Italian drugs cartels conceal payments via Chinese shadow banks

[April 06, 2023]  By Emilio Parodi

MILAN (Reuters) - Drugs cartels operating in Italy are increasingly using shadow networks of unlicensed Chinese money brokers to conceal cross-border payments, according to Italian judicial and law enforcement authorities.

The development highlights how an issue that U.S. authorities have been battling in connection to Latin American narcotics groups has taken root in Europe.

In Italy, authorities are seeing an increased use of the money transfer networks, which operate without an easily traceable trail and facilitate rapid payments, seven judicial and law enforcement officials told Reuters. The transfer method involves depositing a sum with a money broker in one country while another agent in the network elsewhere in the world pays the equivalent amount to the intended recipient.

"The phenomenon is on the rise," said Italy’s national anti-mafia prosecutor, Barbara Sargenti, who coordinates investigations both domestically and abroad. In an interview at her office in Rome, Sargenti said the growing number of related investigations was due both to an increase in activity and an improved ability by authorities to detect such cases.

She added that because money is transferred outside of the banking system it makes it very difficult for authorities to identify and trace. "This kind of financial intermediation undermines the entire international anti-money laundering system,” which is based on the control and analysis of banking transactions, she said. Such measures are a key weapon in the fight against criminal gangs.

Italian authorities have announced at least six investigations involving drug gangs and the Chinese payment networks since the issue first publicly came to light about five years ago. Those probes involve alleged payments to narcotics suppliers in Latin America, Morocco and Spain, according to authorities and judicial documents reviewed by Reuters.

U.S. authorities have said Chinese “money brokers” represent one of the most worrisome new threats in their war on drugs, as a Reuters investigation in 2020 found. Earlier this year, the head of the U.S. Drug Enforcement Administration Anne Milgram highlighted the issue during a Senate committee hearing, saying Mexican drug cartels were using Chinese money laundering organisations “around the world to facilitate laundering drug proceeds.”

It has become an issue for law enforcement in Europe, too. Europol, the European Union’s police agency, told Reuters that Chinese criminal networks are “more and more engaged in the laundering of criminal proceeds in Europe,” including from drug trafficking.

The seven people said money transfers are part of a broader array of services offered by Chinese-linked organisations, including facilitating tax evasion, in what Italian authorities refer to as an “underground” banking system.

One of the people said there were about a dozen additional investigations underway involving money transfers or other illicit activity connected to Chinese organisations that haven’t been made public. The person, who has direct knowledge of those probes, estimated tens of billions of euros each year were being moved out of Italy via the underground system.

Chinese authorities have previously vowed to crackdown on underground banking.

Asked if China was aware of the movement of large amounts of money via unlicensed Chinese money brokers in Italy, including by drug gangs, or whether it was helping Italy to tackle it, the Chinese foreign ministry spokesperson's office said in a statement: “I am not aware of the circumstances you mentioned.”

FLYING MONEY

The money transfers are based on a long-established informal payment system, often referred to by the Chinese term fei qian or fei chien, meaning flying money, which relies on a trusted network of transfer agents.

It is not necessarily illegal to transfer funds via friends and family to pass cash to creditors on your behalf. But it is illegal in Italy to provide banking services without authorization and to launder the proceeds of crime.

One of the first probes to come to light involving use of Chinese money brokers by Italian mobsters was linked to the Calabrian ‘Ndrangheta group, one of the largest crime gangs in the world. The investigation resulted in the 2018 arrest of 90 people in Italy and elsewhere in Europe, and the seizure of 4 tonnes of cocaine worth an estimated 240 million euros ($261.96 million).
 

Among ongoing investigations is one that led to the arrest last November of more than 40 people in Italy and Spain for suspected drug trafficking. That includes a former army officer and senior figure in the Italian Referees’ Association, called Rosario D'Onofrio, who police allege served as a logistics chief for a drugs gang.

Seized drugs are seen following an investigation on drugs cartels operating in Italy increasingly using shadow networks of unlicensed Chinese money brokers to launder their proceeds in this handout photo obtained by Reuters on April 4, 2023. Carabinieri/Handout via REUTERS

According to an October 2022 arrest warrant, D’Onofrio paid 180,000 euros to a Chinese intermediary during a March 2020 visit to Milan’s Chinatown to pay suppliers in Spain for a shipment of hashish. The intermediary sent a text message to a counterpart in Spain to hand over a corresponding sum to the suppliers and charged D’Onofrio 2,700 euros in commission - the equivalent of 1.5% - for the transaction, the arrest warrant detailed.

D’Onofrio is currently in detention; his lawyer Niccolò Vecchioni declined to comment. The Chinese intermediary has not been identified.

SUITCASES OF CASH

In a separate investigation, which resulted in the seizure of 720 kilograms of drugs and millions of euros in cash, police tracked a man who crisscrossed Italy collecting money as payment for large quantities of narcotics sent from Morocco, according to an October 2021 arrest warrant. The money was delivered to Chinese businesses in Tuscany and Rome, where transfers were made to drug suppliers via “Chinese correspondents” in the north African country, authorities allege in the documents.

Authorities arrested eight people on suspicion of drug trafficking and money laundering in connection with the investigation.

The probe also revealed what happened to at least some of the physical cash collected: it was packed into suitcases and given to Chinese nationals flying to Hong Kong, said Major Michele Maselli, a senior officer in the Milan Carabinieri police.

Between 2.5 million euros and 4 million euros were shipped out of Rome’s Fiumicino airport each week from October 2019 to October 2021, according to the Carabinieri.

The Chinese businesses in Tuscany and Rome were part of the underground banking network, according to the 2021 arrest warrant. Authorities asked not to identify the businesses because a probe into the cash transfers to Hong Kong, and their ultimate destination, is ongoing.

UNDERGROUND BANKING

Money brokers are part of large Chinese diasporas in places like Europe, the United States and Latin America. The brokers help affluent Chinese looking to move wealth abroad to evade China’s currency controls, Western law enforcement says. Beijing limits the amount of money its citizens can transfer out of China to the equivalent of $50,000 U.S. dollars annually.

As a result, Chinese nationals use informal exchanges that involve transferring currency electronically in China and the equivalent amount is provided to someone overseas in cash to be deposited into a bank account. Criminal groups, flush with euros from activity such as drug sales, can help satisfy the demand for hard currency.

“Upstream of this clandestine banking activity there is a huge availability of liquidity of these Chinese groups all over the world,” said Francesco Pinto, a deputy chief prosecutor in Genoa.

In Italy there is a debate among authorities about whether there is a single vast Chinese-linked operation with myriad, interconnected branches, or numerous separate organisations that work independently of each other, according to three of the seven people Reuters spoke to.

All seven, however, said money laundering was just one of the illicit services offered. There is a “parallel banking system” that has customers of various kinds “from tax evaders to drug traffickers,” said Laura Pedio, a deputy chief prosecutor in Milan. Last month, Milan prosecutors announced the arrest of 22 people and the seizure of 292 million euros following a probe into tax evasion that allegedly involved some Chinese middlemen in Italy.

Official wire transfers between Italy and China have shrunk over the past decade, which one senior investigator said suggested that the Chinese community in Italy had reduced their use of the official banking system. According to Bank of Italy data, remittances from Italy to China totalled 22 million euros in 2021, down from a high of 2.67 billion euros in 2012.

Italy’s finance police last year set up a special unit to monitor the underground banking system. And, the new Italian government has asked the country’s anti-mafia commission, which is made up of politicians, for the first time to probe “the Chinese infiltration in Italian society.”

($1 = 0.9162 euros)

(Writing by Crispian Balmer. Additional reporting in Beijing by Laurie Chen. Editing by Cassell Bryan-Low)

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