The Wall Street Journal recently reported that the U.S. Department of Justice has uncovered a large-scale money laundering case involving a Chinese underground banking network. Over the course of just four years, this network transferred more than USD 50 million in drug proceeds and collaborated with Mexico’s notorious Sinaloa drug cartel, forming a classic transnational criminal organization. The case highlights significant loopholes in the United States' anti-money laundering efforts and has brought renewed attention to the “gray system” of Chinese underground banks from both Chinese and American law enforcement authorities.
For the U.S., on one hand, money laundering is inherently illegal. The country has a stringent stance in this regard, being at the forefront of global anti-money laundering efforts, enacting numerous laws and regulations. In fact, the world’s first anti-money laundering law was established in the U.S. The Bank Secrecy Act of 1970 requires banks to submit reports on large transactions, identify the identities of customers involved in transactions, and maintain records of financial transactions. Although challenged by multiple parties, the U.S. Supreme Court upheld the Bank Secrecy Act legislation. Furthermore, after the 9/11 attacks, the U.S. passed the famous PATRIOT Act, which strengthened the responsibility of financial institutions in anti-money laundering efforts and granted the government greater investigative powers. The U.S. has also passed other laws to further improve its anti-money laundering legal framework. Therefore, it is inevitable that underground banking, as a significant target, would come under focused legal scrutiny.
Furthermore, the connection between underground banking money laundering networks and drug trafficking shows that there is an urgency for the U.S. government to bolster its efforts to combat them. Indeed, President Donald Trump holds a tough stance on drug-related issues and advocates for severe punishment of drug crimes, publicly stating multiple times that drug traffickers should face the harshest penalties, including the death penalty in certain cases. Additionally, in February of this year, the U.S. government officially designated the Mexican Sinaloa drug cartel as a "Foreign Terrorist Organization” (FTO), placing it alongside groups like al-Qaeda and ISIS. The U.S. even proposed deploying American military forces into Mexico to assist in “combat drug trafficking". Unsurprisingly, money laundering organizations that facilitate funding for such cartels naturally became a primary target of the U.S. government's focus.
However, the current U.S. system limits the effectiveness in this. Law enforcement agencies and corporate compliance officers point out that large transaction reports rarely lead to criminal investigations, and even fewer result in relevant charges. Furthermore, there is a lack of enthusiasm within the banking system. These institutions complain about the high costs and inefficiencies involved in submitting reports. They advocate for raising the minimum transaction amount that triggers a report, in hopes of reducing the number of reports filed. When financial institutions do not cooperate, the effectiveness of regulation is naturally undermined. Additionally, drug cartels are increasingly using cryptocurrency systems, which makes the money trail more concealed, further complicating anti-money laundering investigations.
It is worth noting that, although this case occurred in the U.S., it also poses a potential threat to China. American authorities have accused individuals involved in the case of purchasing leftover U.S. dollars from drug cartels and then selling them at a high price to local Chinese communities to meet their cash needs, allowing both parties to profit. Furthermore, according to law enforcement officials, similar Chinese "gray networks" have been operating in the U.S. long before this case was uncovered. Their clients are mostly wealthy Chinese individuals who seek to use U.S. dollars to purchase real estate in the U.S. or pay for their children's college tuition.
The reason Chinese underground banks are able to continue operating is due to the strong demand for transferring renminbi funds abroad. China enforces strict foreign exchange controls, with an annual limit of USD 50,000 per person for currency exchange. However, in practice, some Chinese individuals seek to bypass these restrictions and transfer large sums of money overseas, which has created a market for underground banking systems. Under these circumstances, on one hand, such systems result in large amounts of capital flowing out of the country covertly, thereby impacting the management of foreign exchange reserves and disrupting key indicators used for macroeconomic regulation.
On the other hand, this system also impacts China’s anti-corruption efforts and tax collection. Clients of underground banks often possess “hidden wealth” and have intentions to evade taxes and bypass regulatory oversight. In recent years, China has intensified its crackdown on corruption, and in this context, underground banks have undoubtedly become a “safe channel” for evading scrutiny. Since embezzled funds are difficult to transfer abroad through official channels, underground banks offer an anonymous, untraceable route, allowing such money to be “legitimized” and land safely overseas. Additionally, some unscrupulous businesspeople use underground banks to transfer profits abroad, evading tax obligations and undermining national fiscal revenue.
Therefore, it is evident that China and the U.S. share common interests when it comes to the issue of Chinese underground banking. On this basis, China could choose to cooperate with the U.S. in order to exchange strategic benefits in trade, economics, or other areas.
In fact, the two countries already have a foundation for cooperation in this area. According to reports, the U.S.-China Economic Working Group and Financial Working Group held multiple meetings in 2024, during which anti-money laundering was a topic of discussion. Additionally, in terms of drug control, China classified fentanyl-related substances as controlled non-medical narcotics and psychotropic drugs as early as 2019. Researchers at ANBOUND have also pointed out that China could work with the U.S. to more strictly control the flow of fentanyl precursors directly into the U.S. Through prioritizing industrial cooperation over tariff pressure, both countries could more effectively address drug control challenges while creating new opportunities for mutually beneficial trade. Therefore, there is indeed a solid basis for cooperation between the two nations.
At the same time, the report noted that the suspects used forged passports and Chinese instant messaging apps to evade investigation, making the case more difficult to crack. China could offer substantive assistance in both of these areas, making such cooperation more pragmatic and operationally feasible. These joint efforts would not only help protect domestic interests in both countries but could also help ease tensions arising from issues such as tariffs and export controls.
Overall, the underground banking system is sailing into highly dangerous waters. Its ties to drug cartels have effectively made it part of an international terrorist network. How this situation will evolve has now become a real and pressing policy challenge.
Final analysis conclusion:
The recent U.S. crackdown on a money laundering case has revealed vulnerabilities within the country’s system. As underground banking networks grow in scale and remain actively linked to organizations like Mexican drug cartels, they are inevitably brought under heightened U.S. scrutiny. As things stand, the U.S. and China share closely aligned interests in combating money laundering and drug trafficking. Deeper cooperation between the two countries in these areas could not only strengthen efforts against transnational crime but also serve as a constructive step toward easing broader tensions in trade and economic relations.
