TheChinese Underground Banking Systems (CUBS) traces back to the Tang Dynasty (618-916AD). Over the years, it has evolved into a sophisticated system and is intertwined with organized global crime. Chinese Money Laundering Organizations (CMLO) have established connections with Mexican drug cartels, North Korean state sponsored hackers and Russian' organized crime.

CUBS, which operates in the shadows of the global financial system, have become regular conduits for transnational organized crime. The Chinese term “Fei-Ch’ein” or “Daigou” or ‘flying money’ operates outside traditional banking regulations and beyond the normal scrutiny of law enforcement agencies and the central banks of the country in which they operate. The Chinese Underground Bankers have increasingly turned to crypto currency to facilitate rapid, anonymous cross-border transactions and have built a large illicit financial network in association with North Korean hackers, Mexican drug cartels and Russian crime syndicates which exploit crypto assets to launder dirty money on a global scale.

North Korea’s state-sponsored hackers have stolen billions of dollars in cryptocurrency through exchange hacks and cyber-frauds. Converting those digital assets into money that Pyongyang can use (to fund its weapons programmes) requires a laundering pipeline that circumvents global sanctions.

US authorities have uncovered crypto brokers and financial facilitators to launder stolen crypto currency into legal currency or commodities. The US Treasury Department has estimated that illicit proceeds mainly from the sale of illicit drugs in the USA by cartels based in Mexico is approximately $154 billion. The US Bureau of Economic Analysis has estimated that billions have been spent by Americans on illicit drugs.

The Sinaloa and Jalisco Cartels pose the greatest criminal drug threat the United States has ever faced. These ruthless, violent, criminal organizations have associates, facilitators, and brokers in all 50 states in the United States, as well as in more than 100 countries. The Sinaloa Cartel, the Jalisco Cartel, and their affiliates control most of the fentanyl global supply chain, from manufacture to distribution.

The Sinaloa Cartel reportedly has its presence in 19 of the 32 Mexican states. There are currently more than 26,000 members, associates, facilitators, and brokers affiliated with the Cartel around the world.

The criminal organizations responsible for bringing fentanyl into the US are modern, sophisticated, and extremely violent enterprises that rely on a global supply chain to manufacture, transport, and sell fentanyl, and rely on a global illicit financial network, particularly CUBS to siphon billions of dollars in revenue from those sales.

Investigations into more than 1,100 cases reveal that drug traffickers are using social media platforms to recruit associates, find customers and sell fentanyl and other deadly drugs. They utilize social media applications and encrypted communication platforms, including Facebook, Instagram, TikTok, Snapchat, WhatsApp, Telegram, Signal, Wire, and Wickr.

Chinese underground bankers facilitate laundering of funds of the Mexican and other drug cartels through a mirror exchange system that largely bypasses formal banking altogether. In this arrangement, CMLOs effectively exchange assets with cartel associates to satisfy both parties’ needs while minimizing any actual cross-border movement of funds.

The mirror exchange system:

A Mexican cartel has millions in American dollars in cash from drug sales that it needs to get into Mexico or otherwise in usable form, while wealthy Chinese individuals in China want US dollars outside of their country to evade its stringent currency regulations.

A Chinese underground broker steps in as the intermediary who will buy the cartel’s illicit cash and, in return, provide the equivalent value to their counterpart in Mexico in pesos or other assets, by using funds that the broker already controls in Mexico.

Conversely, the Chinese broker “sells” those US dollars to a Chinese client, who is seeking dollars in the US; that client pays the broker the matching amount in yuan back in China.

A part of the Chinese currency is also used for the purchase of equipment and material required for the manufacture of fentanyl for export to Mexico.

Finally, the cartel’s dollars never physically leave the United States (they end up with the Chinese customer) and the Chinese yuan never leaves China (they stay with the broker), yet value has been transferred; the cartel gets its money in Mexico, and the Chinese investor gets money in the US, all by a swap with no record.

Cryptocurrency adds a modern twist to this mirror exchange system. Instead of relying solely on cash deliveries and commodity shipments to settle accounts, brokers increasingly use crypto as the intermediary value transfer. This innovation now allows for a trustless network.

Earlier, Chinese underground banking brokers relied on trusted associates in each geographical location they served, crypto now allows for a much looser confederation. There is no trust required or even a shared account when crypto currency forms the medium of exchange.

(The writer is former DG, DRI and DG NCB and member CBIC (Retd)