties concerns. Furthermore, the administrative process used in many drug trafficking cases has faced several criticisms—it lacks judicial oversight, is prone to abuse by unscrupulous officers, and is plagued by unacceptable delays for innocent people seeking the return of their seized assets.

By introducing safeguards against these problems, Congress could restore confidence in the broader civil forfeiture regime and safeguard this crucial tool in the fight against fentanyl trafficking. Confiscated funds could then be earmarked for addiction treatment and mental healthcare programs.

*About the author: Nate Sibley is a Research Fellow at the Hudson Institute

Source: This article was published by the Hudson Institute

Hudson Institute

Hudson Institute is a nonpartisan policy research organization dedicated to innovative research and analysis that promotes global security, prosperity, and freedom.

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