Channing Mavrellis is the Director of Illicit Trade for Global Financial Integrity. She co-authored the 2022 GFI report on China's role in transnational crime and illicit financial flows.
Federal Newswire
What is the mission at Global Financial Integrity?
Channing Mavrellis
GFI is a Washington, DC think tank that focuses on illicit financial flows, which we define as funds that are illegally earned, transferred, or utilized, and that cross an international border or boundary. This is something we've been looking at since 2006, and in the beginning this had been very focused on developing countries, particularly in Africa. Our founding President Raymond Baker had spent a lot of time there.
This issue was very near and dear to him and he saw firsthand the impacts of how the movement of money out of these countries, particularly through international trade and through trade mis-invoicing, which is another way to say customs fraud. [It] really robs these countries [of] much needed domestic resources.
These countries are extremely reliant on income and revenues generated from international trade in terms of their overall tax portfolio.
When we looked at the money going out of these countries it was much larger than any kind of official development assistance these countries received, so we looked at that angle. We were heavily economics-focused over the last five plus years. We've expanded [into] less strict economics–looking at systemic issues or things that can be used and abused.
We look at things like beneficial ownership transparency, international trade, gatekeeper professions. Lawyers, accountants, real estate agents, those individuals in professions that can go either way with their knowledge and skill set in terms of facilitating illicit financial flows.
We still work a lot in developing countries. We have projects now in Uganda, Kenya, Ghana, Colombia, Belize, Ecuador, and Panama. We work very closely with civil society.
As a civil society organization ourself, I talk about preaching the good word of Anti-Money Laundering and Countering the Financing of Terrorism (AMLCFT), and why civil society should care about issues like financial and corporate transparency even though they might be working on environmental or human right issues.
We do a lot of work. Not to brag, [but] I think we're really effective. We've been really strong with our work in beneficial ownership and working closely with governments to define beneficial ownership and adopt this to create central registries.
We do a little bit of everything, and it's really fun to work in these countries, to work with different civil society organizations as well as with the governments to help strengthen everything across the board.
Federal Newswire
For several years our tracking of money laundering and illicit financial flows focused on the Global War on Terror. What changed in the last 5-10 years relating to China?
Channing Mavrellis
There's definitely a lot of factors that at play here which is one of the reasons I find this topic really interesting. Part of that was a [congressional] hearing at the end of April that looked at Chinese money laundering organizations and their role in laundering the proceeds of particularly Mexican cartels. But it can be true of really any organized criminal group, or of any illicit actor.
[The cartels] have always been on the scene, and part of this is opening up their skill set to non-Chinese communities. The other thing–and what really has set them apart from other professional money laundering networks or individual brokers–is why they're getting involved in money laundering.
I'll go to the beginning, particularly looking at the US and narcotics proceeds. It's sold in US currency. Now how do I get that back to Mexico undetected, and then into Pesos?
For a long time Mexican cartels had done this in-house. They had their own money launderer, they had their own practices. A lot of times they would move bulk cash, and that's still a popular method. Drugs are going north and bulk cash is going south. That's why you have dogs that can sniff out cash.
But then Mexico in 2010 instituted stricter controls on the acceptance of US dollars at Mexican financial institutions so [that] changed how they did business. That's one factor or trigger.
There have always been individuals that have done professional money laundering and frequently this is done through international trade, what's known as trade-based money laundering…You can do something as simple as just manipulating the customs documentation and say “I'm shipping 1,000 iPhones and they're worth $1000.” So you're under-declaring that value as it leaves the United States, and when it gets to Columbia you're going to sell them for $1,000 each. So you're going to keep that profit there with trade-based money laundering. It's the movement of the value of the goods that's really the laundering aspect.
A popular method is something called the black market peso exchange. Let's talk about Colombia, for example; you have a cartel in Colombia and they've sold cocaine in the US. They have US dollars and they'll contact what's known as a peso broker. He will purchase those narcotics proceeds for a commission and he’ll charge maybe 10-15% for every dollar to launder that money.
With that he can use it to buy legitimate goods. He could buy clothing, electronics, cards, etc. The goods are then shipped down to Columbia, and when they're sold the proceeds of the crimes are liquidated. They're in pesos, so you've done it in a way that you've never moved the money, you've moved the value. It's very professionalized.
They sign a contract. They have somebody in the US go and collect the cash. They put it together. They do a lot of different things here.
China comes onto the scene, I can't give you a specific date but, for example, you start seeing it brought up in Drug Enforcement Administration annual reports. You see mentions of it by the US Treasury in 2016.
When we talk about anything related to illicit trade or money laundering there's always the caveat of, “Am I seeing it, or am I seeing more of it because there's more activity?" Or, “Am I just better at detecting it?"
We start seeing the presence of Chinese money laundering organizations. [The DEA] used undercover agents who were Colombian to pose as money launderers to pay peso brokers to get a better idea of the drug trafficking, but nobody was contacting them to launder their money anymore. What they started finding was they're having Chinese undercut them. Because the Chinese nationals running these money laundering organizations [need] to get access to US dollars.
They can come in and say we'll charge anywhere from 1-6% to accept these criminal proceeds. There's instances where they won't charge anything because China has currency controls. They can only get $50,000 a year out of the country.
So if you're a Chinese national, and you want to move money out of China in excess of $50,000, you're going to have to find an informal method of doing it.
You're essentially contravening their currency controls. So what has happened is there's this symbiotic relationship now between Chinese money laundering organizations and the cartels. The cartels have cash. They want to get rid of it, they want to launder it, and you have Chinese nationals looking for US currency. This still applies in Canada, Europe, really anywhere.
The Chinese money laundering organizations are making their money by selling this US currency to Chinese nationals. They are just really able to beat out the competition in a few different ways. The first is, they can undercut the rates pretty significantly.
What is maybe even more important is they can provide those proceeds to the cartels extremely quickly.
Chinese money laundering organizations are using two informal methods that have been used for hundreds of years in the Chinese diaspora to move money around. The first is called “flying money” or Fei-Chien – this is essentially the Chinese version of hawala. I think of it as a really informal Western Union.
You have somebody let's say in China and somebody in the US, and the idea is they're sending money back and forth for other individuals. As they send one transaction, another individual sends another transaction. They don't have to send the money.
If I'm in China and I want to send money to the US I'm going to go to the China broker and I'm going to give him $5,000. What's expected is at some point somebody in the US is going to come into the US agent and say, hey I want to send $5,000-10,000 to China. The Chinese agent calls up his friend in China and says give $5,000-10,000 to somebody there, and these transactions balance each other out.
The money's not moving anywhere. It can be really hard to detect because we're not touching the financial system at all. Officially it's called an informal value transfer service.
The other aspect is Chinese underground banking. It's a very informal service called Mirror Exchange or exchange transactions, where essentially you in one location provide a sum of money at another location you provide the same amount of money.
The Chinese money brokers are accepting cash proceeds from the cartels and then they go onto an online encrypted platform and say, I have US cash, who wants it? There is a fee for the cash, somebody would accept it, and they would come and meet with each other.
Again, not touching the US financial system. We're just touching the Chinese financial system there. It's only moving domestically between two banks. By doing so, they're moving that money instantaneously. They're also able to do the same with the Cartels. They accept the cash from the Cartels and they can immediately make an equivalent amount of pesos available in Mexico for the Cartels.
The Chinese money laundering organizations were also guaranteeing that if anything happens to the cash [they] will replace it. It's a business model that's really hard to beat. They came onto the scene and they've just been really popular. You see Colombian cartels looking towards them.
It's a service-based business, so they've opened their community in terms of these tools or practices. They've opened their networks to individuals.
Federal Newswire
With this old method being used by Chinese money launderers and coming together with the Cartels, what are the new tools or methods being utilized?
Channing Mavrellis
You're using existing tools but these informal value transfer system networks are culturally based. A lot of different societies have them.
When we talk about hawala, we're talking about the Middle East, Afghanistan. You can talk about hundi which is the India area subcontinent. Then you have Fei-Chien. If you're in India you're not going to go to a Chinese money launderer or Fei-Chien broker to conduct these transactions.
These are insular tools that are used by the community itself. The Chinese money laundering organizations have now provided access to these tools. This is what's new.
The speed is also what's new. The Cartels or any kind of criminal organization, get their proceeds back much quicker. There is a much lower chance of losing value or money getting seized. Your cost of doing business is much better.
They've really made it easier for cartels, narcotics trafficking organizations, and other criminal organizations to do business better. That's what we're seeing. It's the marrying of old and new cultures.
When you think about a business, if you're able to get your capital back quicker, if you're able to reduce rates that you're being charged, it's better for business overall. [It doesn’t] matter what product or service you're providing.
Federal Newswire
Melding new electronic communications platforms with these traditional systems seems to create an interesting and new wrinkle, but the Chinese government monitors these applications very closely. Surely they must know what’s going on on these platforms?
Channing Mavrellis
Absolutely. I think this goes towards the authoritarian nature of the Chinese State and definitely the kind of surveillance state that the CCP runs. They can swiftly and very effectively shut down…anything against the CCP.
I'll go and point towards wet markets with Covid. They shut those down with quickness. After a long time they went after Ivory. They were very good at shutting down opium production in China. If there is a particular commodity, product, or activity that's occurring that they don't like, they can act much more efficiently than a democratic country. Probably with a bit more force.
They have a certain idea of what's going on. I'm sure there's some limitations to how much they're able to see in terms of every single transaction. But I 100 % believe there could be more done by the Chinese government in terms of monitoring these platforms.
This would be very difficult in the US in terms of the encryption. [This has] really frustrated a lot of law enforcement. The amount of data privacy involved there makes it very difficult and coming from a democratic country and nation they're not going to start getting into that, that's protected. In some ways China has an advantage there. It comes at a certain price that democratic countries don't want to pay.
The Chinese underground banking–or the flying money–are also used by China's ruling class. There's a certain extent they do crack down internally on underground banking. You can look every year, there's usually some report on crack downs on what's called CUBS, Chinese Underground Banking System. They'll seize tens of billions of dollars.
They're not going to completely shut down these systems. It will be hard because they're informal, but they're likely benefiting from these systems as well in terms of sending the money out of the country.
These are very commonly used and I don't want to give these systems a reputation for being illegal or only facilitating illegal transactions. Flying money, hawala, any kind of other remittance system is very common for sending home remittances of the Chinese diaspora to mainland China.
These do serve a legitimate purpose. Just because something's informal doesn't mean it's illegal but it has a potential to be abused.
I don't see them ever shutting these systems down for the reasons I've mentioned.
But you also have individuals that the source of their funds is completely legitimate. You know they're an Average Joe working in China, they've saved up funds, their family has moved to the US, and they want to purchase a home in the US or their child's going to school at university which costs an arm and a leg.
There's legitimate reasons for the source of the funds, but if just the method being used is essentially illegal because it's contravening China's laws, we would consider this an illicit financial flow.
Federal Newswire
What can law enforcement agencies do to detect, investigate, and prosecute this mix of systems and actors?
Channing Mavrellis
Throwing money at the problem can help. In terms of looking at the different law enforcement agencies, appropriating funds to DEA, FinCEN, any other law enforcement agency.
FinCEN’s not law enforcement but they play a large role in terms of Anti-Money Laundering/Countering the Financing of Terrorism. Providing the funds [is a good idea] so they can better understand how these money laundering organizations work, being able to better conduct surveillance and investigations, and hiring individuals that can speak Chinese.
There was a DEA agent lamenting that previously we could use any Spanish speaking person, and now we have to have a Chinese speaker. Building up their strengths in order to better understand and then better combat this can be difficult.
A lot of times when we're looking at how law enforcement is seeing it, they're seeing it at the cash drop offs or pickups. It's not because the money has come to a bank and the bank has filed a suspicious transaction report or a currency transaction report.
It's a huge challenge because the majority of the global AML/CFT framework is focused on financial institutions. They know the red flags to look for.
But when we talk about other types of money laundering, particularly trade-based money laundering, the global framework isn't really set up to combat this. This is why it's so interesting and why it's been popular in terms of being an effective way of laundering money.
There are a lot of different ways of attacking this in terms of the law enforcement side as well as a policy side. It's always going to take resources, but I think trying to focus particularly on this right now should be one of the top priorities.
Federal Newswire
What are the key indicators a legitimate business might be engaging in this questionable kind of activity?
Channing Mavrellis
Let's say I'm selling t-shirts. You come to me, you want to buy t-shirts. I'm buying them and sending them to you, but I'm receiving payment from a third party, or multiple third parties are sending me payments. That's a red flag.
You could potentially look for suspicious jurisdictions where the money is coming from. It's hard because we're talking about a wire bank transfer. You're not always getting to see the whole picture that the financial institution does. So just have a policy of, I'm going to only accept money or a payment from the individual I'm doing business with.
There are other safeguards that companies need to have in place. Think of it as a TSA Precheck or Global Entry. They've undergone background checks to make sure that they're legitimate, and in return they get some expedited service.
Federal Newswire
What websites and social media can people find you at if they want to follow your work?
Channing Mavrellis
You can find GFI [Global Financial Integrity] at www.gfintegrity.org. We're on Twitter @illicitflows. I'm @cmavrellis. We're on Facebook and Linkedin.
We produce a lot of research and advocacy. We're focused here on China, but we do a lot of work in Latin America, Africa. We look at extortion, real estate money laundering, money laundering through private investment vehicles, environmental crimes, kind of a whole host of things.
