The U.S. Drug Enforcement Administration (DEA) released its National Drug Threat Assessment in October 2017, with a section of the report examining illicit finance. The DEA assesses that Transnational Criminal Organisations (TCOs) rely on a number of methods to help them launder and expend illicit profits. Preferred methods to move and launder illicit proceeds include money value transfer systems (MVTS) and trade-based money laundering (TBML). Bitcoin and other virtual currencies are also used by TCOs to transfer illicit proceeds internationally.
Money Value Transfer Systems (MVTS)
MVTS are financial services that involve the acceptance of cash or other stores of value and the payment of a corresponding sum in cash or other form to a beneficiary.
An example of MVTS are Chinese Underground Banking Systems (CUBS), which are operated by cash brokers who employ agents to collect and distribute currency around the world. These transnational money brokers operate under the covers of cash intensive businesses or legitimate financial services such as exchange houses, money remitters, or short term lenders.
CUBS circumvent China’s capital controls and sometimes are used to launder transnational drug proceeds. China prohibits its citizens from transferring more than $50,000 USD outside of China’s borders per year. CUBS allow Chinese nationals to transfer sums of money exceeding this limit overseas, as well as collect cash drug proceeds from TCOs needing to move money to China.
Trade-Based Money Laundering (TBML)
TBML is a popular method used by TCOs to transport and launder illicit drug proceeds, because there is low risk of detection by authorities and it can increase profits. Money laundering activities are disguised by large volumes of legitimate trade, moving drug proceeds through trade transactions to conceal the origins of illicit funds. Once illicit cash is exchanged for trade goods, it becomes more difficult for law enforcement to trace the illicit cash back to its origins.
Some money launderers are beginning to utilise Letters of Credit (LCs) in the conducting of TBML schemes, to circumvent increased regulatory and law enforcement vigilance. LCs have long been integral in facilitating legitimate international trade, and money launderers are finding that LCs give the appearance of legitimacy to trade transactions.
China is a major base for TBML schemes through which TCOs purchase large shipments of “made-in-China” goods via wire transfer or bulk cash carrying from other countries to China. Traditionally, the “made-in-China” goods are shipped to businessmen in Mexico and South America who reimburse the drug trafficking organisations in local currency.
TCOs are also increasingly using virtual currencies due to their anonymous nature. Bitcoin is the most common form of payment for drug sales on dark net marketplaces and is emerging as a desirable method to transfer illicit drug proceeds internationally.
Bitcoin is the most widely used virtual currency due to its longevity and growing acceptance at legitimate businesses and institutions worldwide. Bitcoin is not backed by any central bank or government, and all transactions are recorded on a public ledger known as the blockchain.
Many China-based firms manufacturing goods used in TBML schemes now prefer to accept Bitcoin. Bitcoin is widely popular in China because it can be used to anonymously transfer value overseas, circumventing China’s capital controls.
Chinese manufacturers who desire Bitcoin will undoubtedly ease the money laundering process for many TCOs. Currently, TCOs face scrutiny from national banks when transferring money to Chinese manufacturers. However, a TCO purchasing Bitcoin via a licensed money service business (MSB) without raising red flags will face no further scrutiny when transferring the Bitcoin to China. Many TCOs can also buy Bitcoin from individuals selling Bitcoin on the Internet with no MSB license. Thus, many TCOs will be able to convert their cash drug proceeds to Bitcoin and buy Chinese goods with no fear of oversight from a formal financial institution.
Bitcoin is increasingly used by Over-the-Counter (OTC) Bitcoin brokers who do not properly conduct “know your customer” or anti-money laundering monitoring on Bitcoin purchases. OTC Bitcoin brokers primarily attract two types of clients: those who want to use Bitcoin to move their money out of China and those who want to convert large quantities of cash into Bitcoin.
CUBS money brokers sell Bitcoin to drug traffickers for cash earned from drug sales in Australia, as well as the United States and Europe. This drug cash is then sold to Chinese nationals in exchange for Bitcoin the Chinese nationals use to transfer the value of their assets outside of China.
Transnational Criminal Organisations (TCOs) utilize Money Value Transfer Systems (MVTS) and Trade-Based Money Laundering (TBML) to successfully launder and expend illicit profits. Virtual currencies such as Bitcoin are increasingly being used by TCOs due to their anonymous nature, simplifying the money laundering process for many TCOs. China is a major player in the TBML market with Chinese Underground Banking Systems (CUBS) allowing Chinese nationals to bypass government restrictions on international money transfers and TCOs to launder illicit funds. This includes TCOs who have gained illicit funds from drug sales in Australia.
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