Mapping Chinese Capital Flight via the Sinaloa Cartel

The U.S. Department of Justice is charging some creative intermediaries for figuring out how to match drug dealers who want to launder dirty money with rich Chinese who want to invest in the U.S.

Finance is a technology that lets people transfer purchasing power across time and space. A recent criminal indictment from the U.S. Department of Justice and a detailed news article from the Los Angeles Times describe a fascinating example of how this can work in practice: rich Chinese evaded outbound capital controls in their country by paying Chinese exporters to send goods to the Sinaloa cartel in Mexico, in exchange for claims on the U.S. dollar cash that the cartel’s drug dealers had accumulated in Los Angeles.

The rest of this note is an attempt to explain what is alleged to have occurred, along with some visualizations and context for understanding how it all fits into the global balance of payments. Topics include the cross-currency basis trade, the discrepancy between different official estimates of Chinese exports, and more.

What Happened

The press release accompanying the indictment gives a rough outline of the arrangement:

Many wealthy Chinese nationals who live, work, or invest in China wish to transfer assets to the United States for various reasons but are barred by the Chinese government’s capital flight restrictions from transferring the equivalent of more than $50,000 per year out of China. These individuals seek informal alternatives to the conventional banking system to move their funds…Drug traffickers increasingly have partnered with Chinese underground money exchanges to take advantage of the large demand for U.S. dollars from Chinese nationals.

The funds that are transferred in China are then used to pay for goods purchased by businesses and organizations in Mexico or elsewhere such as consumer goods or items needed to aid the drug trafficking organization to manufacture illegal drugs, such as precursor chemicals, including fentanyl…The money remitters allegedly disposed of the drug proceeds by either delivering United States currency directly to their money exchange customers or by purchasing real or personal property, including luxury goods and cars to be shipped to China.

The LATimes article has a few more details on the mechanics:

Someone seeking to make a large transfer would contact a broker in California. The broker would then arrange for drug profits to be delivered to the Chinese national’s representative in the United States, usually in bulk cash or a series of “structured” deposits small enough to avoid triggering anti-money-laundering controls.

At the broker’s direction, the Chinese national would transfer money to a manufacturer in China that produced either consumer goods, such as electronics and clothing, or chemicals used to make synthetic drugs, [U.S. attorney E. Martin] Estrada said. Shipped to Mexico, the consumer goods would be sold and the money turned over to a cartel representative, returning the value of the drug dollars purchased by the Chinese national to the cartel in pesos.

The chemicals, on the other hand, would be used to produce drugs such as fentanyl and methamphetamine in Mexico for sale in the United States, triggering the cycle again.

Below is a flowchart that I made in an attempt to visualize how these transactions fit together: