The United States needs to overhaul protocols to combat illicit money entering our country. A recent investigation by the Wall Street Journal found that an underground banking network has funneled $50 million in drug trafficking proceeds through a complex web of cartels, Chinese money-laundering operatives, and U.S. financial institutions.
In 2024, there were 80,000 drug overdose deaths in the United States. While this is down significantly from 100,000 in 2023, it still is a staggering loss. In addition to taking American lives, the drug crisis poses a serious national security threat. The Chinese Communist Party uses drug warfare as a way to spread disaster in countries that have a military advantage like the U.S, according to a playbook authored by two former senior Chinese military officials.
One of the techniques used to funnel money into the U.S. by Mexican drug cartels is known as the black market peso exchange, a system used by Colombian cartels during the 1970s and 80s drug trade. With the proceeds of their illegal sales stuck in the United States, Colombian kingpins had to convert the funds in the country from the U.S. dollar to the Colombian peso. The result was a deceptively simple network of various U.S. bank accounts, shell companies, and money brokers capable of sending the money to Colombia as goods to be sold and converted to pesos.
Despite its apparent simplicity, the black market peso exchange persists, used by Mexican cartels and Chinese nationals seeking to circumvent China’s strict capital control laws. The process is as follows:
- The cartel sells drugs in the U.S. and is paid in U.S. dollars.
- This “dirty money” is bought by a broker and sold to a Chinese national, who pays for the dollars in Chinese yuan.
- The broker then uses the yuan to buy Chinese goods and send them to Mexico.
- The goods are sold in Mexico and converted into pesos before returning to the cartels.
This process allows Chinese nationals to circumvent restrictions on how much money they can send out of China and enables cartels to convert the money from their drug sales into pesos without repercussions.
Anti-money laundering laws that were used to prevent such activity originated in the 1970s. After the Bank Secrecy Act (BSA) of 1970 was signed into law, banks began to submit reports to the Department of the Treasury on suspicious activity and high-value cash deposits. However, these laws have seen minor updates since then.
To protect against the threat of illegal drugs entering the U.S., Washington must protect the integrity of its financial institutions.
Banks already must comply with reporting requirements. However, the volume of these reports far exceeds the capacity of the Department of Treasury. In 2023, banks filed nearly five million Suspicious Activity Reports and 23 million Currency Transaction Reports. The Treasury’s Financial Crimes Enforcement Network (FinCEN) has approximately 300 employees–an amount far too small to examine all documentation.
To streamline the process, financial institutions should know the most helpful information to submit. Banks likely have little clarity on what information is useful, resulting in excessive and unnecessary reporting.
Treasury’s FinCEN Exchange – a public-private information sharing partnership between law enforcement, FinCEN, and financial institutions – can be used to clarify what data is most pertinent to send.
The U.S. government should also put to better use Section 6201 of the Anti-Money Laundering Act of 2020, which requires the attorney general to notify the secretary of the Treasury what bank information is most useful for investigations, thereby enhancing the effectiveness of anti-money laundering efforts. Based on a 2024 report from the Government Accountability Office, the Department of Justice continues to face challenges sharing the information that is most effective in leading to arrests.
Furthermore, the BSA E-Filing System, the platform banks use to submit these reports to the Treasury Department, should categorize the suspicious activity the bank is reporting. Doing so will help eliminate the lack of clarity surrounding the drug trade.
Lastly, the U.S. government should collect the beneficial ownership information for domestic companies to determine who financially benefits from them. Without knowing the benefactors, law enforcement will face challenges in determining the criminals behind these networks.
Policymakers should be concerned that the method being used by drug traffickers to launder money in the U.S. has remained in use for decades. Old policies and protocols have failed to stop the flow of drug money in the U.S. Without action, this illicit money will likely continue to flow through our country’s financial institutions. Stopping the drug crisis is a priority. Policymakers must treat it as such.
