July 3, 2024 | Policy Brief

Treasury Highlights Role of Chinese Underground Banking in U.S. Fentanyl Crisis

July 3, 2024 | Policy Brief

Treasury Highlights Role of Chinese Underground Banking in U.S. Fentanyl Crisis

The Treasury Department sanctioned key money launderers on Monday linked to Mexico’s Sinaloa Cartel, targeting a growing national security concern: China’s underground banking network. This action, in conjunction with recent Department of Justice (DOJ) indictments of the sanctioned individuals, underscores the critical role of illicit financial flows in fueling the U.S. fentanyl crisis, which is the leading cause of death for Americans ages 18-45.

The sanctions target Diego Acosta Ovalle in Mexico and Tong Peiji and He Jiaxuan in China, whose money laundering scheme processed more than $50 million in drug proceeds from October 2019 to October 2023. While Ovalle hid and transferred drug trafficking proceeds for the Sinaloa Cartel, Peiji and Jiaxuan laundered the funds through complex methods, including by using cryptocurrencies.

Chinese money laundering organizations (CMLOs) have emerged as crucial facilitators for drug trafficking organizations, which operate cash-intensive businesses inside the United States and need assistance to move those profits to Mexico. According to the Treasury Department’s 2024 National Money Laundering Risk Assessment, CMLOs “are now one of the key actors laundering money professionally in the United States and around the globe.”

The CMLOs streamline the repatriation of drug proceeds into the Western financial system and assist wealthy Chinese nationals in evading capital flight laws. These underground banking networks include illegal money exchange businesses run primarily by Chinese nationals in the United States, processing large amounts of cash for minimal fees. CMLOs routinely employ encrypted communications and informal value transfer systems, making it difficult for law enforcement to trace and ultimately interdict illicit drug money.

Further complicating matters is China’s support for the flow of fentanyl to the United States. The House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party (CCP) recently revealed how the CCP offers tax incentives for the production of outbound fentanyl precursor chemicals and facilitates dealings that ultimately benefit Mexican drug trafficking organizations.

President Biden and China’s Xi Jinping announced in November 2023 a resumption of bilateral cooperation on the fentanyl issue, including targeting illicit finance networks. However, the combined Treasury and DOJ action suggests that Beijing still refuses to stop the Chinese underground banking network that facilitates the flow of fentanyl into the United States and kills thousands of Americans.

To effectively address this issue, the United States must build strong, cooperative relationships with international partners, particularly in countries like Mexico. This involves enhancing intelligence sharing and coordinated enforcement actions as well as building capacity in jurisdictions with less robust financial regulatory frameworks.

However, the most significant threat is the CCP’s lack of enforcement against, and support for, networks facilitating the illicit financial flows fueling the proliferation of fentanyl into the United States. As such, Washington should more aggressively wield its sanctions authorities by identifying CCP-enabled activity and targeting its enablers. Moreover, financial institutions worldwide must implement stringent anti-money laundering protocols to address this gap in enforcement.

This profoundly challenging problem requires sustained and concerted efforts to safeguard both public health and national security. Washington should recognize that Beijing certainly has the ability to take stronger action: After all, if China’s underground banking networks were aiding Uyghurs in Xinjiang or supporting Taiwan’s independence, the CCP would swiftly shut them down and prevent them from ever reconstituting.

Max Meizlish is a senior research analyst for the Center on Economic and Financial Power (CEFP) at the Foundation for Defense of Democracies (FDD). Anthony Ruggiero is a senior adjunct fellow at FDD and served as the National Security Council’s senior director for counterproliferation and biodefense in the Trump administration. For more analysis from FDD, please subscribe HERE. Follow Max and Anthony on X @maxmeizlish and @NatSecAnthony. Follow FDD on X @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.


China Sanctions and Illicit Finance