Authorities Unravel the Sinaloa Cartel’s Connection to Chinese Money Launderers

Last month, the US Justice Department announced a superseding indictment charging Los Angeles-based associates of Mexico’s Sinaloa drug cartel with conspiring with money laundering groups linked to Chinese underground banks known to launder drug trafficking proceeds. During the conspiracy, more than USD 50 million in drug proceeds flowed between the Sinaloa Cartel associates and Chinese underground money exchanges.

The superseding indictment alleges that a Sinaloa Cartel-linked money laundering network collected and—with help from a LA-based money transmitting group with links to Chinese underground banking—processed large amounts of drug proceeds in US currency in the Los Angeles area. They then concealed their drug trafficking proceeds and made the proceeds generated in the United States accessible to cartel members in Mexico and elsewhere.

Lead defendant Edgar Joel Martinez-Reyes—45, of East Los Angeles—and others allegedly used a variety of methods to hide the money’s source, including trade-based money laundering, “structuring” assets to avoid federal financial reporting requirements, and the purchase of cryptocurrency.

As part of this investigation, law enforcement seized approximately USD 5 million in narcotics proceeds, 302 pounds of cocaine, 92 pounds of methamphetamine, 3,000 Ecstasy pills, 44 pounds of psilocybin (magic mushrooms), numerous ounces of ketamine, three semi-automatic rifles with high-capacity magazines, and eight semi-automatic handguns.

Chinese money exchangers transfer cartel cash

Chinese underground money exchanges in the United States facilitate the transfer of profits from cartels, including the Sinaloa cartel, from the US to Mexico. Wealthy Chinese nationals, restricted by Chinese government capital flight limits, seek informal channels to move more than USD 50,000 annually to the US. They achieve this by contacting US-based individuals with dollars for sale. The process involves depositing Chinese currency into a designated Chinese bank account, prompting the release of an equivalent amount in US dollars to the buyer in the US.

These US currency sellers often acquire dollars from individuals involved in criminal activities, such as drug trafficking, by charging a commission to conceal the illicit origins of the funds. Drug traffickers have increasingly partnered with these Chinese exchanges due to the high demand for US dollars among Chinese nationals.

The physical cash purchased by the Chinese brokers is then laundered through domestic US bank accounts and made available to Chinese clients seeking to pay college tuition and purchase real estate, luxury products, vehicles, and other goods in the United States. 

The cartels use the crypto sent to them by the Chinese currency brokers to settle debts with suppliers. They will also use the crypto to purchase goods from Chinese manufacturers. These goods are then sold in local currency in Mexico and South America, generating “clean” revenues for the cartels. In turn, the Chinese manufacturers can then exchange the crypto received from the cartels for Yuan with their own Chinese currency brokers, closing the currency loop and again freeing up crypto to fund the next iteration of the cycle.  

Law enforcement and regulators uses blockchain intelligence to track crypto transactions linked to the Sinaloa Cartel

This case is not the only example of law enforcement successes in the war on fentanyl and cartel money laundering. In fact, following a multi-year boom, crypto-denominated fentanyl sales growth slowed to just under 60% in 2023, according to research by TRM Labs spanning over 120 online vendors of fentanyl and fentanyl precursors. This marks a significant drop in the growth rate, which had averaged 155% since 2019. 

The declining growth rates appear to correlate with a series of actions by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC), which sanctioned several large producers of fentanyl precursors—chemicals that, while often not themselves illegal, can easily be mixed together to create the deadly drug. In 2023, OFAC sanctioned a record number of individuals and entities linked to fentanyl production and distribution following a steady increase in designation activity over the last five years.

It is, however, important to note, that in a recent report, TRM found that cryptocurrency use is becoming increasingly prevalent in the international illicit drug precursor trade, finding that 97% of the Chinese precursor manufacturers studied offered payment in cryptocurrencies, and received over USD 26 million in cryptocurrency in 2023. Between 2022 and 2023, the amount of cryptocurrency deposited into wallets linked to Chinese precursor manufacturers increased by over 600%—and more than doubled in the first four months of 2024 compared to the same period in 2023.

DOJ and Treasury target Chinese-based networks

In a sweeping crackdown in October 2023, OFAC sanctioned a China-based network that manufactured and distributed precursors for fentanyl, methamphetamine, and MDMA. This action followed the sanctioning of several affiliates of Mexico’s notorious Sinaloa Cartel, including Mario Alberto Jimenez Castro, who was accused of using crypto to launder proceeds from drug sales. The cartel subsequently announced it would halt fentanyl production, reportedly in response to US pressure.

Specifically, Mario Alberto Jimenez Castro operated a money laundering organization that used virtual currency and wire transfers, among other methods, to transfer proceeds from illicit fentanyl sales in the United States to Sinaloa Cartel leaders in Mexico. According to the Treasury and DOJ, Jimenez Castro directed US-based couriers to pick up cash in the United States and deposit it into various virtual currency wallets for payment directly to the Chapitos and for reinvestment in fentanyl production.

In addition to adding Jiminez Castro to its sanctions list, OFAC also added a cryptocurrency address on the Ethereum blockchain, associated with Jimenez Castro, which had received more than USD 740,000 between March 2022 and February 2023. This was the first time that OFAC identified the use of cryptocurrency by the Mexican cartel. While the cartel did not use crypto to buy narcotics, cryptocurrency was used to launder illicit funds in an attempt to obfuscate the movement of monies generated from fentanyl sales.

Both the Jimenez Castro case and the latest case against Edgar Joel Martinez-Reyes are examples of global law enforcement coordination. The US Drug Enforcement Administration, IRS-Criminal Investigation, the Federal Bureau of Investigation, and US state and local police departments worked together with the Organized Crime Drug Enforcement Task Forces (OCDETF) and Mexican and Chinese authorities to investigate and disrupt global narcotics trafficking and money laundering networks.

‍