How a Chinese American gangster transformed money laundering for drug cartels

 
In 2017, Drug Enforcement Administration agents following the money from cocaine deals in Memphis, Tennessee, identified a mysterious figure in Mexico entrusted by drug lords with their millions: a Chinese American gangster named Xizhi Li.

As the agents tracked Li's activity across the Americas and Asia, they realized he wasn't just another money launderer. He was a pioneer. Operating with the acumen of a financier and the tradecraft of a spy, he had helped devise an innovative system that revolutionized the drug underworld and fortified the cartels, propublica.org reports.

Li hit on a better way to address a problem that has long bedeviled the world's drug lords:

how to turn the mountains of grimy twenties and hundreds amassed on U.S. streets into legitimate fortunes they can spend on yachts, mansions, weapons, technology and bribes to police and politicians.

For years, the Mexican cartels that supply the U.S. market with cocaine, heroin and fentanyl smuggled truckloads of bulk cash to Mexico, where they used banks and exchange houses to move the money into the financial system. And they also hired middlemen - often Colombian or Lebanese specialists who charged as much as 18 cents on the dollar - to launder their billions.

Those methods were costly, took weeks or even months to complete and exposed the stockpiled cash to risks - damage, robbery, confiscation.
Enter Li. About six years ago, federal antidrug agents in Chicago saw early signs of what would become a tectonic change. They trailed cartel operatives transporting drug cash to a new destination: Chinatown, an immigrant enclave in the flatlands about 2 miles south of the city's rampart of lakefront skyscrapers.

Agents on stakeout watched as cartel operatives delivered suitcases full of cash to Chinese couriers directed by Li. Furtive exchanges took place in motels and parking lots. The couriers didn't have criminal records or carry guns; they were students, waiters, drivers. Neither side spoke much English, so they used a prearranged signal: a photo of a serial number on a dollar bill.

After the handoff, the couriers alerted their Chinese bosses in Mexico, who quickly sent pesos to the bank accounts or safe houses of Mexican drug lords. Li then executed a chain of transactions through China, the United States and Latin America to launder the dollars. His powerful international connections made his service cheap, fast and efficient; he even guaranteed free replacement of cartel cash lost in transit. Li and his fellow Chinese money launderers married market forces: drug lords wanting to get rid of dollars and a Chinese elite desperate to acquire dollars. The new model blew away the competition.

"At no time in the history of organized crime is there an example where a revenue stream has been taken over like this, and without a shot being fired," said retired DEA agent Thomas Cindric, a veteran of the elite Special Operations Division. "This has enriched the Mexican cartels beyond their wildest dreams."

As they investigated Li's tangled financial dealings, U.S. agents came across evidence indicating that his money laundering schemes involved Chinese government officials and the Communist Party elite. China's omnipresent security forces tightly control and monitor its state-run economy. Yet Li and others moved tens of millions of dollars among Chinese banks and companies with seeming impunity, according to court documents and national security officials. The criminal rings exploited a landscape in which more than $3.8 trillion of capital has left China since 2006, making the country the world's top "exporter of hot money," said John Cassara, a former U.S. Treasury Department investigator, in testimony to a Canadian commission of inquiry.

Adm. Craig Faller, a senior U.S. military leader, told Congress last year that Chinese launderers had emerged as the "No. 1 underwriter" of drug trafficking in the Western Hemisphere. The Chinese government is "at least tacitly supporting" the laundering activity, testified Faller, who led the U.S. Southern Command, which oversees military activity in Latin America.

In an interview with ProPublica, the now-retired Faller elaborated on his little-noticed testimony. He said China has "the world's largest and most sophisticated state security apparatus. So there's no doubt that they have the ability to stop things if they want to. They don't have any desire to stop this. There's a lot of theories as to why they don't. But it is certainly aided and abetted by the attitude and way that the People's Republic of China views the globe."

Some U.S. officials go further, arguing that Chinese authorities have decided as a matter of policy to foster the drug trade in the Americas in order to destabilize the region and spread corruption, addiction and death here.

"We suspected a Chinese ideological and strategic motivation behind the drug and money activity," said former senior FBI official Frank Montoya Jr., who served as a top counterintelligence official at the Office of the Director of National Intelligence. "To fan the flames of hate and division. The Chinese have seen the advantages of the drug trade. If fentanyl helps them and hurts this country, why not?"

More than half a dozen national security veterans interviewed by ProPublica expressed similar views, most of them speaking on the condition of anonymity because of the sensitive subject. But they acknowledged that the alleged state complicity is difficult to prove.

Beijing rejects such accusations. And the question of whether China actively supports money laundering and the flow of fentanyl and other drugs to the U.S. remains a matter of debate in the U.S. national security community.

"There is so much corruption today in mainland China it becomes hard to distinguish a policy or campaign from generalized criminality," said an Asian American former intelligence official with long experience on Chinese crime and espionage.

The Chinese embassy in Washington did not respond to a detailed request for comment for this story.

The takeover of drug-related money laundering by Chinese organized crime has drawn global attention. In Australia, authorities are investigating a Chinese syndicate that allegedly moved hundreds of millions of dollars around the world for clients, including a cousin of Chinese President Xi Jinping, according to news reports. (Xi's cousin has not been charged with a crime, and the Chinese foreign ministry has dismissed reports about inquiries into his activities as "gossip.")

Europol has warned that Chinese money laundering groups "present a growing threat to Europe." The U.S. State Department estimates that $154 billion in illicit funds a year passes through China, calling it "of great concern."

"We used to have a regular dialogue with the Chinese specifically on things like money laundering, counternarcotics policies," Assistant Secretary Todd Robinson, who leads the Bureau of International Narcotics and Law Enforcement Affairs, said in an interview. "And since that has stopped, it has not been clear, we've not really been able to get a handle on how much of this is criminal organizations and how much of it is criminal organizations connected to or suborning Chinese government officials."

Xi has led a well-publicized crusade against corruption, but it has been mainly a purge of rivals, according to U.S. national security officials and Chinese dissidents. In fact, they said, Chinese intelligence services have quietly expanded their ties with Chinese mafias, known as triads, for mutual benefit.

"There is no question there is interconnectivity between Chinese organized crime and the Chinese state," said Montoya. "The party operates in organized crime-type fashion. There are parallels to Russia, where organized crime has been co-opted by the Russian government and Putin's security services."

The Li case led federal agents in an unexpected direction: an investigation of a possible Chinese covert operation to penetrate American politics. The DEA agents stumbled across Li's enigmatic associate, an expatriate Chinese businessman named Tao Liu. After moving from Mexico to New York, he launched a high-rolling quest for political influence that included at least two meetings with President Donald Trump.

Both the DEA and FBI pursued Liu, suspecting he had ties to Chinese spy agencies. They wanted to know how and why a wanted Chinese criminal had gained access to the president of the United States.

Although authorities convicted Li and Liu of money laundering and other crimes, the political and diplomatic aspects of the groundbreaking investigations of them are still largely secret. Citing open investigations, the DEA declined to discuss the case or even the general issue of how Chinese organized crime launders profits for the cartels. The Justice Department and FBI declined requests for comment. Lawyers who represented Li rejected requests for interviews with them or their client.

To explore the full dimensions of the case, ProPublica interviewed more than two dozen current and former national security officials, as well as lawyers and others involved. ProPublica granted some of them anonymity, either because they were not authorized to talk publicly or because of concerns about their security. ProPublica also reviewed court files, social media, governmental reports and other material. Many details - about the suspected role of Chinese officials, the hunt across the globe, the links to U.S. politics - are being reported for the first time.