The Chinese underground banking system (CUBS) is a network of informal financial services that bypasses traditional banking regulations. It facilitates cross-border money movement with no physical transportation of money across borders. Accounts get settled through transactions that hide the flow of funds. Traditionally, it has allowed an individual to “deposit” funds at a node in one country. Then, using a chit, code, or receipt they could retrieve funds at a “node” in a different country. Nodes are often businesses that have good cash flow and the ability to easily keep money off of any official books, such as gold, jewellery, and pawn shops.
This system has been utilized for centuries. Today, individuals seeking to evade capital controls imposed by the Chinese government are a major facilitator of underground banking. Additionally, as well as by modern criminal organizations, to include actors in the fentanyl trade. [source, source]
1 Historic background
The CUBS is not new. Its early roots trace back to 618-906 AD in ancient China. Tax collectors used a system called fei ch’ien (“flying money”) to secure revenues from travelling merchants. This form of value transfer allowed merchants to conduct business without the physical movement of money, reducing the risks of theft during transit. Over centuries, fei ch’ien evolved from a state-controlled mechanism. Today, it is mainly a means for individuals to evade taxes and circumvent government regulations. [source]
The CUBS first reached wider public attention in 1983 when it was used in the East Asian drug trade. Also, it was present in the notorious Golden Triangle heroin trade of the 1990s.
2 How it works
The CUBS operates in diverse ways. Sometimes, it involves physically moving cash, and other times settling funds with little to no physical movement of money. Beyond the common deposit receipt system briefly described above, elements facilitating this include:
- Money mules: Individuals–for instance, foreign students–receive funds on their bank accounts and transfer them further in smaller amounts. This helps to evade reporting requirements below the thresholds for certain legal reporting requirements on financial transactions.
- Split transactions: Transactions are split up into multiple smaller transactions that are sent through different routes, similar to the practice of “smurfing” in modern Western systems of money laundering.
- Smuggling: This involves physical smuggling of cash across borders such as between Hong Kong and Guangzhou, usually by organized crime groups. More recent examples include smuggling cash through the US-Mexico border on behalf of Mexican drug cartels. [source]
- Debt: Instead of moving cash, debt is settled between different parties in different countries. This allows for money owed in one country to be paid in a different country. [source, source]
2.1 Daigou
Daigou, meaning “buy on behalf of,” is a cross-border practice in which individuals outside of China purchase goods for consumers in mainland China in order to circumvent import tariffs. Often, this involves luxury items or other high-cost purchases. While Daigou itself is legal, it often circumvents formal import regulations and involves large amounts of money, making it a part of the CUBS. People use underground banks to transfer funds for Daigou purchases, thereby facilitating money laundering. [source, source]
3 Driving Factors of CUBS
There are multiple factors contributing to the popularity of underground banking, many of which are linked to the Chinese system of financial regulation. The legitimate transfer of money out of China is highly regulated and limited in amounts, making underground banking an alternative for those seeking to circumvent official channels. [source]
The inefficiency of China’s mainstream banks pushes legitimate clients into sharing financial services with criminals, creating an environment where underground banking flourishes. Wealthy Chinese individuals are increasingly looking for ways to move their capital out of China. According to David Lesperance, a tax and immigration adviser in Gibraltar, “the last two years have seen the biggest exodus of my ultra-high net worth Chinese clients in over three decades.” [source]
Under Xi Jinping, Beijing’s strict regulatory measures have increased, leading to more ultra-wealthy individuals leaving the country and using underground schemes to move their funds. It is estimated that 40,000 such individuals have left China since 2022, costing its economy hundreds of billions of dollars annually. [source]
3.1 Current Trends
Recent trends observed in the US show an increased cooperation between Chinese organized crime groups and Mexican drug cartels. In June 2024, 24 people were accused of laundering 50 million USD for the Sinaloa cartel.
The money laundering services offered by Chinese organized crime facilitate the fentanyl crisis in the US by providing a flexible, secure means of managing the financial side of drug production and distribution. Additionally, CUBS networks increasingly utilize encrypted apps for communication and transaction handling, and cryptocurrencies for payments. This limits cross-border movement of funds, thereby making it harder to detect. Also, other regions–such as South America–have seen a growth in CUBS activity. [source, source, source]
4 Challenges in Fighting Underground Banking
In 2024, Chinese authorities dismantled 100 black-market banks and arrested hundreds of individuals in relation to money laundering. Despite that, the demand for such services remains strong. As underground banking often blends with legitimate transactions, they become increasingly difficult to detect. Also, underground banking systems operate globally with large networks of facilitators, which requires extensive prolonged international investigations and collaborations. [source, source, source]
In response to the rise of underground banking, the Chinese government has tightened their anti-money laundering (AML) regulations. The new regulations widen the definitions of money laundering and impose more severe penalties for such violations. Additionally, China extended its jurisdiction over money laundering activity beyond Chinese borders if it affects Chinese interests or national security. [source]
The long-term effects of the new measure are yet unknown.
5 Conclusion
The CUBS remains a significant criminal element worldwide, facilitating both the evasion of financial regulations for wealthy individuals as well as the operations of organized crime groups.
The increased adoption of digital platforms and cryptocurrencies marks the continuous evolution of underground banking systems. The CUBS spans internationally, complicating enforcement efforts as they often operate under different legal frameworks and require extensive cooperation. As long as the demand for such services remains high, it is unlikely that their existence will be seized.
