Advisory is Accompanied by Related OFAC and DOJ Actions

On June 20, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a supplemental advisory to alert U.S. financial institutions about emerging trends in the illicit fentanyl supply chain. The supplemental advisory emphasized the increasing involvement of Mexico-based transnational criminal organizations (“TCOs”) in the procurement of fentanyl precursor chemicals and manufacturing equipment from suppliers in the People’s Republic of China (“PRC”).

The detailed supplemental advisory builds upon FinCEN’s 2019 advisory (see our blog post here) by introducing new typologies and red flags for financial institutions to try to identify and report suspicious transactions.  As we discuss, the supplemental advisory was accompanied by related actions by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the U.S. Department of Justice (“DOJ”) as part of an apparently coordinated effort by the federal government to combat this pernicious illicit industry.

The Bigger Picture

The supplemental advisory is part of a broader government effort to disrupt the international fentanyl trade by targeting the financial networks that support it.  Simultaneously with FinCEN’s supplemental advisory, OFAC announced sanctions against eight Mexico-based targets affiliated with the La Nueva Familia Michoacana drug cartel for trafficking narcotics into the United States. La Nueva Familia Michoacana, one of the most powerful and violent cartels in Mexico, has expanded into fentanyl trafficking in recent years. The cartel smuggles not only fentanyl but also cocaine, and methamphetamine into the United States and is involved in human smuggling, forcing individuals to enter the United States illegally with drugs.

Similarly, in July 1, 2024, in a coordinated effort with the Mexican government, OFAC sanctioned Diego Acosta Ovalle, a Mexico-based money launderer, and Tong Peiji and He Jiaxuan, members of a PRC-based Chinese Money Laundering Organization (“CMLO”) linked to the Sinaloa Cartel.  According to the Treasury, CMLOs play a significant role in laundering narcotics proceeds worldwide by receiving bulk U.S. dollars from drug operations is  the United States and returning the profits to cartels in Mexico.  These organizations use Chinese banking apps and encrypted technology to launder cartel drug money while evading detection by U.S. law enforcement.

Just prior to the supplemental advisory, the DOJ announced a 10-count superseding indictment charging associates of Mexico’s Sinaloa drug cartel in Los Angeles, who allegedly conspired with money-laundering groups connected to Chinese underground banking to launder drug trafficking proceeds. The indictment claims that over $50 million in drug money flowed between the Sinaloa Cartel and Chinese underground money exchanges. The investigation, known as “Operation Fortune Runner,” resulted in charges against 24 defendants for conspiracy related to drug distribution, money laundering, and operating an unlicensed money transmitting business.

The Supplemental Advisory: New Trends in Illicit Fentanyl Supply Chain

FinCEN’s supplemental advisory underscores the evolving nature of the illicit fentanyl supply chain, with a particular focus on the role of Mexico-based TCOs. These TCOs are increasingly procuring fentanyl precursor chemicals and manufacturing equipment from suppliers based in the PRC. This shift in procurement strategies poses significant challenges for financial institutions in identifying and reporting suspicious activity, as it necessitates a nuanced understanding of transaction patterns and potential red flags.

According to the supplemental alert, there has been a significant shift in the illicit fentanyl supply chain in recent years. Previously, complicit entities based in the PRC directly shipped illicit fentanyl and other synthetic opioids to the United States or to criminal networks in Mexico. However, since 2019, TCOs, including the Sinaloa Cartel and the Jalisco New Generation Cartel, have taken over as the primary traffickers of illicit fentanyl into the U.S. These TCOs purchase precursor chemicals and manufacturing equipment from PRC-based suppliers to synthesize illicit fentanyl within Mexico. The drugs are then smuggled across the U.S. southwest border in various forms, including powder, adulterants, and counterfeit medication. Traffickers distribute these lethal substances to American consumers through person-to-person sales, e-commerce platforms, and social media arrangements.

In 2021, President Biden issued executive orders, E.O. 14059 and E.O. 14060, both aimed at combating the global illicit drug trade and transnational organized crime. E.O. 14059 expanded sanctions to target drug trafficking organizations, their supporters, and financial facilitators, specifically addressing the supply chain of illicit fentanyl. OFAC has sanctioned over 290 individuals and entities involved, including suppliers of precursor chemicals and equipment, brokers, manufacturers, smugglers, traffickers, and money launderers.

Typologies and Red Flags: A Closer Look

The supplemental advisory discusses the illicit procurement of fentanyl precursor chemicals and manufacturing equipment by TCOs from suppliers in the PRC. These transactions often involve intermediaries or chemical brokers based in various jurisdictions, including Mexico and the PRC. Chemicals and equipment are advertised on multiple platforms, including the Darknet, and various methods to evade law enforcement, such as disguising and mislabeling shipments are utilized.

Payments for these chemicals and equipment are often conducted in single or multiple transactions, involving low-dollar amounts but potentially resulting in significant drug trafficking proceeds. These payments may be made through shell and front companies, banks, money services businesses, online payment processors, and virtual currency.

Shell and front companies play a crucial role in the supply chain, often appearing as legitimate businesses in various industries. They create layers of corporate ownership to hide the source of activity and obscure the supply chain. TCOs often use banks and online payment processors for money transfers, which typically originate from Mexico or the United States and are sent to the PRC. TCOs are increasingly using virtual currencies for these transactions, showing adaptability to changes in regulatory or law enforcement environments.

In response to these emerging trends, the supplemental advisory provides updated typologies and red flags to assist financial institutions in identifying and reporting suspicious transactions related to the fentanyl supply chain. These build on those provided in FinCEN’s 2019 advisory, reflecting the evolving nature of illicit fentanyl trafficking and the sophisticated methods employed by TCOs to evade detection.

The supplemental advisory also provides guideline related to the purchase of fentanyl precursor chemicals and manufacturing equipment, including specific transaction patterns, unusual shipping routes or methods, and other indicators of potential illicit activity. By understanding these typologies and red flags, financial institutions can try to improve their ability to detect and report suspicious activity, aiding in the wider effort to disrupt the illicit fentanyl supply chain.

Customer and Counterparty Red Flags

• Previous drug-related convictions or open-source reporting
• A chemical or pharmaceutical company in the PRC or Hong Kong, or other jurisdiction with no physical presence
• PRC-based phone numbers or IP addresses
• Darknet marketplace vendors advertising precursor chemicals or equipment used for the synthesis of illicit fentanyl and other synthetic opioids
• Mexican companies importing fentanyl precursors without proper licenses
• Low online presence and fentanyl-related imports
• Shared contact information among unrelated Mexican importers
• Unusual transaction patterns with PRC or Hong Kong entities

Transactional Red Flags

• Low-Dollar or Virtual Currency Payments – Customers send small payments without an apparent legitimate purpose to beneficiaries in chemical manufacturing and pharmaceutical industries
• Many-to-One Transactions – Multiple customers send funds without an apparent legitimate purpose to the same beneficiary in these industries
• Cross-Industry Transactions – Unrelated industry entities from Mexico and China transact with chemical or pharmaceutical companies
• Efforts to Evade Reporting – Customers alter or cancel transactions to avoid Currency Transaction Report filings or engage in structuring with multiple cash transactions under $10,000
• Blockchain-Linked Payments – Customers send virtual currency payments linked to beneficiaries associated with PCR based industries or individuals/entities with OFAC designations
• Inconsistent Industry Activity – A Mexican company procures fentanyl precursor chemicals despite not being directly involved in these industries

Conclusion

The supplemental advisory emphasizes financial institutions’ regulatory obligations under the Bank Secrecy Act, and highlights that compliance with these obligations forms a significant part of the wider government strategy to counter illicit fentanyl trafficking. Similar to what we noted in our 2019 post, although the supplemental advisory provides additional guidance, it correspondingly demands financial institutions to adjust and enhance their monitoring systems to capture and include the new typologies and red flags.

[View source.]