Chinese gangs use cryptocurrencies to launder billions

These gangs are exploiting the decentralized nature of cryptocurrency markets to evade the grasp of Chinese and foreign authorities. They are using crypto to launder the profits of drug dealing and illegal gambling, and have made huge amounts from investment scams that promise easy returns in the cryptocurrency markets.

Crypto addresses linked to a group of suspected chemical traders based in China have received more than $37.8 million worth of assets since 2018 in exchange for shipping a key ingredient of fentanyl, the research firm Chainalysis said in a report last year. These shipments are often sent to Central America and Mexico, where drug cartels use them to manufacture the drug, which is then shipped to the U.S.

In October, the U.S.’s Office of Foreign Assets Control sanctioned a network of individuals and companies based in China over the manufacturing and distribution of ingredients used in fentanyl and other drugs. Some of those individuals held cryptocurrency wallets to send and receive funds, the Treasury Department said.

Fentanyl use by Americans has become a major public health issue, contributing to more than 100,000 deaths a year, according to the latest figures from the Centers for Disease Control and Prevention. It has also been a rare area where the world’s two superpowers have appeared to be on the same side: Chinese and U.S. officials agreed this year to work together to tackle the issue.

These cases highlight the changing nature of money laundering, which is increasingly being done through cryptocurrencies rather than old-fashioned methods such as shipping suitcases of cash.

That is a problem for investigators, but it also gives them new ways to track money flows, since most cryptocurrency transfers are saved on a public ledger.

Scammers of several victims in China and Florida shared the same two crypto wallet addresses, implying they are likely parts of the same group, according to a joint investigation published in January by ChainArgos, a Singapore-based blockchain data platform, and Bitrace, a China-based blockchain research group. One of those wallets processed at least $20.7 million worth of tokens since early 2021, the report said. The study found that the stolen funds from those two addresses were later deposited onto two major crypto exchanges, OKX and Huobi, now called HTX.

It is tough for victims in the U.S. to recover their money because many of them lose $10,000 or less—big enough to be someone’s life savings but too small for organizations such as the Federal Bureau of Investigation to consider it a priority, said Jonelle Still, adjunct professor in blockchain analytics at the Middlebury Institute of International Studies.

The transnational nature of these syndicates adds further difficulty in catching criminals or helping victims recover their assets, since it requires cooperation between officials in different countries, say antifraud advocates.

Beijing has for years taken a hard line against cryptocurrencies, forcing exchanges to shut down, banning trading and jailing executives who previously worked in the industry. In January, the powerful State Council said it would submit a revised anti-money-laundering law to the country’s top lawmaking body for review. Addressing the role of crypto in money laundering is the most urgent issue, legal experts have said.

“Having a blanket ban on cryptocurrency exchanges is one thing, but it doesn’t seem to be working,” said Rory Doyle, head of financial crime policy at financial-software provider Fenergo.

Chinese law-enforcement agencies across the country have investigated more than 800 cases, shut down five underground banks used to help process payments, and uncovered about $4 billion worth of funds based on blockchain data, the country’s police force said in January. It worked with blockchain analytics firm OKLink to track the wallets, which allow the storage and transfer of cryptocurrencies.

In late 2022, Chinese police arrested 63 suspects linked to a criminal group that used cryptocurrencies to launder the equivalent of roughly $1.7 billion in an operation spanning 17 provinces.

Chinese prosecutors also have charged well-known crypto executives. Zhao Dong, founder of a major over-the-counter crypto platform in China called RenrenBit, was sentenced to seven years in prison in 2022 after providing crypto-exchange services to an illicit business involved in overseas gambling and so-called pig-butchering scams. Tether, a stablecoin pegged to the U.S. dollar, has been used as a way for these groups to switch between different fiat currencies, officials said.

Write to Weilun Soon at weilun.soon@wsj.com and Elaine Yu at elaine.yu@wsj.com