How Chinese shadow banks are used by Italian drug gangs to conceal payments

According to judicial and law enforcement authorities, drug cartels operating in Italy are increasingly exploiting shadow networks of unregistered Chinese money brokers to hide cross-border payments.

The development demonstrates how a problem that U.S. authorities have been addressing in relation to drug cartels in Latin America has spread to Europe.

According to seven judicial and law enforcement officials who spoke to Reuters, money transfer networks, which operate without a clear trail and enable quick transfers, are being used more frequently in Italy.

The transfer method entails depositing money with a money broker in one country, and then having another agent in the network pay the equivalent to the designated recipient somewhere else in the world.

According to Barbara Sargenti, Italy's national anti-mafia prosecutor, who oversees both domestic and international investigations, "the phenomenon is on the rise." In an interview at her office in Rome, Sargenti claimed that both an increase in activity and authorities' increased capacity to identify such cases were to blame for the rise in the number of related investigations.

She continued by saying that when money is transmitted outside of the financial system, it is extremely challenging for law enforcement to identify and trace. This type of financial intermediation, which is focused on the monitoring and evaluation of banking transactions, "undermines the entire international anti-money laundering system," she claimed. These actions are a crucial tool in the war against criminal gangs.

Since the matter was made public roughly five years ago, Italian officials have disclosed at least six investigations connecting drug cartels and Chinese payment networks. According to authorities and judicial papers examined by Reuters, those investigations center on alleged payments to drug dealers in Spain, Morocco, and Latin America.

According to a 2020 Reuters investigation, Chinese "money brokers" are one of the most concerning new challenges to U.S. officials' fight against drugs. In a Senate committee hearing earlier this year, Anne Milgram, the director of the U.S. Drug Enforcement Administration, brought up the problem by stating that Mexican drug cartels were employing Chinese money-laundering organizations "around the world to facilitate laundering drug proceeds."

It has turned into a problem for law enforcement in Europe as well. Chinese criminal networks are "more and more engaged in the laundering of criminal proceeds in Europe," including revenues from drug trafficking, according to Europol, the police agency of the European Union.

The seven individuals said that money transfers are a part of a wider range of services provided by organizations with ties to China, including enabling tax evasion, in what the Italian government refers to as a "underground" banking system.

One of the individuals claimed that there were around a dozen further inquiries into money transfers or other illegal activities linked to Chinese organizations that were ongoing but were not made public. A individual with direct knowledge of the investigations indicated that tens of billions of euros were being transported out of Italy each year via the underground network.

The Chinese government has repeatedly threatened to crack down on illicit banking.

"I am not aware of the circumstances you mentioned," the Chinese foreign ministry spokesperson's office responded to a question about whether China was aware of the movement of significant sums of money through illegal Chinese money brokers in Italy, including by drug gangs, or whether it was assisting Italy to combat it.

The money transfers are based on a well-known informal payment method called fei qian or fei chien, which means "flying money" and relies on a reliable network of transfer agents.

Transferring money to creditors on your behalf through friends and relatives is not always against the law. However, it is against the law in Italy to offer banking services without authorisation and to launder criminal money.

One of the earliest investigations into Italian mobsters' use of Chinese money brokers was connected to the Calabrian 'Ndrangheta group, one of the biggest criminal organizations in the world. 90 persons were detained as a result of the investigation in Italy and other parts of Europe in 2018, and 4 tonnes of cocaine worth an estimated 240 million euros ($261.96 million) were seized.

One of the continuing investigations resulted in the detention of more than 40 persons in Italy and Spain last November for alleged drugs trafficking. This includes Rosario D'Onofrio, a former army officer and prominent member of the Italian Referees' Association, who authorities claim worked as the logistics chief for a drug gang.

D'Onofrio paid a Chinese middleman 180,000 euros during a trip to Milan's Chinatown in March 2020, according to an arrest warrant issued in October 2022, to pay suppliers in Spain for a shipment of hashish. According to the arrest warrant, the middleman charged D'Onofrio 2,700 euros in commission for the transaction—the equivalent of 1.5%—and texted a counterpart in Spain to provide the necessary funds to the suppliers.

D'Onofrio is now being held; Niccol Vecchioni, his attorney, refuses to comment. The Chinese intermediary is yet unidentified.

An arrest order from October 2021 states that police monitored a man who traveled around Italy collecting cash in exchange for significant amounts of drugs shipped from Morocco. This investigation led to the seizure of 720 kilograms of drugs and millions of euros in cash. Authorities claim in the documents that the funds were sent to Chinese companies in Tuscany and Rome, from whence payments were made to drug dealers via "Chinese correspondents" in the north African nation.

In connection with the investigation, authorities detained eight persons on suspicion of drug trafficking and money laundering.

According to Major Michele Maselli, a senior investigator with the Milan Carabinieri police, the investigation also showed what happened to at least some of the actual cash that was seized: it was placed in luggage and transferred to Chinese people traveling to Hong Kong.

According to the Carabinieri, between 2.5 million and 4 million euros were exported out of Rome's Fiumicino airport each week from October 2019 to October 2021.

According to the 2021 arrest warrant, the Chinese companies in Tuscany and Rome were a part of the underground banking system. The businesses were requested not to be named by the authorities since an investigation into the financial transfers to Hong Kong and their final destination is still continuing.

Large Chinese diasporas exist in regions including Europe, the US, and Latin America, and money brokers are a component of those communities. According to Western law enforcement, the brokers assist wealthy Chinese who want to move their money abroad to avoid China's currency controls. Beijing sets an annual cap on the amount of money its residents can send outside of China at the equivalent of $50,000 USD.

As a result, Chinese people engage in unofficial transactions that entail sending money electronically within China and giving the equal amount in cash to a recipient outside to deposit into a bank account. Criminal organizations that are loaded with cash from activities like drug sales may be able to help meet the demand for hard currency.

According to Francesco Pinto, a deputy chief prosecutor in Genoa, "upstream of this clandestine banking activity there is a huge availability of liquidity of these Chinese groups all over the world."

According to three of the seven persons Reuters spoke to, there is disagreement among Italian authorities about whether there is a single, sizable Chinese-linked operation with a variety of interlinked branches or a variety of different organizations that operate independently of one another.

However, all seven claimed that money laundering was merely one of the illegal services provided. According to Laura Pedio, a deputy chief prosecutor in Milan, there is a "parallel banking system" with clients of all stripes, "from tax evaders to drug traffickers." Following an investigation into tax evasion that was allegedly connected to some Chinese intermediaries in Italy, Milan prosecutors last month announced the arrest of 22 persons and the seizure of 292 million euros.

Over the past ten years, there have been less official wire transfers between Italy and China, which, according to a top investigator, may indicate that the Chinese community in Italy has curtailed its use of the official banking system. Remittances from Italy to China reached a low of 22 million euros in 2021, down from a high of 2.67 billion euros in 2012.

In order to keep an eye on the shadowy financial system, the Italian finance police established a special section last year. Additionally, the newly elected Italian government has requested for the first time that the government's anti-mafia commission look into "the Chinese infiltration in Italian society."

By fLEXI tEAM