Special Report: Burner phones and banking apps: Meet the Chinese 'brokers' laundering

Special Report: Burner phones and banking apps: Meet the Chinese 'brokers' laundering Mexican drug money




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FILE PHOTO: A soldier holds up a seized grenade launcher after an operation at the village of Guayabal





Drazen JorgicThu, December 3, 2020, 7:06 AM EST



By Drazen Jorgic

GUADALAJARA (Reuters) - Early next year, a Chinese businessman named Gan Xianbing will be sentenced in a Chicago courtroom for laundering just over $530,000 in Mexican cartel drug money.
Gan, 50, was convicted in February of money laundering and operating an unlicensed money-transfer business that whisked cartel cash from U.S. drug sales offshore. Gan has maintained his innocence; his lawyers say he was entrapped by U.S. authorities. The trial garnered few headlines and little of the public fascination reserved for kingpins of powerful narcotics syndicates that U.S. federal prosecutors said Gan served.

Still, U.S. law enforcement officials told Reuters that Chinese "money brokers" such as Gan represent one of the most worrisome new threats in their war on drugs. They say small cells of Chinese criminals have upended the way narcotics cash is laundered and are displacing the Mexican and Colombian money men that have long dominated the trade.

Virtually unheard of a decade ago, these Chinese players are moving vast sums quickly and quietly, authorities said. Their expertise: routing cartel drug profits from the United States to China then on to Mexico with a few clicks of a burner phone and Chinese banking apps – and without the bulky cash ever crossing borders. The launderers pay small Chinese-owned businesses in the United States and Mexico to help them move the funds. Most contact with the banking system happens in China, a veritable black hole for U.S. and Mexican authorities.

Chinese money brokers based in Mexico "have come to dominate international money laundering markets," U.S. prosecutors said in a Sept. 24 sentencing memorandum for Gan's case.

Reuters spoke to more than a dozen law enforcement officials, diplomats, lawyers and sources familiar with the Gan case or Chinese money laundering techniques. The news organization also examined more than 1,500 pages of documents from the trial. The material included previously unreported details about how the ring operated compiled by prosecutors and agents of Homeland Security Investigations, the investigative arm of the U.S. Department of Homeland Security that led the probe.

What emerged was a blueprint showing how some groups of Chinese money brokers have become key cogs in the multi-billion-dollar drug empires run by Latin American cartels. The Chinese role presents a formidable challenge for U.S. anti-narcotics efforts at a time of rising tensions between Beijing and Washington.

Gan, who U.S. prosecutors said operated a tight ring with another Chinese money broker, was apprehended in November 2018 by Homeland Security Investigations agents at Los Angeles International Airport on his way to Mexico from Hong Kong. The U.S. government said that Gan had moved anywhere from $25 million to $65 million in illicit drug proceeds from 2016 to the time of his arrest, according to a September court filing by Gan's attorneys.

Based in Guadalajara, the ring is believed to have worked with multiple syndicates, including the famed Sinaloa Cartel that was previously led by jailed Mexican drug lord Joaquin "El Chapo" Guzman, according to two U.S.-based sources familiar with the investigation.

The U.S. Department of the Treasury and Europol, the European Union's law enforcement arm, have warned about the expanding web of Chinese crime groups laundering drug money. Europol in November 2019 said these groups present a "growing threat to Europe," while the U.S. Treasury in February placed Chinese professional money laundering networks on its list of "key threats" and vulnerabilities within the U.S. financial system.

U.S. law enforcement has stepped up operations against these groups. In addition to the Gan case in Illinois, federal prosecutors have brought charges in Virginia and Oregon against alleged members of at least two other Chinese money laundering rings since October of last year. Those cases are pending.

Still, a senior U.S. Drug Enforcement Administration (DEA) agent said U.S. efforts to nail Latin American drug capos by following the money have gotten much more difficult.

"I can't emphasize this enough, the involvement of the Chinese has really complicated all of these schemes," the DEA official said.

Gan, who declined to testify in court, pleaded not guilty to three counts of money laundering, one count of conspiracy to launder money and one count of operating an unlicensed money transmitting business. He was acquitted on the conspiracy charge. Reuters did not receive a reply to requests for comment from Gan sent to his legal team.

His lawyers, in a September sentencing plea document, said Gan was not the mastermind of the operation, rather a seafood exporter who was duped into letting his bank account in China be used to launder money by another Mexico-based Chinese national named Pan Haiping. Glenn Seiden, Gan's lawyer, declined to speak with Reuters or answer questions about Gan's case.

Attorney Aaron Schwartz, who was part of the defense team, said he wanted to make it clear that Gan did not cooperate with the U.S. government because his client feared for the safety of his family in Guadalajara, where the powerful Jalisco New Generation cartel holds sway. Gan's lawyers also allege Gan was entrapped in a sting operation by Homeland Security Investigations agents working with an informant who helped arrange the transactions that resulted in their client's conviction. The agency said it does not comment on ongoing investigations.

Pan Haiping, Gan's alleged associate, was detained earlier this year in Mexico on accusations of money laundering and is awaiting extradition to the United States, according to the two U.S. sources familiar with the investigation and a senior Mexican federal police source. Pan Haiping could not be reached for comment. The Mexican prosecutor's office declined to comment on Pan Haiping's case or provide the name of his legal counsel in Mexico, saying it cannot comment on ongoing cases.

In a March 2019 U.S. indictment unsealed a few weeks ago, Pan Haiping was charged with laundering almost $500,000 for Mexican cartels; running an illegal money transmitting business in Illinois; and conspiring to launder money using bank accounts in China, including an account belonging to Gan.
Another alleged conspirator, Long Huanxin, was arrested in February at Vancouver International Airport by Canadian law enforcement acting on a warrant from U.S. authorities, according to Canadian court transcripts from Long's detention hearing. Long was extradited to the United States, and last month he pleaded not guilty in Chicago to charges of money laundering for Mexican cartels, U.S. court documents show. Long's lawyer did not respond to a request for comment.

U.S.-CHINA TENSIONS

U.S officials informally sought assistance from China in the Gan case but received no support in their investigation, according to the two U.S. sources familiar with the probe.

China's Foreign Ministry disputed their account. The ministry told Reuters in late October that it did not receive a request from U.S. authorities for help on that case. China stands ready to cooperate with the United States to "destroy drug cartels and drug-related money-laundering networks," the ministry said in a statement. But it stressed the need for the two countries to work on the "principle of respecting each other's laws, equality and mutual benefit," the statement said.

The ministry said most Chinese bank-account holders about whom Washington has inquired as part of its money laundering investigations in recent years were "legitimate enterprises and individuals" in China. "After we asked the U.S. side to provide drug-related clues or evidence of enterprises and individuals, the U.S. side has not responded," China's Foreign Ministry said in the statement.

Without help from Beijing to track money flows in China and to infiltrate the laundering networks, U.S. agents say they face an uphill struggle to catch culprits.

"It's the most sophisticated form of money laundering that's ever existed," one of the U.S. sources familiar with the investigation said.

BURNER PHONES AND DOLLAR BILLS

Key to cracking the case was Lim Seok Pheng, a New York-based member of the ring who became a cooperating witness for the U.S. government following her May 2018 arrest on suspicion of money laundering.

A Singapore national, Lim said at Gan's trial that she once peddled footwear and had first met Gan in China where he ran a shoe factory before he relocated to Guadalajara in 2011. Lim testified that Gan recruited her to join the illicit operation in 2016 and that she became lovers with the other alleged ringleader, Pan Haiping.

Following her arrest at New York's John F. Kennedy International Airport, Lim agreed to wear a recording device to help authorities gather evidence against Gan and the other alleged conspirators. She also brought undercover Homeland Security Investigations agents into the operation as money couriers on three separate cash pick-ups in Chicago that led to Gan's conviction, according to the trial testimony of Lim and the agents.

Lim pleaded guilty to money laundering charges in November 2019 and is out on bail, awaiting sentencing.

She and her attorney declined to comment.

The only thing tougher than moving illegal drugs across borders is getting the profits back to Mexico's cartels, U.S. officials said. Cash is heavy, and transporting it exposes traffickers to lots of risk. Putting it into the banking system is perilous, too. The U.S. and Mexican financial systems have been geared to detect dirty money.

Prosecutors told the court that Gan and his accomplices sidestepped these obstacles by first moving the U.S. cash offshore to China, then on to Mexico. Lim was a linchpin connecting both sides of the Pacific. In her November 2019 plea agreement, Lim admitted to laundering, with Gan and Pan Haiping, about $48 million in drug cash between 2016 and September 2017. She took a 0.5% commission, the agreement said.

Lim testified at Gan's trial that she had two jobs. The first was collecting drug money in U.S. cities such as Chicago and New York from cartel contacts, typically anywhere from $150,000 to $1 million at a time. She would wait in a public place, armed with a burner phone, a code name and the serial number of an authentic $1 bill. Mexican cartels would pass on her details to their dealer contacts, who would call Lim's burner phone and use the code name to identify themselves. At the rendezvous point, Lim would give them the $1 bill with the corresponding serial number as a "receipt" to verify the handoff had taken place, Lim said at trial.

Lim's other job was recruiting businesses in the Chinese diaspora to help them make that cash disappear, Lim and prosecutors said.

Some U.S.-based Chinese merchants have long engaged in off-the-books currency "swaps" to avoid hefty bank fees. Such transactions are illegal in the United States, American authorities said, if they are used by companies routinely to skirt the formal banking system or to operate an unauthorized money transfer business. In some cases these informal, hawala-style transactions are used to help wealthy Chinese move money clandestinely out of China, in violation of that nation's currency controls.

The operation run by Gan and Pan Haiping grew to include at least three Chinese merchants in New York, who were paid commissions to participate, Lim told the court. The names of the Chinese merchants were not revealed at Gan's trial, and it's unclear if they knew of Lim's links to drug trafficking.

Prosecutors at trial presented testimony, evidence and graphics showing how the transactions worked. At their simplest, authorities said, that process worked as follows: Lim would arrive at one of the merchants with, say, $150,000 in cartel cash. With the businessperson observing, she would open a currency converter app on her smartphone to obtain the exchange rate between the U.S. dollar and the Chinese yuan. She would also hand over the details of a bank account in China given to her by Gan. In what's known as a "mirror transaction," the Chinese businessperson would take possession of the $150,000 in U.S. currency while simultaneously transferring the equivalent in Chinese yuan from their own account in China to the bank account number provided by Gan.

The result was that a foreign transfer of funds had been made without involving a U.S financial institution - or the accompanying digital fingerprints. The Chinese business had effectively used yuan from its China-based bank account to purchase cash dollars now on hand in the United States; it earned a commission for its trouble while avoiding bank fees and U.S. government scrutiny.

Meanwhile, Gan had converted U.S. drug dollars into Chinese currency now sitting in a Chinese bank. The only contact with the financial system – a domestic transfer between two accounts in China – would be unlikely to raise red flags with Chinese banking authorities unaware of the money's provenance.

The crime ring used various Chinese banks for the operations, including the Bank of China, according to WhatsApp messages exchanged between Gan and Pan Haiping. The messages were extracted from Gan's iPhone by Homeland Security Investigations agents after his arrest, and key excerpts were read out aloud by prosecutors at trial, according to court transcripts.

Bank of China did not respond to requests for comment.

To get the money from China to Mexico, Gan performed the same sort of mirror transactions, only this time with the help of Chinese businesses who had access to pesos in Mexico. This leg of the journey was described by the two U.S. sources familiar with the investigation and is outlined in court documents, including the U.S. government's September 2020 sentencing memorandum for Gan and the June 2019 superseding indictment detailing charges against him.

U.S. prosecutors said the laundered money was delivered to Pan Haiping's Mexican drug cartel clients, according to the superseding indictment. No Mexican banks were named in any of the court documents reviewed by Reuters.

OPPORTUNITY IN MEXICO

In October, Reuters traveled to Guadalajara and found Gan's wife, Pan Emi (no relation to Pan Haiping), working in a busy store she owns in the city's Chinese quarter selling wigs, plastic jewelry, sunglasses and other low-cost merchandise imported from China.

Manning the cash register, Pan Emi said her husband was innocent of wrongdoing and being unfairly portrayed by authorities as a criminal when he was nothing more than a plucky businessman. She said no Mexican or U.S. law enforcement agents had contacted her about the case.

She said Gan, fed up with high Chinese taxes, had left his shoe factory in the Chinese city of Wenzhou nearly a decade ago seeking a better life in Mexico. In Guadalajara, she said, Gan co-founded a business exporting jellyfish, which are considered a delicacy and an aphrodisiac in China. Pan Emi said her "super friendly" husband built a large network of friends and contacts in Mexico and was always on the phone.

Pan Emi confirmed some details of the case. She said her husband knew Pan Haiping and Lim and had participated in currency swaps with other Chinese merchants. But she denied Gan was involved with traffickers or knew anything about drug money.

She said currency swaps were common in the expatriate Chinese business community to avoid pricey fees and lousy exchange rates offered by banks.

"These swaps that we do with each other are easy. It's no big problem," Pan Emi said. "I don't think it's illegal."

Money brokers like Gan and Pan Haiping are growing in number among the large Chinese diasporas in the United States, Europe and Latin America, according to three DEA officials.

Demand for their services is being driven by affluent Chinese looking to evade China's currency controls and move wealth abroad, the DEA officials told Reuters. Beijing limits the amount of money its citizens can transfer out of China to the equivalent of $50,000 U.S. dollars annually.

Latin American cartels, flush with dollars and euros from drug sales, are uniquely placed to satisfy the Chinese appetite for hard currencies. Some Chinese expatriates located in drug-producing countries such as Mexico, Colombia and Peru are the intermediaries bridging these disparate sets of people, said Donald Im, a senior DEA agent and anti-money laundering specialist.

"When there is need by the cartels for cash to be laundered, and there is demand for cash from the Chinese, you have a perfect marriage made in heaven," Im told Reuters. "The Chinese brokers are very important to the Mexican and Colombian cartels."

In the case of Gan, it was a lucrative business, according to conversations between his alleged associates taped by Homeland Security Investigations agents. "He has made $1 million already because of us, for real," Pan Haiping told Lim in August 2017, according to transcripts of intercepted phone communications presented at Gan's trial.

Chinese money launderers are squeezing out Mexican and Colombian rivals by undercutting them on price by as much as half, U.S. officials said. The Chinese operators have been able to do that because they levy fees on both sides of each transaction. They impose fat commissions as high as 10% on Chinese citizens eager to get money out of China. That allows the Chinese money brokers, in turn, to charge traffickers nominal fees of just a few percentage points. The money launderers still turn a handsome profit while locking in a steady supply of coveted dollars and euros from cartel customers.
DEA agent Im said the Chinese expats had the "systems and the infrastructure" in place not only to launder the drug proceeds but to do it so cheaply that drug cartels receive back "almost 100%" of their dirty money.

Chinese money brokers have also managed to avoid choosing sides in Mexico's cartel wars, even coordinating money contracts with both the Sinaloa and Jalisco New Generation cartels on the same day, according to a second senior DEA agent, who spoke on condition of anonymity.

Traffickers use other so-called trade-based money laundering schemes to move drug money from China to Mexico, according to the DEA and Mexican government officials who spoke with Reuters. In July, Mexico's Financial Intelligence Unit, an investigative agency, said publicly that Chinese nationals laundering money for the Jalisco New Generation cartel were using drug proceeds to buy shoes in bulk from China, then reselling them in Mexico to get the gang their cash.

Chinese exports to Mexico, including electronics, clothing and other consumer goods, have nearly doubled over the past decade to $83 billion in 2019. The surge has allowed drug cartels and their money launderers to piggyback on this burgeoning trade relationship, authorities said.

In Guadalajara, Pan Emi said e-mail exchanges with her husband's U.S. lawyers left her optimistic ahead of Gan's looming sentencing. Prosecutors have asked for a 20-year jail term; Gan's defense attorneys have argued for no more than two years.

Pan Emi said business was going well in Mexico and she had no desire to return to China. "I hope my husband comes back," she said.

(Reporting by Drazen Jorgic; Additional reporting by Diego Ore, Lizbeth Diaz, Abraham Gonzalez and Frank Jack Daniel in Mexico City; Julia Love in New York; Reuters reporters in Beijing; Steve Scherer in Ottawa; Matt Spetalnick in Washington; Editing by Frank Jack Daniel and Marla Dickerson)



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