The Taiwan Banker

Over the past few years, the anti-fraud community has learned the term shazhupan, in which scammers hide behind the anonymity of digital communication and payment platforms, slowly earning the trust of their victims. It turns out that Chinese criminal organizations however also excel at face-to-face operations in the US, particularly when it comes to moving money. The public and policy makers have yet to come terms with some of the implications. Thus, for example, a March local article in the Washington Post detailed the story of an elderly scam victim who lost close to US$ 1 million in the form of gold bars. The thief was caught following a heroic bust, but he was only a runner working for “a friend in China,” in the words of the reporter; the article provided no further details on the downstream crime model. The Washington Post is a top-tier publication for national US politics, and even its local reporting tends to include the larger political picture. What if this genre of reporting started asking questions about where this money goes, and how it gets there? The answers may go straight to the core of US-China relations. Money laundering could even set the stage for the next major geopolitical crisis. Flying gift cards Fentanyl has become one of the most important topics of bilateral negotiations, to date mostly focusing on production of precursors within China. Last November, the US negotiated a related agreement in exchange for some degree of relaxation on the Xinjiang human rights issue, demonstrating that Washington is willing to deprioritize other issues in the wake of a growing threat. Fentanyl is a legitimate public health issue: the US centers for disease Control and Prevention reported 72,027 drug poisoning deaths from it in 2022. Because of its extreme potency, it is difficult to measure accurately and unlike other drugs, overdoses are frequently the result of accidental rather than deliberate ingestion. In the international trade of fentanyl derived from Chinese ingredients, a US consumer pays for the end product using dollars, while the Chinese seller requires payment in renminbi, and Mexican processors also trade with both sides. This money cannot cross borders directly. Instead, the criminals keep each currency within its respective country, and instead move items of value across borders. Chinese money laundering organizations (abbreviated as CMLOs) have become much more adept at these operations, recently also displacing the Mexican cartels on their home turf. “CMLOs have come to dominate much of the money laundering activity in the United States as well as globally,” said Ricardo Mayoral of the US Department of Homeland Security (DHS) in April 30 testimony before Congress. Previous congressional hearings last year had further detailed the so-called fei ch’ian system, named after the “flying cash” of the Song dynasty (a system also better known by its Arabic name, hawala.) Dollars earned in the US through crime may end up in several places. One is investment or spending by Chinese residents in the US, seeking to evade China’s currency controls which limit outflows to US$ 50,000 per year per resident. Another method is known as daigou, or purchases made on behalf of others. Under that scheme, Apple products such as smartphones offer good value density and can be shipped physically to China to be sold there. One waypoint of increasing importance in this process is gift cards, which are either prepaid or top-up cards tied to a specific brand, which are often the preferred method of payment for social engineering scammers. They may be able to buy the aforementioned phones with the money on an Apple card; more sophisticated criminal organizations have also set up fraudulent apps on the App Store with in-app payments, which can also be paid using gift cards. Gift cards are gradually entering the public view. In April, the outlet ProPublica reported that DHS created a task force late last year to combat the related practice of “card draining,” in which the criminals divert money added to stored-value cards, most of whom are reportedly Chinese. Media reports have described perpetrators visiting over a dozen retailers over a single day, and the topic was also raised in the most recent congressional hearing. Inching closer to the threshold The scheme involving gold bars as well as the “card draining” model both involve stealing cash directly from Americans on the side, rather than laundering drug profits, but the infrastructure and channels are nevertheless shared with the drug trade. As awareness of these problems grows, it is possible that the next step in US-China relations following the trade war and the tech war might be a financial war. The topic of potential SWIFT sanctions for China came up recently in the context of the Ukraine war. In April, the US accused China of helping Russia’s war effort through exports of production goods like machine tools and microelectronics – essential elements in military supply chains such as missiles, tanks and aircraft, which Russia is unable to produce itself. Prior to Secretary of State Blinken’s visit to China, an anonymous US official told Reuters that the US had preliminarily discussed sanctions on Chinese banks in response, although it had no immediate plans to implement them. Financial sanctions have long been considered a ‘nuclear’ option in US-China relations, due in part to the potential economic impact. Now that the topic has been gingerly broached, however, the calculus could change, especially if considered as a domestic issue of criminality with direct American victims. Such moves become more thinkable as the election race heats up, or perhaps in the context of a potential second Trump presidency. Anthony Ruggiero, Nonproliferation and Biodefense Program Senior Adjunct Fellow at the Foundation for Defense of Democracies, a defense and foreign policy think tank, also suggested another way to manage the economic tradeoff in the 2023 congressional hearing. Rather than sanctioning banks for non-cooperation in AML, the US could instead target its executives, a somewhat less disruptive approach which would nevertheless create the same incentives. “While the Biden administration is focused on combating US demand for drugs and the export of fentanyl precursors from China, it has not tackled the problem of the Chinese financial sector’s role in laundering the proceeds from drug sales that kill over 100,000 Americans each year,” he testified (apparently using a figure for mortality from all drugs). Solutions closer to home Although the present situation easily lends itself to political narratives already a long time in the making, some lower-impact solutions also have yet to be explored. Gift cards are a favorite payment vehicle for scammers of many nationalities and deserve significantly more scrutiny than they have received thus far. Even without considering outright fraudulent uses, they are a questionable deal for consumers. Issuers count on money on the cards not being spent, which creates large profit margins. Western cultures tend to frown on cash as a gift, but when giving a gift card as an attempt to be more thoughtful, there is no guarantee that the recipient will subsequently find something to spend the money on. Smaller gift cards are meanwhile also popular as employee benefits, among other uses. The gift card industry is forecast to earn US$ 200 billion in revenue in 2024 – approaching an impressive 1% of GDP. To be fair, convenience stores have become more aware of fraud involving gift cards. It is also sometimes possible for victims to recover funds after taking quick action, although more often through the credit card through which the gift might have been purchased. In most cases, however, money on the card acts like cash, and no major legislative solution yet exists for the misuse of gift cards. Fraud and money laundering are highly multifaceted problems, currently being exacerbated by the growth of Chinese organized crime. Some progress may be possible by working within the US financial system, yet with models as brazen as physical cash deliveries using money mules, the onramps and offramps to offshore banking will become essential control points.