Sebastian Rotella is a senior reporter at ProPublica. He is a finalist for the Tom Renner Award for his article, How a Chinese-American Gangster Transformed Money Laundering for Drug Cartels.

Federal Newswire

How did you start on this project of uncovering Chinese money launderers and their connection to Mexican drug cartels?

Sebastian Rotella

It was an interesting journey to do this story. I'd covered Latin America and organized crime and drug trafficking in the cartels at the Mexican border for many years. In the past couple of years my investigative focus has been on different kinds of PRC/Chinese malign activity around the world, transnational repression, espionage and other things, and really immersing myself in that topic which was relatively new to me. 

Sources were saying in the national security community, here and abroad, that this convergence of Chinese organized crime and the Chinese state was something interesting to look at, and specifically what came to my attention was something I hadn't realized in a world that I knew well, which was how quietly, but relentlessly and dramatically, Chinese organized crime had come to dominate the laundering of money for Mexican and Central American drug cartels of profits made in the United States. This had really been a revolutionary development that had empowered Chinese organized crime, that had empowered the cartels, that had really transformed the international underworld, and I found that fascinating. 

There were several investigations primarily by the DEA that cast a light on that. In this case, this Chinese Mexican American Gangster named Xizhi Li was one that really attracted me and that I dove into and found all kinds of connections and interesting revelations.

Federal Newswire

There's been a recent uptick of Chinese nationals among illegal migrants coming up into the United States. How does this fit with Xizhi Li and his criminal enterprises?

Sebastian Rotella

It fits in in a number of ways. He's an interesting character because … he's born in Southern China but comes to Baja California to the border city of Mexicali near Tijuana when he's about 10. [He] grows up or spends the formative years in Mexico and then immigrates to Southern California. So he…has these three cultures; Chinese, Mexican, and American. He's sort of positioned to be an underworld figure that creates new alliances. There's evidence that his family was involved in [and had] connections to the Chinese Triad, the 14K, in smuggling of people and smuggling of drugs at the Mexican border. 

Smuggling of Chinese migrants in particular. This is going back to the late 80s, early 90s but smuggling of Chinese migrants through Cuba to Mexico and into the United States and through other routes. Using things like border tunnels and planes and things like that, he was quite involved in sophisticated and multiple forms of drug smuggling and people smuggling. 

At a certain point he realizes, later on in his career when he flees to Mexico and sets himself up in Mexico and Guatemala, that the real money to be made is in the money business and the money laundering business.

Federal Newswire

How did the cartels come to trust a person like this?

Sebastian Rotella

The cartels tend to accept these kinds of outside figures for two reasons. First, there's some sort of connection usually through diasporas that creates trust, and second, they offer a service that is useful and valuable. The previous example would be–and I did quite a bit of work on this some years ago–the big Lebanese diaspora in Latin America. There was a period in which Iran connected Hezbollah with underworld figures in Latin America [who] were some of the prime money launderers for the cartels. They took advantage of the fact that they had a longstanding diaspora presence in places like Mexico and had connections to Mexican organized crime in the cartels and offered that service. 

This is somewhat similar to Xizhi Li and people like him [who] take advantage of the small but notable and growing presence of Chinese diaspora communities in places like Mexicali and Tijuana. Don't forget, the Chinese Exclusion Act [goes] back to the 19th century and pushes Chinese people out of the United States and into some of the Northern Border regions of Mexico. Those communities go back 100 years and I covered them while covering people smuggling in Northern Mexico in the 1990s. 

So he's got those kinds of connections and he's got personal connections. He's someone who has multiple wives and girlfriends, some of whom are Chinese, but one of whom is Mexican and has cartel connections herself. So he established his connections that way when he literally marries into the mob when he moves down. 

Federal Newswire

So he literally married into the mob?

Sebastian Rotella

[Yes.] There's a point where he's a rising drug trafficker in 2008 and he's almost caught in an undercover operation in Los Angeles county, flees to Mexico, [and] sets up shop there in Guatemala. His new romantic interest is actually a Chinese immigrant who's connected to Chinese Mexican figures involved in drug trafficking. So he has an in who becomes one of his gateways into finding laundering clients. 

There's a certain transborder, transcultural, and translinguistic agility that he has, and [that] enables him to execute this rather remarkable feat in this very violent world. 

He and other Chinese launderers are handling cartel money, yet there isn't that much violence as they go about sort of taking over this laundering market. They offer a service that is so fast, cheap, efficient and is so beneficial to the cartels... They're laying the Golden eggs, you don't mess with them. So it's quite remarkable how they do it and how it's kind of quiet and nonviolent but transformative.

Federal Newswire

How does this new money laundering process work?

Sebastian Rotella

I'm by no means a financial expert. So I talked to the DEA, IRS, HSI and others. All of them marveled at the math of it.  It almost seemed too good to be true in how ingenious it was and what a benefit it was to all involved. 

But to try and simplify it, before the rise of Chinese money laundering you had mainly Colombian and to some extent Lebanese specialists doing the laundering for the Mexican cartels. [They] charged as much as 15-18% and it could take weeks or even months, and so that created all kinds of problems.

So Xizhi Li sees that he's got … the cartels that have all these dollars they want to turn into pesos and … this huge amount of elite wealthy Chinese in China, many of them in the Communist Party elite, who desperately want to get their fortunes offshore and get ahold of dollars–[and they] are willing to lose money in the process. 

So what he offers the cartels is this, “[you have] $350,000 on the streets of Chicago and your guy will turn it over to my guy. A signal will be sent to my people down in Mexico and within 24 hours you get the equivalent amount of pesos for 1-2%. It goes from weeks to a day and I guarantee that if the money's lost I'll take care of it, I'll take the cost.” Because he's making so much money on the other side of that equation. 

[The] wealthy Chinese are buying those dollars–or their representatives or their relatives on the streets of the United States.  [They] are willing to lose money through high commissions of 10% or more to get dollars. 

Then he does something even more innovative because he has them do what are called mirror transactions. They give him the money in China, moving it to Chinese currency to accounts he controls.

[He has this] equivalent amount of money and he sells that money again, a second time for a healthy commission to import-export firms doing business in China. Mainly Latin American ones that need to do business in Chinese currency and that then move goods into the Americas. 

Sometimes they also help him mask the transactions or provide paper trails for the cartels to help launch the laundering. But he sets this up, and again it's fast, cheap, guaranteed, and it solves a huge problem for the cartels and makes everybody rich and only worsens one of the great national security threats faced by the countries of the Americas.

Federal Newswire

Does the desire of wealthy Chinese citizens to get their money out of China help fuel this money laundering triangle?

Sebastian Rotella

I think that's right, because I think in the past decade the administration of Xi Jinping has cracked down selectively and politically on corruption. But the wealthy in China feel more pressure and have more difficulty. 

There's always been an underground banking system and what's called the flying money system. [It goes] back decades.  There's all this wealth being made but there's more pressure. There's more vulnerability [in] that fortunes are made, but there were also limits placed, I believe $50,000 at some point, on how much money could legally be taken out of China. 

All these things kind of push the wealthy Chinese elite into the arms of people like Xizhi Li., 

Federal Newswire

What role does digital currency play in this kind of nexus?

Sebastian Rotella

In this case, it didn't really come up as a money laundering mechanism because there was so much being sent through Chinese banks and businesses. It was all about cash and more traditional structures. 

Many of the people who come up in this case are involved in one kind of cryptocurrency activity or another, including scams. I was just reporting in Europe and saw some similarities in money laundering and this kind of Chinese service, and there are definitely cases in which cryptocurrency is coming more to the forefront. 

So I haven't studied them as well, but that is definitely something that is also emerging as Chinese organized crime around the world is specializing in this kind of laundering cash supply service.

Federal Newswire

Is there any tie back to the Chinese government or the Chinese Communist Party (CCP)?

Sebastian Rotella

Yes, I mean this was obviously a difficult area. Most of the people [who] would talk … all sort of agree the Chinese government was aware of it. In the words of Admiral Faller, the former head of SouthCOM, he said to us on the record [that they were] ‘at least tacitly supporting the money launders.’ There was all kinds of evidence for that in the case we looked at. 

[China] is the most formidable authoritarian police state on the planet. It has incredible control of its diaspora, not to mention its old territory and its own economy. [Now] enormous amounts of money are flowing in and out of banks and businesses in a way as one DEA investigator said, ‘there's no way that this was normal business activity.’ 

I mean you've had Chinese banks in the United States and in Europe fined and even prosecuted for allowing criminal proceeds to flow through them. 

Then there was considerable evidence of specific individual connections of Xizhi Li and others involved in this network in contact with Chinese officials. Whether as individual clients, the theoretically corrupt elite who he was laundering money for, or a fraudulent document business whose clients included at least one senior military officer whom he sold a real fake Guatemalan passport to. That raises another question; is he providing services in exchange for being allowed to do this business with Chinese officials? 

He had contacts with Chinese officials under diplomatic cover in the United States, according to investigators going back several decades. 

There's a lot of indications both in this specific case, and we quoted a high-level State Department official saying, ‘we are seeing more and more of this activity and often it's hard for us to see how much of it is just gangsters working with corrupt officials or how much is gangsters being allowed to operate.’ 

It's a difficult area, but I think there's a lot of evidence pointing in that direction. If you read the article, you know we try to phrase it as carefully and judicially as possible. I think we have strong on-the-record sourcing about both individuals and Chinese institutions that are involved. That led to the strong indication the Chinese state is at least aware of and tacitly involved in and perhaps more actively involved in this.

Federal Newswire

Any sense for how widespread this kind of money laundering is in the United States? 

Sebastian Rotella

Well, there are aspects of it that are a big deal in the United States and our growing concern [is that] the command and control is Mexico and Guatemala. 

Li has a casino in Guatemala where he brings together the two sides of the equation, the Latin American drug lords and the Chinese elite, to show both sides he can deliver. But after all, this money is being made and passed from the Mexican organizations to his organization on the streets of the United States in about 11 cities, and he has lots of operatives working in the United States who move back and forth between the United States, Latin America, and China.  

The Chinese elite who are getting the service from him are doing things like buying homes. There's a certain amount of home buying that still goes on in the United States in cash. In diaspora communities [especially they use cash] for tuition [and] making investments. 

We looked in particular at one of his close partners, Tao Liu, who had been down in Mexico and Guatemala with him. He was kind of instrumental in bringing him into touch with wealthy Chinese. 

Liu then pops up in New York and at this point is a wanted criminal in China, but [he] embarks on what the FBI and the DEA believe to have been a political influence operation, where he's cultivating both Democratic and particularly Republican politicians and campaign contributors. [He] ends up in rather a short period of time managing to meet twice with President Donald Trump. 

Yes, you have a lot of activity going on in the United States that is of great concern.

Federal Newswire

Did you get any indication from your sources that the U.S. is cracking down on these money laundering schemes and criminals?

Sebastian Rotella

I think they were. One of the best examples is in Spain. The ICBC is a state bank [in China]. Its four top executives were prosecuted and convicted by Spanish police. [It was] found they opened a branch of the ICBC in Madrid, Spain, and industrially set about laundering suitcases and carloads full of cash that showed up at this bank from Chinese diaspora folks involved in criminal activity. 

Day and night, through all kinds of brazen and illicit means [they] moved this money back to China. [They] assisted in laundering, capital flight, tax evasion, contraband, and everything else. 

One of these executives actually had gone on to be a Europe-wide Luxembourg-based executive overseeing ICBC activities in the rest of Europe. So there was some suspicion if this is going on so brazenly and in Spain what else is going on elsewhere? 

There have been Chinese banks fined. There was one in New York State, that we cite in the story. So I think there's a pressure to have Chinese banks do the basic things that other banks do.

Some of the cases are clearer than others, but it is a definite concern and a high priority. 

In general the DEA and HSI kind of took the lead on this larger issue of laundering. The problem here is that it does cross silos. There's a criminal part and there's a counterintelligence part, and I found myself talking to people about the criminal side and then it led inevitably to questions of state involvement. 

But [these countries are] using instruments in the diaspora communities, including organized crime, to do things like repress dissidents, fund operations, or do political influence operations. So I think this is something going on in government right now to bring together jurisdictional boundaries among agencies. Not unlike, I think, with Russian organized crime and intelligence which are so intertwined as well. 

Federal Newswire

How does fentanyl fit into this money laundering nexus between the cartels and Chinese nationals?

Sebastian Rotella

Well, certainly fentanyl has been the most prosperous and lethal new drug to emerge and ravage the United States in the past decade. Obviously fentanyl and its precursors are made largely in the Chinese pharmaceutical industry, and until 2019, legally so. There were some curbs on actual fentanyl, but the precursors still made their way through Mexico until that crackdown in 2019.

Americans were buying fentanyl basically over the internet and having it sent, sometimes by FedEx, to the United States. It was dramatic and brazen with great costs, remarkable casualties, and almost exclusively in the United States, which is interesting because there's so much drug trafficking of other kinds of drugs in Europe. 

That's the data point. Now we try to be very careful and rigorous in this story, and we talked about fentanyl a bit, but it wasn't our main focus. Obviously as you said the laundering and the question of what U.S. officials have said on the record is at least tacit support of the laundering which leads you into the question of fentanyl, because much of the laundering now is obviously happening for organizations that deal in fentanyl. It's so much more prosperous and so much easier to smuggle. 

So as I said the many high-level and frontline people that we talked to felt the same way about fentanyl, and they suspected that there was at least a passive if not active role of the Chinese state in letting this happen. 

But what is allowing this fentanyl to continue to flow into the United States are these alliances, because after all the precursors are going into Mexico now. 

Federal Newswire

How are Li and Liu similar, and how are they different?

Sebastian Rotella

They have some similarities in the way of multiple identities, nationalities, and documents, some illegal and some not, and an incredible set of contacts around the world. 

They were just bouncing, careening around the world from one scam or criminal enterprise to another. 

Tao Liu was more a businessman with organized crime connections who shows up in Mexico and Guatemala and meets Xizhi Li because Li has this side racket selling fraudulent documents. They meet that way. But his role in helping Li really grow this laundering business seems to have been connecting him with people in the Chinese elite, because Li was more of a working immigrant. 

Tao had many more connections in the CCP elite in China, Hong Kong, and around the world that [he] was able to connect him with. 

Federal Newswire

How did the arrests play out?

Sebastian Rotella

The DEA comes at them from multiple angles, they go after Li first basically by catching key people. They get inside the communications of the network with some excellent work, and then once they're inside the network down in Mexico and Guatemala, they're able to track and pick off the couriers that are industriously moving around the United States with this money. 

So they're able to really build this case and assemble the network. They capture his girlfriend at one point in Los Angeles, which gets him inside WeChat, which is an even better sort of window into the organization. They're able finally to track down and arrest Xizhi Li and bring him back to the United States. 

Once they have them, they're in sight of all these devices and all these communications, and they're realizing the magnitude, both in terms of money and global scope of this organization. 

They've come across this character who's clearly someone who has been with him down in Guatemala and Mexico but then they're finding all this evidence that Tao has spent the past couple of years in New York, certainly making all kinds of contacts of people in the financial community, the United Nations, people obviously in politics, including meeting with the President of the United States. Making at least one legal campaign contribution to the GOP that we're aware of and may have made others. Doing some sort of subnational type of political influence as well with a prominent Democrat in the state legislature of New York. 

They're just fascinated. Who is this individual and how does he go from being someone who's sneaking across borders and hanging out in casinos laundering money with Li to being sort of accepted here in U.S. high society? Even though he's publicly wanted in China [he] is able to get through the defenses and meet not once but twice with the President of the United States.

But by the time they focus on him, he's back in Hong Kong and the pandemic has hit so he's stuck. He's a globetrotter who can't trot the globe anymore, and they can't get at him in Hong Kong so they come up with a great [idea]. 

In the classic tradition of the special operations division of the DEA, which is very good at undercover things around the world, a great sting where an excellent Chinese-speaking agent gets him on the phone in his high-rise apartment where he's sitting bored and on lockdown in Hong Kong. 

[He] convinces him that he's a friend of Li's who can sell him–through a corrupt state department–an official U.S. passport.  And he develops a relationship with them over the phone over months. 

There's a bit of a debate about whether [to pursue] the intelligence imperative, which is more to let him continue to operate, or the DEA [imperative] to go and catch him and see what he's going to say. 

Finally the DEA succeeds in sending a private plane with undercover agents posing as gangsters to pick him up in Hong Kong, and he gets on the plane thinking that he's going to Australia to buy a U.S. passport which will be his ticket, his keys to the kingdom to return to the United States and to launder money. 

They land in Guam which is [a] U.S. territory and they arrest him. So they bring him back [with] all these guys. Two of them were the two main figures, and about half a dozen others have all been convicted. 

But some of these fundamental questions, like the extent of this network's connections to Chinese state officials and what Tao Liu was doing meeting the President of the United States and other U.S. political figures and campaign contributors, have yet to be answered publicly. Most of the stuff that we found is not in the court documents, or at least not in the public ones. As much as we found out, there are still aspects of this story that remain a mystery and perhaps will be clarified.